Is the Market Calling Trump’s Bluff? — ft. Aswath Damodaran

26:04That's why BYD doesn't exist in America. So it's such a funny dynamic where China is letting the market prove BYD's success. And then over in America, we're going isolationist mode and saying, we're not going to let you in. And that's why electric vehicles in America cost, what, four times more than they do in China. It's a really remarkable turnaround. Let's move on quickly to OnlyFans here before we have Aswath on. OnlyFans is in talks to sell for$8 billion. I just want to highlight what that number means. That means that OnlyFans is more valuable than Dropbox, more valuable than Sunoco, as valuable as Paramount Global, and my favorite, more valuable than Match Group, which, of course, is the company that has a near monopoly on all the dating apps.

26:53It owns Hinge, Tinder, OKCupid, Match.com, etc. etc. And OnlyFans, the app where you pay money to creators to receive explicit adult content and basically pretend to have a relationship, that company is now more valuable than Match Group. That company is now valued at$8 billion, according to these reported sales talks. Scott, I'm sure you have a lot of thoughts here. Any reactions? So I have a little bit of information here. Someone I know was approached by potentially putting together an investor to buy it. It looks like the number, if it trades, it's going to be closer to$4.5 billion. That$8 billion number was the number put out by the company.

27:34It's probably going to trade for, if it trades for just a little over half that, it does about, I think,$700 or$800 million in EBITDA off of$1.2 billion in revenues. And I think what's pretty obvious here, Ed, is the current owners realize AI is an existential threat. And that is, I don't know if you saw Google's AI release of those products, but they were so lifelike and so incredible. You just got to think that AI is going to be able to crawl the most popular OnlyFans content creators. And I think we're 12 months away from essentially OnlyFans like creators or content creators that offer you 80 % of what they offer for 5 % of the price.

28:16I think probably the first company, multi-billion dollar company that gets absolutely disrupted all in caps is OnlyFans. The margins are enormous here. There isn't a lot of IP that's protectable. The smartest acquisition, quite frankly, would be for OpenAI or Anthropic to buy this company and then have a hybrid model where you can say, okay, we're going to let content creators, the most popular ones, have an AI version of it at a lower price point where you can have the real thing at whatever they charge. I don't know what they charge per minute or I don't know how they charge. My credit card won't go through.

28:55I can't figure it out. They don't take Apple Pay. I don't know what the pricing model is, but if there was like a distant number three or four AI company, I would absolutely – I think this might be a failed auction because I think a lot of people are going to be very afraid to get near this thing. I can tell you how the pricing works. And it's very simple. It's just OnlyFans takes a fifth of all of the transaction revenue that happens on the platform. And the pricing is totally up to the creator. And we keep on calling them creators. It's basically being a porn star is essentially what's happening.

29:31They say that, oh, we have athletes on the platform. No, this is all porn, essentially. and they charge however much they want. And some people, some creators are saying that they've been making millions and millions of dollars. One said she made$43 million last year. And you can set it up any way you want. You can do exclusive members access. You pay this amount per month. You can pay on a per message basis, like pay me$100 ,000 and I'll send you a picture of my feet. I mean, that's hyperbolic, but I wouldn't be surprised if that has actually happened. That's the way it works. And then OnlyFans takes a fifth of that.

30:15And that's what that$1.3 billion in revenue means. And by the way, which tells us that$6.5 billion is being transacted on the platform every year, which is just unbelievable. Also, 300 million users on the platform. Totally crazy to me. That's almost the population of the US. So I agree with you. AI could come in and disrupt this. I guess I'm just trying to think, what would that actually look like? What you're basically saying and putting forward here is that you can deepfake AI porn. If AI is allowed to crawl, if LLMs are allowed to crawl my books and in any question you can ask for a response in my voice and it does a pretty good job and it cites specifics, there's absolutely no way the porn industry can defend itself against LLMs.

31:07and with the innovations I've seen from Gemini and OpenAI, you're going to have a company basically, and those companies don't want to be in the adult business. You're going to have several startups. I'm sure they're already there and already have funding who are going to offer you a near similar and in some instances better because they'll be trained to tell the customer exactly what he wants to hear. And let's be honest, 88 % of the time or 90 % of the time, it is a he. and they'll be able to do it for, you know, a dollar an hour. I mean, the incremental, the marginal costs are absolutely zero.

