Prof G Markets: Takeaways from the Second Debate + Does the US Need a Sovereign Wealth Fund?

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1:21This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best idea win! On brand with Jimmy Fallon. Series premiere Tuesday on NBC. Today's number, 790 That's how many islands are in Scotland 130 of which are inhabited Ed, in Scotland If you buy a 3 year old whiskey You can call it Scotch Any younger than that? It's just bad parenting, Ed Ed,

1:58I'm in Scotland I'm in Scotland I couldn't tell from the haunted house behind you. You got to tell everyone where exactly you are in Scotland and why you're there and what the occasion is. I'll go in reverse order. I'm turning 50 and the naked I look 49 and seven eights. I am here and a hundred of my closest friends are showing up. By the way, you came in at 102. So you just missed the list. Just missed it. Just missed it. You just missed the list. I'm outside of Aberdeen at a place called the Five Farms. And no joke, we've taken over a hotel. We've been planning this for two years. And basically my entire life is flying in over the course of the next 24 hours.

2:43This isn't airing until Monday, so it's almost sort of, I don't worry that I'm hexing it. Anyways, I'm here celebrating a nice moment in life. I never thought I'd get here. I never thought I'd be here at this point. So I'm very, very happy to be here. That's probably the alcohol speaking, but I'm actually, I am actually very happy to be here. Any anxiety? It's funny you even ask that. Better be fun. Better be fun. I've been thinking a lot about that. I do have anxiety. I'm already sort of just hoping it goes really well and that everyone else has a nice time. It's really, when I was your age, Ed, I didn't have enough anxiety.

3:19I almost got kicked out of UCLA three times. I was on academic probation. And then if you get less than a 2.0 the next semester or quarter, you go subject to dismissal. I was subject to dismissal. I was on academic probation, I think, four or five times. I was subject to dismissal two or three times. And I just wasn't worried about it. I just didn't care. I'm like, I'll just take an easy econ class and get a B and everything will be fine. And I should have been more worried about my life back then. From the age of 30 to 40, I think I had exactly the right amount of anxiety. And anxiety is a key attribute or trait for survival.

3:52you're supposed to be anxious about shit because there are things that can kill you and then from about the age of 40 45 on i've been too anxious i don't and unfortunately i get anxious the day after i drink alcohol so i'm pretty much anxious kind of five six days a week but yeah now i worry about fucking everything i don't worry about my kids i worry about business um i don't worry about that much about you guys i couldn't tell no i do do you feel like you're an anxious person well i think i think hosting is a very anxious thing because you're inviting a bunch of people, they're taking time out of their day, in this case, their entire weekend, to come and celebrate you.

4:28So you kind of, there's all this pressure to get everyone to have a good time. I'm a terrible host because I get anxious. I'm always checking in on people, making sure they're having a good time. And then I think I become annoying. I think the best hosts are the one who can do all the work, get anxious beforehand, and then just totally let go, have a good time, let people do what they want to do. Don't be too controlling. saying, those are the best hosts, and I am not one of them. Jesus Christ, don't be so fucking mature. Like, when did this happen to you? Seriously. No, that's good advice. Mostly my answer for that is good beer and edibles.

5:02Yeah, exactly. That's a good idea. I want to get through. I want to get everybody here. I want Saturday night. I want the speeches to go well. I want everyone to feel welcome and loved. And then I'm just going to let loose. So I'm not going to drink because I get very emotional when I drink, and I'll just be walking around sobbing all the time, which kind of brings the whole vibe down. Yeah, I'm real happy to be here. Anyways, enough of that shit. Get to the news. Get to the news, Ed. What's going on? Let's start with our weekly review of Market Vitals.

5:34The S &P 500 rose, the dollar was flat, Bitcoin climbed, and the yield on 10-year treasuries hit a 52-week low. Shifting to the headlines. The consumer price index increased just 2.5 % from a year earlier and eased slightly from July. That is its lowest level in three years. And in other economic news, median household income rose 4 % in 2023 to more than$80 ,000. That's the first increase since 2019. Oracle's revenue came in higher than expected, rising 7 % year over year. Cloud services became the company's largest business, with revenue up 21 % from a year earlier, and shares rose 15 % to a record high.

