Prof G Markets: Hindenburg Shorts Roblox + Germany’s Shrinking Economy

25:27We're back with ProfG Markets. Hindenburg Research has shorted Roblox, accusing the company of inflating its user metrics and operating a, quote, pedophile hellscape. Regarding that first accusation, Hindenburg estimates Roblox over-reports its daily user base by 25 to 42 % and its engagement hours by 100%. And on the second, more alarming point, Hindenburg claims it found Roblox members trading child pornography and soliciting sex from minors on the platform. Roblox shares initially dropped 10 % following Hindenburg's report, but the day after, they recovered. Scott, I know you've talked about Roblox in the past.

26:11From my understanding, you were quite bullish on the company at one point. What do you make of this new development? So I got this wrong. I mean, I don't know who to believe here, because obviously the incentives here are for Roblox or for Hindenburg to push the stock down, right? They've taken a huge short position. And when you call someone a pedophile hellscape or accompany a pedophile hellscape, I mean, that's just not nice to say about the Catholic Church. Oh, wait, they're talking about Roblox. Sorry. Anyways, little Freudian slip there. Little Freudian slip. I don't know what to think here.

26:44Roblox has about 3 ,000 moderators. TikTok has three times the number of daily users, but 13 times more moderators. In 2023, Roblox reported over 13 ,000 incidents of child exploitation in the National Center for Missing and Exploited Children, up from 3 ,000 the year before. It also responded to more than 1 ,300 subpoenas and search warrants from law enforcement, a jump of almost one-third from 2022. I'm just sort of headed the same way here, and that is, I think that these companies could figure out a way to make sure, like if you walk by a park, they have these signs that say, no adults allowed unless accompanied by children.

27:25They don't want strange adults hanging around in the kid park. I mean, first off, if you look at the data, we overprotect children offline and we underprotect them online. They could figure out a way to ensure that there are no adults on this platform or anonymous accounts messaging kids. And I don't doubt that it's difficult, but these firms manage to solve much more difficult problems when there's a profit incentive. The hard part here, Ed, is you have a company whose incentive is to exaggerate everything. And I'm not saying there's not a problem here. But if Surgeon General Vivek Murthy came out with this, I would give it a lot more credence, veracity.

28:08What are your thoughts? Yeah, the two accusations are, one, that they inflated their user numbers. And the specific accusation is that there are many bots on Roblox. And so they're saying that Roblox is double counting and counting bots in their numbers. And the second is that it's a pedophile hellscape. And I think that both of those accusations are true. But to your point, I think those accusations are also true of basically every single platform on the internet. So from Twitter, which has openly admitted to overstating its user numbers, which was a huge problem during the whole Elon acquisition, to Instagram, which according to studies is a host of nearly a third of all child predator interactions, to Facebook, a platform from which 94 % of child pornography originates, this is just a description of the internet.

29:08Fake, lying about the numbers, and also hosting the exploitation and abuse of children. So it's just ubiquitous. And I think the reason we're paying a little bit more attention to Roblox here is because it is specifically targeted to children. So if you just look at the demographic numbers, 42 % of Roblox's users are under the age of 13, and 58 % are under the age of 17. So this really is a children's platform. But I would hope that we can take this level of scrutiny, which I do think is warranted, and I would hope that we can start applying it to the rest of the internet companies. Because for some reason, as you pointed out, we have a much higher bar for what constitutes illegal and immoral practices in the physical world far higher than we do in the digital world, despite the fact that we are now leading the majority of our waking lives on the internet.

30:08There's clearly a problem. Whether it qualifies as a pedophile hellscape is unfair relative to the other platforms. I think we're going to find out. But just looking at it through a shareholder lens, the stock is probably overvalued. It trades at 8.6 times sales, which is a 57 % premium to gaming peers. and a 2022 survey found that 21 % of children in the U.S. who played Roblox spent more than 10 hours per week on the platform. There's just too much shareholder value in addiction. Especially the addiction of children. The addiction of kids. And you just think about how, quite frankly, just fucked up this is.