31:42It's the dream of autonomous driving, but you don't even have the expense of the car. I mean, it's already happening for me or in my life. The submarine sandwich shop by my work had moved to a new location and was replaced with an adult sex shop. And I didn't realize it until one day I walked in and asked for a 12-inch salami on an Italian. That was a big lead up for that joke. That wasn't easy to maintain.

32:13Is that it? That's it. That's my analysis. That's how you're ending that conversation. That's how I'm stopping. Look, I'm trying to bring it back here. I think that AI is going to do to OnlyFans what OnlyFans and the web did to Playboy. Or let me put it this way. With that kind of EBITDA and profitability, why would they want to sell? That was the question. It's like, okay, the guy who owns it took home almost$700 million in dividends. It's like, yeah, why is he selling? He's got to be selling for some reason. I think you're probably right. I think the question then would be on the other side of the transaction, what is this investment group, Forest Road Company, going to do with OnlyFans?

32:59And maybe they see opportunity in the AI world, and maybe they want to infuse it with some AI porn update. I mean, the whole thing is really just disturbing to me, to be honest. And, you know, the stuff you talk about where one in three men under the age of 30 haven't had sex in the past year, up from one in 10 in 2008, the fact that one in three men in America are watching porn regularly and then one in 10 say that they have a porn addiction and that number continues to grow, the fact that we've got more than 300 million users on this OnlyFans platform. I know I'm not going to buy that they're paying for original content from their favorite sports stars.

33:41They're paying for porn. The whole thing is just very depressing. I think porn and low friction relationships are an enormous threat to the well-being of young men. And that is that relationships are very rewarding, the most rewarding thing in life, because they're very messy and they're very difficult and they're hard to get it's hard to get to friendship it's hard to find mentors at work it's hard to establish really great professional relationships with people but once you have them they're incredibly rewarding because they're hard to navigate and establish and these deep pocketed companies with incredibly talented individuals with godlike technology are trying to convince young people specifically young men they don't they don't need to engage in that two-hour romantic comedy they can do it in 15 minutes with a reasonable facsimile of some AI-driven relationship.

34:30And it's not only a huge threat and sad for the young men, it's bad for society because we're going to have a lack of household information. You're going to see a birth birth because people aren't connecting. And you have this entire new species of asocial males coming into society that don't have the skills to be good citizens. And they start blaming women for the problems. They wake up at 30. They have no skills. A lot of the skills you have to develop socially to find friends, to find jobs, and to find mates are the same skills you need to be economically viable or to be a good citizen. And when you have a ton of people engaging in increasingly lifelike porn from AI, you're going to have a set of incompetent young men who just don't have the skills to be good partners, to be good co-workers, to be good husbands, to be good fathers.

35:21And then they're going to wake up at 30 and be depressed and lonely and realize that this is a low-calorie toxic replacement or substitute. I see this as terrible. I don't know the answer. I don't know what you do about it. I would probably try and tax the shit out of it and reinvest in third spaces and vocational training for young people. I think you could argue that if we can tax alcohol the way that we tax it and the way Europe taxes it because of the external damage it does to the industry or the way we tax cigarettes, I would like to see us start taxing, or talking myself to a solution here.

35:55I think we should tax the shit out of AI porn. We'll be right back after the break for our conversation with Aswath Damodaran. If you're enjoying the show so far and you haven't subscribed, be sure to give Prof G Markets a follow wherever you get your podcasts.

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38:31Welcome back. Here is our conversation with Professor Aswath Damodaran, the Kirshner Family Chair in Finance Education and Professor of Finance at NYU's Stern School of Business. Aswath, great to have you back on Prof G Markets. Glad to be back. It's been three months since we had you on. And by the way, we've been recording this podcast every time I've been thinking, I really just want to know what Aswath is thinking right now. So I'm very glad we finally got you because a lot has happened. I'm just going to run through it. We had Liberation Day, where the markets went into crisis mode and we went into bear market territory.

39:12We had this huge sell-off, particularly in U.S. markets, which led Scott and I to believe that we might be witnessing this great rotation out of America. Then we had the tariff reversal and the markets picked back up. Then we had the China tariff reversal and then the markets rallied once again. And now, as of the end of May, the S &P and the NASDAQ have completely recovered their losses since Liberation Day. They're basically flat since then. In fact, I think a little bit up now. And it's almost as if the markets are telling us that nothing has actually happened. So what have you learned in the past few months?

