Prof G Markets: Goldman and Apple Part Ways, Shein and Temu, and Charlie Munger’s Legacy

0:28Time to check on the skies. Whether you're a founder, investor, or innovation company executive, you need a bank that truly understands your business inside and out. A bank that offers uniquely specialized solutions for your unique needs. A bank like Silicon Valley Bank. Silicon Valley Bank is still the SVB you know and trust. The only difference? SVB is now backed by the strength and stability of First Citizens Bank. Yes, SVB. Learn more at svb.com slash box. This week's number, 5.9 billion. That's how many packages Amazon is projected to deliver in the U.S. by the end of the year, more than UPS and near double FedEx's volume.

1:13I found out recently that there was a porch pirate stealing all of my Amazon packages, so I ordered a butt plug. That way, if it gets stolen, the thief can go fuck himself.

1:32Welcome to Prop G Markets, Ed. Today we're discussing Goldman and Apple's partnership, the fast fashion industry, and Charlie Munger's legacy. Here with the news is Prop G media analyst Ed Elson. Ed, what is the good word? Was that Elon-inspired, that joke? How did you come up with that one? Okay, so hold on. Before we even get to the headlines, can we just talk about how literally this guy is coming undone? What are your thoughts? Did you see the Dealbook conference clips? Of course. You're young. What do you think of this? I think he's lost his mind. I think he's probably really bored. I mean, it feels like everything he does is just to make his life more exciting in some way.

2:15I don't know. And Claire made a good point as well, which is like, everyone's freaking out about this, but it really is pseudo news. It's like a guy just went on stage and threw some F-bombs around and like— Made an ass of himself. Who cares? yeah, he's mentally ill. That's a fair point. What did you think? Well, I have a bias because I don't know if you've picked up on this, but I don't love Elon Musk. But as far as I know, at about 499 of the Fortune 500 refuse to advertise on this pod, does that mean they're blackmailing us? It's a total injustice. I can't believe it. And the delusions of grandeur and him talking about his terrible childhood.

2:49So we decided to save humanity at the age of 13 by developing, making us an interplanetary species. It's like, tell me you do ketamine without telling me you're doing too much ketamine. Jesus Christ. It feels like this guy's world is closing in on him. And I think it comes back to not having anyone close in your life. But what's going on? Talk about the markets. Let's start with our monthly review of Market Vitals.

3:21The S &P 500 had its best month in more than a year. The dollar saw one of its sharpest sell-offs since the summer. Bitcoin hit an 18-month high, and the yield on 10-year treasuries fell below 4.3 % for the first time since September. Shifting to the headlines. U.S. home prices hit an all-time high in September. Prices rose 0.7 % from the month before, marking the eighth straight monthly increase. Year-to-date in September, prices were up more than 6%. Binance and its CEO, Changpeng Zhao, pled guilty to violating US money laundering laws. Binance will pay a$4.3 billion fine as part of its plea deal, and Zhao stepped down as CEO.

4:01He faces up to 18 months in prison. OpenAI finalized Sam Altman's return as CEO. The company also gave Microsoft a non-voting seat on its board. Saudi Arabia's public investment fund is taking a 10 % stake in London's Heathrow Airport. And finally, Mark Cuban is selling a majority stake in the Dallas Mavericks. However, Cuban will maintain control over the team's basketball operations. Scott, do you have any thoughts on this? The American dream of owning a home has become a hallucination for people your age. I bought my first home at 28. It was in Petrero Hill in San Francisco. I'd started a company, but my job offer out of Haas was for about$100 ,000 a year.

4:45And the home we purchased in Potrero Hill was$285 ,000 or 2.85 times salary. I think average salary now is like$160 ,000 or$200 ,000 coming out of Haas. And these are blessed kids. That's a staggering income for somebody at that young an age. But the average home, I think, is about$2 million. So it's gone from 2.8 times the income of an MBA graduate to eight times. Average home in that area? Yeah, in San Francisco. Okay, yeah. But homes in the U.S. have gone from an average price of$290 ,000 to something like$420 ,000. And then you couple that with interest rates coming from 3 % to 7%. And it's just, I think the monthly or the yearly income you need to qualify for the average home in the U.S.

5:28has gone from$70 ,000 to$120 ,000. meaning that I would imagine, I don't know, something like a half of people under the age of 40 qualified. Now it's probably less than a quarter. And not only that, there's just going to be unintended consequences of accelerating interest rates 500 bps in whatever it was, 12 or 14 months. And one of those unintended consequences was we all thought that if interest rates went up 500%, no one was expecting that would result in an increase in housing prices. Everyone thought, okay, that's going to massively increase the cost of owning a home, which will take down the price.