30:49It's really frightening. And I was kind of hoping Roblox would be the good guy or the good gal that spend a disproportionate amount of their money and created a safe place online for kids. But there's just so much money in addiction and going further and further downstream to younger people. And you can just see an environment where I think we're just going to punch out millions of kids who are just dopa monsters. It's also interesting to me, one, that Roblox is sort of built off of the backs of developers because it's not Roblox, the company that is developing games within the platform. It's the users who are developing the games within the platform.

31:31So that's a very interesting detail. And it was something that I think Roblox touted because it basically said that it's going to benefit from network effects and look how enthusiastic our users are. They're actually building within the game. But I've never really liked this company because you think about what that actually means. You think about that number, 42 % of the usership is below the age of 13, which means that the developers are 12-year-old kids, actually. It's 12-year-olds who are going online and who are building these games on Roblox. And so when you really think about it, what Roblox has done is they have figured out a way to siphon value from children who are getting addicted to the platform and creating games on the platform and basically not paying them.

32:25The retort from Roblox would be, actually, we do pay them. We pay them in Robux. My response is, Robux is a virtual currency that you can only spend inside the game. And this goes back to, you know, the early 1900s, this idea of scrip, where you'd have mining companies and logging companies who would pay their employees with internal currency that could only be used to buy things within the company's camp. And it essentially forced workers to spend money at the company. And this was something we banned in the US in the 30s. So this to me is a very similar thing that I think it's very easy to, I think they did an incredible job of making it seem optimistic and exciting and it's encouraging children to be entrepreneurial.

33:12But when you really think about it, it's a very similar dynamic. If this weren't an online company, if this weren't happening on the internet, I think we'd be a lot more concerned about this business model. And I think it's highly likely that we'd say, actually, this is illegal. I mean, even the sexual exploitation that we're seeing, and I'll just give you some anecdotes of what has happened in the past couple years. So this year in New Jersey, there was an 11-year-old girl who was kidnapped by a man that she met on Roblox. And last year in Indiana, there was a 15-year-old girl who was kidnapped by a man she met on Roblox.

33:51And in Utah, there was a 13-year-old boy who was abducted and sexually abused by a man that he met on Roblox, and there have been many, many others. As I mentioned, this happens on the other platforms too. A lot of sexual predators meeting kids on Facebook, on Instagram, on Snapchat, etc. But I think the question becomes, if this were a physical company, would we be saying that this is flat out illegal? To what extent is Roblox responsible for the fact that sexual crimes against children are originating on its platform? You're absolutely right. I was just thinking, Just as you said that, you inspired a thought, and that is, what if over the last couple of years, Disney, which is a bigger company, worth a lot more, what if three kids in the last, whatever it is, 24 months, three teenagers had been kidnapped and abused from a Disney park?

34:42I mean, they'd shut the fucking park down. Or there would be cameras everywhere, and you would be able—I mean, airlines. What if all of a sudden on airlines, kids were being kidnapped? I used to travel when I was a kid. After my parents got divorced, I would travel alone on an airline. My mom would drop me off and I'd get a little sticker saying I'm a traveling minor alone and they'd look out for me or what have you. But what if, you know, if now if I'm traveling alone with my sons, sometimes I'm asked for a letter, like a notarized letter from their mother saying it's okay that I travel and take them out of the country with, I need her permission.

35:24Because the airlines are like, we just can't have kids kidnapped. We can't. But if you do it online and it involves innovation and digital, it's the wild west. And you're exactly right. What would happen if these kids were being kidnapped at Epcot or at Universal Studios? They just would shut the fucking thing down. I'm with you. I think what you said was really powerful. We'll be right back after the break with a look at Germany's struggling economy. And if you're enjoying the show, hit follow and leave us a review on Prof G Markets.

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37:45We're back with ProfG Markets. Germany's economy is expected to shrink for their second year in a row. The government's 2024 GDP forecast was revised down from 0.3 % growth to a 0.2 % contraction. That's disappointing, but not entirely surprising news for the country. Last year, Germany's economy was the weakest of its large Eurozone peers. So, Scott, I can get into the details of what I think the main issues are, why this is happening in Germany. But I would like to just get your initial reaction, having just been in Germany and Munich. Does this surprise you at all? What are your thoughts? Yeah, quite frankly, it does surprise me.