39:50What has surprised you? What are your takeaways? I suggested to somebody yesterday that they run a thought experiment, which is read all of the news stories of what's happened this year without knowing what's happened in the market and guess what the market would have done over those months. Because my guess is almost anybody reading the news stories of what's happened in March, April, May, without knowing what the market is in, I would be convinced that the markets would be down 20%, 25%, 30%. Because the stories have been horrifically bad, not just in terms of short-term impact, but potential long-term impact.

40:27But just as in COVID, and that's what I kept going back to, I remember March 23rd of 2020, when people said, this is the end, the economies are going to collapse, and markets magically found their way back. Markets somehow seem to be much more resilient than any of us could have been, or any group of experts could have been. So if there's a word that I take out of these months, it's resilience, that there's something that's keeping these markets afloat in the face of news that normally would bring them down. And I think it reflects, I think, a fundamental shift in markets away from 20, 30 years ago, where if you've got a bunch of portfolio managers in Boston and New York get together and say, the markets are in bad shape, they're going to go down, you had that collective letdown.

41:14There seems to be a spreading of influence, whether it's good or bad, we can debate, of what drives markets. Maybe it's social media. Maybe it's the fact that we get so much of our news from places other than financial journals, which has made markets almost separate themselves from what people think about the economy and what experts do. And it's not just markets. If you look at corporate earnings, again, if you look at the news stories, you'd be convinced that the first quarter earnings for this year are going to be horrifically bad. But they weren't. Something is holding up both the economy and markets in a way that I can't quite see in the news stories.

41:51But that's something we've seen for the last four or five years. So maybe it's something we need to get used to in markets, that markets have a mind of their own. What you're kind of describing here is a diversion between the reality that we're seeing in the news and in the headlines that we read and the stuff we see on CNBC versus what is actually happening in the markets. And it sounds like you believe that there is a diversion in the narrative between investors and between broadcasters that is wider now than ever before. And that 20 or 30 years ago, if we were hearing these headlines and hearing these stories, we would see a way larger reaction from investors.

42:34And so my question would be, what do you think has changed? I know you're not claiming to know the answer, but if you could hazard a guess as to what is different now, different in 2025, and why this has been the case. I think it's the difference between going to a restaurant in the 1980s and reading the New York Times review of the restaurant and looking up a restaurant review on Yelp right now. I think, in a sense, why are markets going to be immune from what's happening with the rest of our lives? We're picking movies based on rotten tomatoes. We're picking restaurants based on Yelp. And guess what?

43:10Markets are being driven by social media judgments more than by what experts claim will happen. And I don't think we should be surprised by that. I think it's something that, you know, we talk about the wisdom of crowds. We can talk about the madness of crowds. But we live in a time when crowds drive almost everything we saw. We saw this in the last election, if you remember. It was the political betting markets that essentially led the game rather than the experts making judgments based on looking at the polls. And you see that same phenomenon, I think, with markets. And I think experts have lost that credibility because increasingly investors are saying, you told me this would happen, but it doesn't seem to happen.

43:53Would you say then that experts and the media overreacted to these tariff proposals and to the Liberation Day tariffs? I mean, I look at those tariffs and I thought, holy shit, this is a big deal. And then I came on this podcast and I said so. And perhaps under that framing, it would be like I, Edelson, overreacted. No, it's not an overreaction. I think we think through logically as experts. We look at an action. We say, if this gets carried through, what will the consequences be? And I think the experts are right in making that judgment when that Liberation Day announcement came out saying this is not just a problem.

44:32This could be a catastrophic problem. I think what they failed to recognize was that that was an opening act. And I don't know what this drama is, to be quite honest, where every day you wake up at the drama is a new move to it. And crowds, the market seem to be more attuned to that kind of behavior than experts were. So maybe this is a reflection of the fact that what you see as actions don't seem to stick as the final actions. They seem to be revisiting and revisiting. And that in the process is very difficult to then estimate what the end game is going to be. So I wouldn't blame the experts for that initial judgment.

45:10But if you remember, the initial judgment didn't stop Liberation Day tariffs from going into practice. The market behavior that actually is the only thing that seems to have acted as a check on this administration, to be quite honest. It wasn't experts. It wasn't economists. It wasn't Nobel Prize winners. It was the market saying this will not stand. And that seemed to be the only message that got through. My interpretation right now is that the market is basically saying that Trump and the administration are just so much smaller than we think in terms of their actual impact on the economy. That the market really doesn't believe at the end of the day, over the middle and in the long term, when you discount back the cash flows, that their actions have much ramifications and or that Donald Trump is not a serious person.