5:59such that people can buy homes. And what it ended up doing was locking in or basically ossifying the market because anyone with a mortgage that's longer than three, five, 10, 30 years has a below market mortgage. And that's now an asset that's worth a great deal of money. So they're trapped. They can't move. So there's a dearth of supply. I think it's important to highlight how this is like a supply demand problem because the strange phenomenon here is that demand is decreasing because mortgage rates are higher. So people are less interested in buying a home. And despite that, prices are going up.

6:34And you kind of highlighted that. But what this is really showing is just how low the supply really is. And we've been talking a lot recently about solutions to this stuff. I think less discussed, though, which we should acknowledge, is the extent to which the Biden administration is actually addressing this. So last year, the White House launched this housing supply action plan. They're basically rewarding areas that are reforming their zoning policies. They're trying to expand access to federal financing for housing development. And then last month, they announced this plan, which I thought was a great idea, which is that they're going to try to help convert commercial offices, which, as we know, are increasingly empty, and convert them into residential properties.

7:17You know, having said that, we need to see results. Like, we don't—the results aren't there. The housing prices are rising. but I do think it's worth recognizing that the government in this case, the Biden administration is recognizing this problem. They are taking steps to address it. And I just like acknowledging every now and then when the government is actually doing its job. I love that you said that I'm encouraged and heartened when people your age recognize the power and the scale and the, you know, the benign nature of U S government. And I didn't know about any of those things. So that's great.

7:49So thank you. Binance, I think you called this. Binance is next because the thesis here is very simple. If your business is predicated on existing outside of the law, and generally that means existing outside of the US, which has probably the strongest regulatory environment in the world. If that's the first pillar of your business and second, your sector is in structural decline, there's just no way that you can win this game. What do you know? Here we are. You can kind of guess how this played out. And that is the DOJ showed up and said, with evidence from the SEC, hey, Shao, you're in hot water.

8:28And he probably said, fuck you, I'm a billionaire. Talk to the hand. Talk to my 200 lawyers. And you guys aren't innovators. You don't get it. And then my guess is he saw, you know, what went down with Sam and then realized, okay, Sam's going to jail for the rest of his life. And his lawyers called him and said, we don't want this to go to trial. Because if this goes to trial, there's now a precedent that every other juror has seen where they sent this guy up the river. And to think that you're not going to have a similar outcome is just you're smoking something. So let's call the DOJ back and see if we can cut a deal to sweet.

9:03And I think that's what they did. And I think this is important. And arguably, we've been talking a lot about ESG. That's what we're riding on this week in No Mercy No Malice. I think this is the most important ESG investment of the past year, and that is investing in the SEC and the DOJ that say to individuals who come up with innovative reasons to wallpaper over the fact that they are engaging in money laundering, transferring assets to terrorists, helping people engage in human trafficking. The incentives in America are as present and burn brighter than they ever have. There's a lot of reason to take risks.

9:41You can attract capital, work your ass off. The incentives are in place. What's missing is the other side, and that is the disincentives. So I like when we see the government move in. Obviously, they follow the letter of the law here and show that, OK, it doesn't matter how many models or quarterbacks you hang out with or how many billions of dollars you have. if you engage in criminal activity that harms the commonwealth, we're coming for you. I just want to highlight the prediction itself. It was seven months ago. I said, 12 months from now, Binance is probably not a company anymore. So five months left.

10:16Hopefully we get this one right. But yeah, it's just as you said, the reasoning behind the prediction is very simple. It's like the writing's been on the wall for Binance for such a long time. The first clues were one that it was registered in the Cayman Islands, that's weird. And two, that it just generally refused to comply with basically any federal regulation. And that extends beyond the US. And I think the learning for me here is like, generally speaking, companies are usually a little shadier than they appear, because every company has an incentive to present itself in its best light. So with Binance, you take a look at a company, and if your instincts tell you this kind of looks like a well-branded organized crime group, I would argue it's not a bad idea in general to trust your instincts there.

11:02Generally speaking, especially, I don't want to be too ages here, but with older CEOs, you know, above 25 or whatever, they have a pretty healthy fear of jail. And they have a pretty strong, I have found distinctive, the examples we talk about in big tech, I have found that most CEOs and leaders of organizations have a pretty strong moral compass. And while they'll engage in activity that might not, you know, they'll sell tobacco or they'll sell big gulps or they'll, you know, engage in supply chain that might not be as charitable as it should be, but they will absolutely comply with the law. If for any reason or any other reason is that my generation knows they can go to jail.