38:28So a lot of people would argue that our growth is artificial and masked by the fact that I'm taking your credit card and spending pushing$2 trillion that are not being paid for, that are going on your credit card into the economy, which creates growth. or at least the illusion of growth that might come back and bite us in the ass. Like, I can create the illusion of growth if you give me a credit card where I spend$70 ,000 on a household that's making$50 ,000, which is effectively what we're doing right now. They essentially have a balanced budget policy. The Germans are grownups, and they say they limit the federal deficit to 0.35 % of GDP, which has limited their ability to make these sort of forward-leaning infrastructure investments that, quite frankly, sometimes pay off and grow the economy faster than the deficit.

39:12But in the short run, at a minimum, kind of juiced the economy. And they've said, no, we're the adults in the room. We're not going to have this kind of sugar high of growth. And they kept – from 2014 to 2019, Germany posted budget surpluses and interest rates were negative. The government kept infrastructure investments to a minimum. Now German automakers, including Volkswagen, are struggling to compete with more modernized EV makers in China. I think that, I mean, if you look, the numbers are pretty striking here. So the GDP growth in 2024 in the US was 2.5%. In the UK, it's 1.1%. The eurozone, it's 0.7%.

39:50Japan, negative 0.1%. Germany, negative 0.2%. India, plus 7%. And then if you look at the stock markets, Germany's DAX over the last 10 years is up 37%. And the SP has got this up 200%. I mean, it's just amazing. The Nikkei is up 157. The Nifty 50 in India is up 216, but still on a risk-adjusted basis, we've just outperformed everyone. Germany's public investment to GDP ratio is 2.6%, which is lower than the Eurozone at 3.1 and the U.S. at 3.3. If I were to try and talk about what is holding back the German economy, it's a weird duality. And that is, if you get out of Germany in high school and you took auto shop or you're just fairly talented or handy or disciplined, you can get a pretty good job working in the auto industry and find a decent place to live.

40:52and if your partner works, you can have a pretty nice middle-class life there on a middle-class salary. And in the U.S., you can't. And so the motivation, America believes in winners and losers. And the upside to a lack of a safety net and a lack of opportunity, and I hate to frame it this way, is people in the U.S. are very motivated to take risks and start business and try and crawl up the ladder. I don't think the same incentives are in place in Germany. Germany has had an incredible lack of innovation. There's just strikingly few unicorns in Germany. It's an economy, it's the biggest economy in Europe, and I believe the UK, because of its payments companies, has more unicorns.

41:39So in a weird way, I wonder if the safety net or the fact that you a nice life without taking the types of risks that Americans are more apt to take has hurt some of their innovation. Because name, well, let me do this. Can you name a unicorn to come out of Germany? Can you name any kind of Germany as a third largest economy in the world? What tech company can you name out of Germany right now? The company I think of is SAP, you know, Enterprise SaaS, and they've done very well. But if you look at the rest of the economy, you're exactly right. It's not tech companies. It's not software. It's not services.

42:13It's basically all industrial companies, mostly just auto companies. And the stat that I have here, which I just find remarkable, is that NVIDIA alone is more valuable than the entire German stock market combined. But there are a couple of things that you said there in that macro data, which I think are quite interesting. One was you mentioning this public infrastructure spending, this public investment, which is only 2.5 % of GDP, and that's far lower than the rest of Europe, and it's also a lot lower than the US, and we're not even that big into public infrastructure. So that's one piece. The other piece is the debt that you mentioned.

42:58So the debt-to-GDP ratio in Germany is around 60%, which is way, way lower than us, way, way lower than the rest of the G7. And if you look at the private sector in Germany, there is this big surplus of savings among companies. So private sector savings make up roughly a third of GDP in Germany, which is, again, far higher than the rest of its peers. So two main insights here, which is that Germany is very, very scared slash reluctant about spending. And two, they're very, very afraid of debt. It's basically the polar opposite of the US. And I think that you can argue, maybe you could argue that that demonstrates that they are fiscally responsible.