45:58That whatever he says, okay, the stock market pop goes crazy, then it comes down. But the volatility or the swings seem to be decreasing as the market no longer believes anything he says to the upside or the downside. I mean, if you don't carry through on what you say, eventually your message becomes muddled and it becomes diluted. And you can see that even if you compare April to May. during April, I computed the price of risk in the equity market every day because it was so incredibly volatile. In May, I stopped doing it. I mean, basically, I said, look, you know, the market's beginning to look like a normal market in terms of its ups and downs.

46:37So I think you're right in the sense the market is not taking. Even last Friday, when the EU announcements came out, the effect was muted. It wasn't a big reaction that you'd expect to a news story that big. So I think that if the administration is not careful, It risks diluting its message so much that people stop even listening to what it's saying. They're effectively going to assume that this is just a kabuki dance, that you're going to go through, you're going to go through the motions, and eventually nothing changes. So let's see, I mean, if at some point in time that changes, but right now I agree with you, Scott, that that's basically what's happening in the market.

47:15And one of our key themes for 25, Aswath, is that some of the underpinnings of the U.S. markets that global investors have come to expect, including rule of law and consistency, are no longer ever present or can be taken for granted. that we're going to see the rivers of capital reverse flow and that we'll see multiple contraction and that that is a very negative forward-looking indicator for U.S. stocks. That is kind of one of our key themes for 25. A, do you agree with that and do you see evidence of that? I don't think it's that extreme of a draw, but I do think that for the last 20 years, the arguments for international diversification got weaker.

48:00I know a lot of portfolio managers telling me, why would I want to invest outside the U.S. when I make so much higher returns investing in the S &P 500 than the FTSE or the Euro indices or the Asian indices? And they drew the conclusion that therefore international diversification did not make sense. This year, I think, is a reminder that 20 years in stock market history is a very short time period, that these things reverse. I wouldn't be surprised if over the next decade or two, with or without what we've seen this year, we'd seen a reversal back to more normal times, where you see ups and downs, where some markets do better than the U.S.

48:40in some part sometimes. And so I think we're going to see that. I do think that the U.S. for a long time had a buffer, where it was allowed to do things that most countries could not do and get away with it, because of the largest, most powerful economy in the world. It was assumed that could get away with running a deficit 40 years in a row, having debt levels rise to levels that would terrify investors in most of the countries. I think we've lost that buffer now. So the Moody's rating by itself, to me, was not a surprise when they downgraded it. But the signal it sent of you're not special anymore, we're not going to treat you as a country that runs by its own rules, is, I think, a lasting message.

49:22And I think you're going to see it play out in other actions that the U.S. takes where historically it might be given degrees of freedom, that it's not going to get those degrees of freedom anymore. I think, and I agree with you, someone on the other side of this might argue that we saw that, we saw the ratings downgrade, we saw this GOP tax bill, which is going to, by many estimates, increase deficits by$3 trillion. dollars. You know, we saw reactions in the treasury market that were not great. There are a lot of, I mean, we've seen what's happened to our reputation as a reliable trading partner, many of the stuff that Scott has mentioned.

50:04And yet, the markets opened this week up, and we're up since Liberation Day. And I guess that's the part that I'm struggling to put together where, yes, we are seeing flows away from the US. And that was very, very pronounced after Liberation Day. We're also seeing inflows into ETFs that exclude the US stock market. And we're seeing record inflows that we saw that in the first quarter. But now since Liberation Day, it's almost like all of that's forgotten, at least if you were just to look at the S &P and if you were to look at the NASDAQ. And I guess that's the part that I'm struggling with where I saw this rotation happening.

50:48I wasn't hallucinating it. We saw it in the data. But then suddenly these markets in the U.S. rose again. And I don't know where we are in the rotation, if it's on hold or if it's just totally canceled or if it's just going to come in the future. Well, remember, a lot of the rotation into the U.S. didn't happen in the 1980s of the 90s. It's happened in the last 15 years. It's post-2008. And some of that rotation came from the fact that the U.S., more than any other country, kind of retooled itself to become a 21st century economy, right? If you look at the largest companies, young companies, technology companies, we're, in a sense, benefiting from that very real advantage we derive by being first in the game into the 21st century.