11:47And I feel like your generation has been given role models that I can do and say anything. And as long as I'm wealthy, I'm somewhat immune from the law. And I think they have a lot of data points that support that view. And it feels like the chickens are coming home to roost. Sam Bankman-Fried, Elizabeth Holmes. Let's move on to the kingdom. I love this. Saudi Arabia investing in London's Heathrow. What's interesting is that we have normalized, for better or worse, money coming out of the Gulf. And I would describe the last year, if there was a theme, it would be the capital wins. Oh, no, they're buying our sport, the PGA.

12:24Well, okay. Yeah, you're right. And capital wins. And whatever your fears around infrastructure or owning these iconic assets, capital wins. And it's actually, I think it's a good thing. I think the kingdom and the West should embrace each other. They have a lot of cheap capital. We have innovation and IP. As an asset class, I think infrastructure is fantastic. I was at Heathrow this morning. You cannot snap up an airport in two, three, even 10 years. These things, I mean, first off, there's no land left. So these things have incredible barriers of entry. The thing about airports is not only are there landing fees and restaurant revenues, all that sort of stuff, but the amount of luxury retail that comes through airports is extraordinary.

13:08I used to do work with Estee Lauder and LVMH, and some of the most successful distribution by far was airport retail because a lot of time wealthy people travel. They get trapped in airports for long, extended stretches of time, and hey, maybe I'll go buy a Bottega Veneta bag. I didn't even realize when I read this that airports are privately owned. And generally, they're not in the U.S. But at the moment, I think it's around a fifth of airports in the world have at least partial private ownership. And then when we were discussing this, you mentioned that you once considered investing in airports yourself.

13:43Could you take us through that experience? A friend of mine, Orlando Machant, who was a Tiger Cub and was the number two at Gracie Capital, a great investor. Tiger Cub meaning? Julian Robertson, who started Tiger, seeded a bunch of his favorite managers. He'd give them$100 million and then they would go raise their own money. And Orlando is this sort of special sits guy, mostly focused on Latin America, but the world is sort of his thing. He won't buy Apple. That's not what he does. He finds these really unusual, strange, small and mid-cap companies that he just thinks are dramatically underpriced.

14:16He'll follow a small number of companies, get to know them really well, talk to management regularly, and then wait till he thinks that they're so inexpensive that there's just dramatic upside to the downside. So he only does kind of one or two of these a year. And one of the ones he was looking at, I don't think we did it. I'm an investor in his fund. It's one of my biggest investments, was in airports in Latin America. So this one company owns a bunch of airports, and I think it's El Salvador, Chile, and maybe Bolivia. And they're good businesses. They're kind of consistent, stable revenues.

14:50You obviously have, if you're the airport in Asuncion, you kind of have a lock on it. So the idea of privatizing it and giving it, handing over the keys to someone who has a profit motive, I guess there's some downside to that too. But it's a business. I don't think we made the investment. But yeah, there are privately owned airports all over the world. Cuban, any thoughts? The thing that struck me about it was what effectively has happened here, and I haven't seen this in sports before, is a dual-class shareholder company. And that is despite selling most of his economic interests and de-risking, he's still maintaining control.

15:25And the Adelson's probably said, okay, that's not ideal for us, but there's so few teams that come up for sale. You seem like a reasonable guy, and I think Mark Cuban is a reasonable guy. True story, my neighbor, Ed, who basically held up the construction of my house for a good six months, and I could never figure out why, bought the Houston Rockets in like 1990 for$120 million and sold them for$2 billion, I think three or five years ago, for Tita Brothers. Yeah. And now he has like, he can't be that bad a guy, though. He has all these dogs. Anyways, he's a dog lover, but I'll tell you this. He hates people.

15:57He hates people. Anyways, that's my brush. with NBA greatness. Are you going to buy the Rangers? First, I don't have the money. I kept thinking, well, if I have another big year in the markets. Yeah, that's a problem. So there's that. I don't have the money. But even if I did, I see how Chelsea fans treat Todd Bowley, who strikes me as a nice man, who's doing his level best, invested a ton of money. You're a Chelsea fan, right? Yes. They give the guy so much shit. Rightly so. Well, okay. The guy went to the manager in his first week. He said, I've got a new idea. I've got a new game plan. I think we should play a 4-4-3 formation.

16:40He thought that there were 12 players on a football pitch. I don't know. I think when you show up and spend$5 billion, you get to pretend that you understand the business. Anyways, not buying a football team anytime soon. We'll be right back after the break with a look at Goldman Sachs and Apple.