43:49They don't want to just overspend. They don't want to just borrow to the hilt like we do. But what's interesting is we're also seeing the other side of being perhaps too responsible, perhaps not risk-aggressive enough, which is the great thing about debt is that you borrow money and you take the risk, and then you invest that capital into building things into the future. And that's what a lot of companies do too. So I'd be interested to see here how you view that balance. Because I'm looking at Germany's economy right now, and to me, this is the dark side of being responsible. This is the dark side of being fiscally conservative.

44:30Your economy just starts to wither and wilt, and now they are officially in a two-year-long recession. Well, there is good debt in the sense that when I was on the board of Urban Outfitters back in the – I was there for four years from I think 2018 to 2022. And we had Goldman, our bankers, come present. And I asked how much can we borrow money at. We didn't need money. We were spending our cash. And they said, well, you could probably borrow money. I think it was like a 2.5%. And I'm like, why wouldn't we go borrow a couple billion dollars and either get very aggressive around acquisitions or buy stock back?

45:09I mean, if you can borrow money, there is good debt. And as long as you can justify forward-leaning investment. And sometimes when your economy goes into the doldrums, it does make sense to, quite frankly, turn the printing presses on and try and jumpstart the economy. the tough part and what economies typically don't do is that or we haven't done since the clinton years is when it's the economy's strong to maintain some discipline even cut some costs while the economy is strong because cutting costs while the economy is strong you're not going to send it into recession because hopefully the economic the tailwinds um supersede or greater than the the headwinds of cutting your spending we don't do that anymore we it's like we okay we can make an excuse to pump$7 trillion in the economy during COVID.

45:57You can make a really rational argument, and they made it, that it's better to overdo it than to underdo it. But then when the economy comes ripping back and company stocks are going fucking crazy, do we say, okay, now it's time to pay a little bit more back? No, we don't. So I would, you know, Germany is probably also, I think the thing we haven't been talking about also is that Germany made a very big bet, I forget the term, where they would engage Russia. And I would have made the same argument. Basically, when a country opens a McDonald's, it's less likely to go to war with us. And they said, if we engage Russia in commerce, specifically around energy, it'll be good for us.

46:36They started unplugging their nuclear reactors, and they became way too dependent. Their energy costs skyrocketed. It threw their economy into a bit of a freeze. Just to clarify on that point, though, because that was the beginning of their problems. And I think they're still blaming their issues on the Russia problem, where they were too reliant on Russian energy. But if you look at gas prices, they have sort of normalized. So at this point, they can't be making that argument. But to your point, yes, that's where it all sort of began. The final point I want to make here is that the most important company, in my view, right now in Germany is a company that's a unicorn.

47:15It's a company called Salonis. It's a SaaS business workflow company that helps optimize decision-making for businesses, creates efficiencies, finds where business improvement processes are most ripe, where they should invest. Sounds very boring and very profitable. This company's on fire. And I think they're going to do$600 or$700 million in revenue. They're growing like crazy, super impressive founders. And what happens is when you have one unicorn. Hopefully it goes public. Hopefully it has a huge pop. And then the wealth that creates internally, people decide, I have family in Stuttgart or I have family in Hamburg.

47:53I'm going to stick here. And they become rich and they start a venture capital firm and they start investing locally. Germany is dying for a unicorn. If I were the German head of industrial growth or whatever in Germany, I would really be rooting for Salonis because they need a big winner here to inspire. Everyone talks about Berlin being this hub, the central hub for innovation and tech. Okay, who? What? What's come out of there? So they need a big win. The reason why I think Germany will, I mean, I'm just an enormous fan of Germany. One, I think culture matters. I think quality of life. I mean, Munich is just a spectacular city.

48:41If I spoke German, I would live in Munich. They have fantastic football, which is obviously very important. But these are wonderful cities. England basically has London. France basically has Paris, and I'm going to get shit for that. But they have one economic center. Germany has five or six really strong industrial centers. They work hard. They play hard. The other thing about Germany, and this is totally off topic, if you know anything about German history, and it's kind of a cautionary tale, if you were to pick the society that has been the most progressive, the most forward thinking, the embrace of jury trials, the embrace of immigrants, the embrace of academia, the embrace of a thriving gay community over the last 200 years, who would be the most progressive over that 200-year frame?