51:34I mean, Europe can try as much as it wants, but the reality is it's still a 20th century economy struggling to find its foothold in the 21st century in terms of technology, in terms of the shifts in economies. So I don't think you're going to see a rotation back to pre-2008 levels because there have been real changes in companies in the economy that are seeing reflected in markets. I mean, the U.S. was 33 % of global equities in 2008. It was 50 % of global equities at the start of this year. That happened in spite of the rise of China, which tells you how much the U.S. has benefited from allowing technology to become as dominant a force as it has become.

52:16So I think some of the protection that the U.S. gets is from that adjustment it made to the world changing around it that other countries have not made. China might be the only other country that's tried hard enough to do it. But the U.S. has been almost unique in its capacity to readjust to a new 21st century economy. Yeah, it sounds like if we are seeing a rotation, it's going to be sort of probably slight. And then at the very least, it'll take a long time because of just the size and scale of this. But I just want to go back to something you said there about how the market doesn't take what Trump says seriously.

52:55If that's the case, what matters anymore? Ultimately, government actions other than taxes don't directly show up in cash flows. That comes from how the economy does and earnings are. So I think the reality is at some point, the market is going to say, I'm not going to watch what the government is doing because it seems to keep changing its mind. I think you're going to see almost a laser-focused return to earnings and the economy as we got further into the year. So I think more than anything else, I'm looking at the second quarter earnings because that's the quarter where you're going to see the effects of tariffs and uncertainty play out.

53:29And if earnings hold up in the second quarter, then I think we're in a sense in safer territory. If you start to see serious damage to the economy and earnings start to show up in the second and the third quarter, then I think the market will notice because this has nothing to do with the government anymore. It's got to do with what it's paying for and saying this is not going to continue. These earnings are not going to continue. The growth is not going to be there. So I think more than anything else, this will force the market to look at real things happening with earnings in the economy and try to adjust to those rather than government policy decisions on what they think will happen in the future.

54:08Stay with us.

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56:23We're back with ProfG Markets. I want to go through some individual names, but first I want to start with one company we've been talking a lot about. Do you cover BYD? I own BYD, actually. It was one of my limit buys during April. I put limit buys in three companies. I got one of the three. I got BYD at a limit buy at 80. Mercado Libre, which is the Latin American Amazon fintech company at 1600. I got close, but I didn't get quite. And the third was Palantir at 85 or 80 or 85. And then get either of those, but they got close. And I think the reason I picked BYD is historically I've avoided BYD because it's a political stock.

57:05Any big Chinese company, Beijing isn't the rule. So my argument for owning Tesla in 2024 was, hey, I don't want to have a political stock. But Tesla has now become a political stock in many ways. So to me, there was nothing separating BYD and Tesla in terms of the politics of it. So I said, might as well go with the company that seems to be much more focused on the electric car business. Because to be quite honest, Tesla seems distracted by automated driving, by robots, by other things on its plate. It doesn't seem to be that interested in being the dominant electric car company. And I wanted a good electric car company in my portfolio.

57:44So I was in Europe a couple of months ago and I went to a BYD showroom and I was really impressed with some of the cars, with the way they were made and the way they were sold. And I think that it's a company that, I mean, it's bounced back up. It's again gone back to being fully priced. It's a company that I think is worth thinking about. You know, I'm generally leery of Chinese companies in my portfolio, but BYD was my exception. Thoughts on Apple? Apple's the most exposed, I think, to the Mag 7, to this tariff issue because it is an iPhone company. It's not a computer company. It's not a software company.

58:23It's an iPhone company with a services business on the side that's a cash cow. And unfortunately or fortunately for Apple, its iPhones get made elsewhere in the world and brought into the U.S. And it's not going to be easy to move that production to the U.S. in the near term. So that exposure is what makes Apple particularly susceptible to any kind of tariff talk. So more than any other company, Apple's hoping and praying that people stop listening to what Trump says and look at the economy and earnings. because I think that it is, I think, the company that could be punished the most if there's punitive action that follows from those tariffs.

59:05Follow-up on Apple stocks up nearly 40 % over the past three years. It's down 19 % year to date. It's gone and crashed this year. But still trading at 30 times earnings. We were looking at Apple's most recent quarter where they announced their big announcement, their big innovation is, wait for it, $100 billion buyback. And what we've been saying, largely based on all of the work you've done on corporate life cycles, that this is a mature company that's being valued as if it were a growth company. I just want to get your thoughts on that thesis. I think it's a mature company which goes between being valued as a growth company every time an iPhone update goes well, and being a mature company every time an iPhone update crashes and burns.