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18:35We're back with ProfitU Markets. Apple's partnership with Goldman Sachs may be coming to an end. For the past four years, the two companies have worked together to launch an Apple credit card and consumer savings account. Last week, however, Apple handed Goldman a term sheet that would allow them to end their contract in the next 12 months. That term sheet will only go into effect if Apple is able to find an alternative provider. In other words, Apple's on the hunt for a new finance partner. Scott, Goldman's been struggling with consumer banking for a long time now. We've discussed those struggles before.

19:06What do you make of this new development? So one, there were smoke signals around this. Goldman has said they're just getting out of the consumer finance business. So this isn't a surprise. What is interesting here is nomenclature. And that is whoever runs comms at Goldman should be justifiably getting a lot of shit from David Solomon, the CEO, because it positioned it as Apple is on top. And it's, I think the exact term in the Wall Street Journal was severing ties with Goldman. Pulls plug, yeah. Pulls plug, right? And that makes it sound like Apple's disappointed in Goldman or there was a falling out.

19:43It makes it sound like, you know, Apple is in charge here, didn't like Goldman and fired them. That's not good for the Goldman brand when the reality is I think that it was essentially a mutual decision to part company. Goldman's exiting the business. And it just struck me how the framing of a story has such an impact on people's perception of the company. I mean, so some of the headlines, Wall Street Journal, Apple pulls plug on Goldman credit card partnership, business insider Apple to cut ties with Goldman, Axios, Apple breaks up with Goldman. And you mentioned, you know, it was more mutual.

20:21A direct quote from the Wall Street Journal, quote, quote, by early this year, Goldman had told Apple that it would be looking to offload the partnership. In other words, this was Goldman's idea. Like, it's something they wanted to do, but that's exactly right. Like, the way that the media has unanimously characterized this is that it was Goldman who was sitting on their hands, and then Apple came over and, quote, pulled the plug. So, that's strange. And I guess my question to you would be, why is that happening? Like, why are media outlets either intentionally or unintentionally reporting on this kind of small story with this strange pro-Apple bias?

21:03I think anything Apple does, people just give them the benefit of the doubt, or at least the media. They do an outstanding job managing the media. They're very, very manicured. They're very careful about it. They're very measured. Everything they do publicly is highly curated. And quite frankly, the comms people at Goldman didn't do their job here. The media has always loved to hate Goldman. It really does. It finds it as like, what was that term, the giant face-sucking squid on the economy. And I think people are jealous of their success. I would have been fucking furious if I were the board or Solomon at the comms group that they let this be portrayed this way.

21:40Because comms matters. When you're a public company, you trade within a range. Investments banks trade within, call it, a range of 8 to 12 times EBITDA. And I don't know what the range is. And that delta is based on a few things. Their growth and management or the perception of management or strategic positioning. But it's also very much based on how effective they are at communications. And again, I've said that the core competence now of every CEO has to be storytelling. And that is the ability to shape a vision that's compelling, be likable such that you can attract investor attention and get cheaper capital that you can invest at a greater clip than your competition such that you can begin to pull away.

22:20Well, one thing to keep in mind is that when you read the news, it usually isn't the journalist who writes the headline. Usually it's the editor. But we wanted to try a little thought experiment. So we fed that Wall Street Journal article into ChatGPT. And we gave ChatGPT two different prompts. First, we asked it to write a headline designed to generate clicks. And then we asked it to write a headline designed to accurately encapsulate the content. So here were some of the clickbait headlines. Apple's shocking breakup with Goldman Sachs. Goldman faces major setback as Apple plans to exit partnership.

22:55Apple to drop Goldman Sachs amid growing challenges. So very similar to the real headlines and all puts, you know, Goldman on the defensive. Now, here are the headlines optimized for accuracy. Goldman discusses handing over Apple card program. Apple and Goldman Sachs part ways on credit card venture, marking a strategic shift for both companies. So it's so interesting how, one, this reveals a bias in the headline writing when we literally just gave it the article itself. But two, it shows that with the right prompting, AI could potentially do a better job of summarizing the news for us. So the question I'd ask you is, do you think there's a case to be made that we should actually start using AI in journalism?

23:37And maybe it would be to our advantage. Yes, but young Padawan, you're so cute. What you've just shown is that, in fact, they are using AI. and they're using it to do exactly what you just outlined. They're using it to get as many clicks as possible. Wall Street Journal? Oh, well, you think they're immune? I don't know, yeah. They're in the business of making money, so I would be shocked if they aren't using AI to generate headlines. And they're not saying, they're not instructing the LLM to say, we want a thoughtful and measured summary of the substance of the article. That's not what they're tasking it with.

24:14They're like, get me clicks, baby. Get me mad fucking clicks, bitch. That's the prompt they're getting.