49:28It would be Germany with a huge asterisk around this 11-year descent into darkness. But Germany is really arguably one of the most progressive, enlightened societies in the world. And so I think people, and not only that, it's the economic engine of Europe. If they sneeze, all of Europe catches a cold. You know, you got to root for Germany. Anyone who spent time in Germany, you just realize that this is kind of, this is just a wonderful Western nation. So I'm rooting for them, but they, oh my gosh, they are desperate. But no country has been more ripe or deserving of a unicorn right now that re-inspires or reignites the tech community than Germany.

50:09Yeah, but it all plays into the same thing, which is they need to take more risk. And, you know, you need to invest in risk capital. You need to start looking at startups and start investing in them and making slightly bolder bets. The one other detail which I think is very important when it comes to Germany's economy is this demographic problem. So in the US, the average age, the median age in the US is 39. The median age in Germany is 47. It is the fourth oldest country in the world. And as a result, they have been seeing their labor force start to shrink, which they have slightly been addressing through immigration, but immigration has become a political issue and an actual issue in some cases.

51:00And so that might not continue. So it's continuing to shrink. And it is expected, the labor force, the working age population, is expected to decrease over the next five years three times faster than the Eurozone average and six times faster than the US. So this is a very, very old nation, which means you're going to see a lot more pressure on its pension program, its social security program, and also it's going to be just a far less productive society, a less productive economy. So it's sort of the worst of both worlds here where they've already got their issues. They need to start figuring out a way to get out of that hole.

51:43But if you look at the demographics issue, which I agree with you on, I believe is one of the most important forces in economics. it does not look good for Germany. Well, as Peter Drucker said, kind of my role model around economics, he just always said, demographics are destiny. If you look at any industry, it can usually, its decline or its ascent can be reverse engineered to demographics. And what you're saying is it's a really ugly picture. The advantage they have is that they will always be an attractive place for immigrants. And I would think they'd be able to solve that birth earth. But anyways, it'll be interesting.

52:19But I'm a huge fan. I think we're rooting for Germany. I think they're a fantastic ally and just a wonderful culture. Let's take a look at the week ahead. Second quarter earnings season continues with the banks. Goldman Sachs, Bank of America, US Bank, and Morgan Stanley are all reporting. And we'll also see earnings from Johnson & Johnson, American Express, and Netflix. Scott, do you have any predictions for us? Well, I just think we're about to see the first major externality of AI. And that is, I believe that some of the misinformation around FEMA, which is really dangerous and has been spread by people, including this guy who owns an EV company and sends shit into space, spreading misinformation that, you know, you can't trust FEMA or that they're spending, they're run out of money and they're spending it on illegal immigrants.

53:12All of this misinformation creates confusion across people who are really suffering and need good information on how to access resources when in need. That is a dumpster fire compared to the nuclear mushroom cloud we're going to experience over the next three weeks in terms of the run-up to the election. A combination of increased social media activity, the ability to generate content through AI, just spin up tens of thousands of fake accounts, test a million times per second the iteration of content that goes viral, a polarized media environment. I think we're going to see all sorts of videos, deepfake videos of violence at polling stations and key swing districts.

53:56I think that just the zone is going to get so flooded with misinformation that it's going to discourage people to vote and not know what's true, what isn't. And all the platforms are going to feel really bad about it the day after the election. And the fear is, you know, what happens, not only what happens leading up to the election, but the misinformation that then gets distributed around, quote unquote, a fake election. You know, what happens when two people show up on Inauguration Day, each with their own supporters and even their own army potentially? I mean, this shit could, it could spin out of control pretty fast.

54:36And the ability to generate misinformation, test it, and then distribute it across these porous platforms who don't, as you referenced, just have not put in place safeguards. This is the first big externality. This is the first big puff of carbon into the air of AI. It's going to be misinformation over the next three to four weeks leading up to the election.

55:03This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon. Mia Silverio is our research lead. And Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Join us on Thursday for a conversation with Alice Hahn only on Prof G Markets.

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