59:50So this is something we've been seeing since 2011, which is when I think it started approaching middle age, 2012, when the smartphone market started to level off. But you see the market kind of get overexcited when an upgrade goes well. And it's back to being a growth company. I bought Apple because it was a 7 % to 8 % growth company. That's the greatest cash machine in history. I've never seen a company generate as much cash as Apple has been able to generate, return that cash, and still manage to increase its cash balance. I mean, it's bought back$500 billion of stock just in the last six to seven years,$500 billion, and still increased its cash balance while doing so.

1:00:32So you buy it as a middle-aged company. It's a really healthy middle-aged company. you buy it for reasonable expectations, then I think you can get away with it. But if you build in expectations of double-digit growth, you're going to be disappointed. It's going to be ebbs and flows in this company because it can't maintain that kind of growth rate. Do you think that 30 times earnings is reflective of high expectations or is you think that's... You know what? It's cash flows are almost bond-like in terms of how predictable and stable they are. So I don't think of it as a risky stock in the sense of equity risk.

1:01:08So the reason it's being priced at such a multiple of earnings is the cash flows from the iPhone, even in a bad year, are so immense and so predictable that people have gotten used to those cash flows. That is the stability that will be at risk if their production comes under assault and you have to move the production. So that's going to be the real test for Apple is can they keep their earnings and cash flows stable while dealing with the demands that the production be brought back to the U.S. Because the cost of an iPhone is not 70 or 80 % of what their revenues are. Luckily for them, their gross margins are large enough that they have a buffer.

1:01:46But that buffer doesn't mean that they won't be hurt if they have to move their production elsewhere. Alphabet? I like Alphabet. I mean, I think of all the companies, Alphabet is perhaps the most buyable of the Mac 7 companies. And here's why. I mean, you could justify what you're paying for it based on just its advertising revenues. I know there are threats from AI and, you know, and ChatGPT and other the AI entities, which might put their search engine at risk, but they're an advertising company. They're priced as an advertising company. I know we've been waiting a long time for some of their bets to pay off.

1:02:24I still hold out hope that one of these days, one of those bets is going to pay off. If it does, it's icing on the cake for me. But the market seems to have given up hope, and that's the reality. The market is not pricing in expectations that any of these bets are going to pay off. And to me, that is the upside of buying Alphabet. If they can get one of their bets to pay off, I think it's going to add to their return. So if you are going to buy a Max 7 stock, Alphabet would be it. And we'll just round out the other four, Amazon and Meta. Amazon is going to be the canary in the coal mine in terms of whatever mine they put the canary in of what the economy is doing.

1:03:04To me, that's a company whose earnings I'm going to watch because more than any other company, it's going to capture the uncertainty that consumers face about their futures and the costs that are added by tariffs. You can try to hide the cost in the prices somewhere, but it still is not going to take away the effects on earnings and revenues. So I own Amazon. To me, it's going to continue to be the company that I watched this year to see if this year leaves a lasting impact on earnings and revenues of the company. Now, Meta and Microsoft, I think they're expensive companies, but you're paying for that AI hope that shines through in both those companies.

1:03:45I'm not sure that the hype will get delivered, but you're paying a premium for both those companies. I'm just wondering, in your view, do you think it's possible that even in Q2, we won't see the full effect of tariffs? And is it possible that what maybe we need to be looking for is the quarter after that? In other words, at what point in the schedule can we look at it and say, okay, this was the effect of tariffs? I think it's going to get staggered out. To me, it's not going to happen in one. It depends on the kind of company you are. I mean, for some companies, especially companies that are nimble and agile, the effects will be short term.

1:04:23It'll be near term. The adjustments will happen fairly quickly. For companies that are manufacturing companies, infrastructure companies, it'll take a while to play out. So I don't think it's going to be a particular quarter for every sector. It's going to be different sectors. The effects are going to play out at different points in time. I think the real wild card here is where the consumer sentiment comes back, because that has nothing to do with how companies react. It's what consumers feel about their future. If you don't see real damage in the second quarter, that's good news. Because that you should start to see the effects fairly quickly of people feeling uncertain about their future, starting to pull back on big purchases.

1:05:01So that's where you're going to see the effects, I think, first is in consumers pulling back on big purchases, not so much in sentiment, but in actual purchases, in big appliances, big in automobiles, those are the places you're going to see the first impact. And if that doesn't happen, as I said, we're running a resilience test of three groups. You've got markets, you've got companies and businesses, and you've got economists and experts. Economists and experts, we've kind of given up on. This is going to be a contest between market resilience and economic resilience as to whether, in fact, the markets are overestimating the resilience of the economy.

1:05:44And that's what the actual numbers are going to deliver is maybe the economy and markets are a lot more resilient than we gave them credit for. In which case, we'll come out of this year just like we came out of 2020 and 2022 with much less damage than we thought would be created by what we saw happening on the ground. It looks as if this new tax bill goes through somewhere between$3.5 and$5.5 trillion in additional deficits. Does that concern you with respect to ultimately its impact on the equity markets? Ultimately, default is both an economic and a political action, right? Historically, the reason the U.S.

1:06:22has been given so much slack is the acceptance that this is a huge economy that will choose not to default because it has the resources to pay its debts. And that's still true. So what I think might have changed is that political component, which is, are we still the kind of country which will choose not to default because we are the U.S.? We are the dominant. We are the largest economy in the world. So my worry is, no matter what the markets might have said about the last few months, there's been some lasting damage done to the reputation of the U.S. as a country that stands behind its obligations, political as well as economic.

1:07:03And that's going to show up in the way markets assess these deficits, debt. And that's why I said the U.S. has lost the protection it had for decades of being viewed as a country that no matter what it's... I mean, we've had this debt and deficit problem for 40 years now. I've been hearing about it since the 1980s. It's not new. But for much of the time, investors outside the U.S. looked at it and said, you know what? Large debt, large deficit. But the U.S. would never put its credit at risk by defaulting on its debt. In the last decade, we had that politically driven debt cliff. Every time you got to a debt ceiling, Congress would threaten.

1:07:40And I think that started to put a dent. And that's why I think this entire process, I would trace it back to that day in 2011. I think it was August 5th of 2011, when S &P was the first ratings agency to downgrade the U.S. Fitt joined them in 2023, leaving Moody's as the outlier. And now all three ratings agencies have effectively come to the same conclusion, which is there is no longer the political or they don't believe that there is enough of a political will in the U.S. to actually guarantee that the country will never default. And that's something that you can't claim back. It's very difficult to get back a triple A once you've lost it.

1:08:20And that's, I think, what you worry about the most is that long-term erosion of trust going to play out, not just in politics, but in economics. And how will that affect markets going forward? Final question from me, Aswath. You recently became a grandparent. My question to you is, what is it like to be a grandparent? And has that taught you anything about parenting, about being a father, or just about life in general? Perspective, basically. I mean, you know, you hold a baby in your hands, you stop thinking about markets, you start thinking about the MAG7 stocks, you stop thinking about the economy.

1:08:59But ultimately, this baby will have to grow up in a world that's very different than the world that you and I grew up in. You know, and I think that, you know, so at one level, I am incredibly happy to be holding a baby. On the other level, I worry about what this world would look like 30 years from now and what kind of job prospects and whether they can, you know. So I think it kind of reminds you of the things that ultimately matter. Markets are just a manifestation of real things happening on the ground. And for a long time, we've let the fact that markets are doing well blind us to the fact that on the ground, people are struggling.

1:09:42Younger people are struggling. They're struggling to own their first house. They're struggling to pay their student loans. The fact that our portfolios are up 20 % has allowed us to look the other way. And I, you know, when I had my baby, my thought was, I need to pay more attention to those things happening in the ground because this baby will have to live through those things before he or she can enjoy a portfolio that makes them wealthy. Aswath Damodaran is the Kirshner Family Chair in Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation and is a first-time grandparent.

1:10:18Is this your first grandchild? Third. Oh. This is your third. I thought it was your first. And by the way, Aswath, you can say that it's not the world that you and I grew up in, but young Ed here grew up in an entirely different world. He's 40 years younger than us. Anyways, congrats for a third time. Always appreciate your time, Aswath. Thank you. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Isabella Kinsel is our research associate. Dan Shallon is our intern. Drew Burrows is our technical director.

1:10:52And Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

1:11:06Lifetimes

1:11:11you help me in kind reunion as the world turns and the dark flies in love

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