6:15Wall Street is limiting the amount of hours that young bankers can work. JP Morgan announced it will cap hours for junior investment bankers at 80 hours a week. Bank of America already had a cap in place, but it has a new timekeeping tool that will more closely track the hours its junior bankers work. And finally, OpenAI is releasing a new AI model known internally as Strawberry, which is trained to spend more time coming up with an answer before it responds to a prompt. The new model will be able to solve multi-step math and coding problems. Scott, your reactions, starting with the inflation and economic data.

6:51So inflation, the consumer price index, just 2.5 % down from, I think, 2.8 or 2.9 last quarter. It's almost at its target, 2%. And then household income rising 4%. I mean, basically, you have the Goldilocks economy. Now, the psychological problem that happens is, one, social media loves shitposting, And there's a certain gravitas and intellectual, I don't know, vibe you get when you're a pessimist. But and people just love to shitpost our government. And also people credit their own grit and character for their household income increasing. But when diapers go up in price or oil goes up or gas goes up in price, they blame whoever's in office.

7:32But this is about as strong as economy as you could point to anywhere in the world. The problem is, I would argue, is that we don't distribute it equally. Just as that technology philosopher said, was it William Gibson or someone else, said that the future is here, it's just not evenly distributed. Prosperity is here. An unbelievable economy is here. It's just not evenly distributed. And I think of what I've been—we're writing a post in a mercy and a malice about minimum wage. And I believe that the one thing you could do most seamlessly to reduce diabetes, high blood pressure, depression, suicide, decrease divorce rates would be to raise minimum wage to$25 an hour.

8:19Instead of building a gigantic apparatus, which all these government programs are, which tend to be somewhat inefficient, instead of a thick layer of unions, which are trying to protect workers whose intentions are noble but are very inefficient and sometimes corrupt, just put more money in the pockets of Americans with a minimum wage of$25 during a period where employment is this strong. Do you know what percentage of American households, Ed, make less than$75 ,000 a year? I'm going to guess 20%. Get this, 50%. Half of American households make less than$75 ,000 a year. What would raising minimum wage to$25 an hour do for them?

8:57Anyways, a bit of a tangent, but I'm very happy about CPI only dropping to 2.5%. What are your thoughts? Yeah, just on that point. One thing we should point out is that that household income number is inflation adjusted. So it is somewhat meaningful. uh there is one statistic that was in that same report that came from the census bureau and that was that the poverty rate in america fell but the number is quite staggering it fell from 11 and a half percent to 11.1 percent so that means that there are 37 million people in america who are still living in poverty. And, you know, to your point, I think we spend a lot of time analyzing a lot of technicalities in the markets, and we should be doing that.

9:52You know, we think about the yield curve and interest rates and PE ratios, et cetera, et cetera, and there's value to that. But I think there is also value in keeping the big picture front of mind. And the big picture is that one in 10 Americans cannot afford basic necessities to live. So I would hope that it also reminds us that while, yes, we are doing pretty well on a relative basis when we look at other countries, if you look at just America from an absolute perspective, we could certainly be doing a lot better in this country. Oh, I 100 % agree. There's, I mean, more stats. One in five children in America live in a household that's food insecure.

10:31Whatever all the blessings are of the fruits of our riches. We do, in my view, a pretty shit poor job of distributing and allocating resources, despite the fact that we just have so much of it. Now let's talk about Oracle's earnings. You kind of own this, Ed. Talk about Oracle. Well, one segue that we could use here is that, you know, you're talking about wealth inequality, income inequality. Larry Ellison, who is the founder of Oracle, added$14 billion to his net worth in one day after these earnings. He is now the fifth richest person in the world. He is ahead of Bill Gates. His net worth is, wait for it,$168 billion.

11:19It's just staggering. We can get into a conversation about that, but I think we've already covered the inequality part. Let's talk about the Oracle earnings themselves. earlier this year, I said I was bullish on Oracle. My thesis here was that Oracle is kind of the fourth musketeer when it comes to cloud computing. The options are basically Amazon, Google, Microsoft, or Oracle. And my view was that Oracle is a really attractive company for AI companies, especially AI startups, because Oracle is the only one that isn't actively developing its own LLM. So if you're an AI company and you want to compete with the likes of Microsoft, who's developing Copilot and working with OpenAI and ChatGPT or Google with Gemini, you probably don't want to be also paying them to keep your lights on.

12:05You'd probably rather go with a compute provider who you ultimately won't be competing with. In this case, that would be Oracle. And I think we are seeing this play out. If we look at the actual earnings here, revenue growth was up 7%, which is fine, not great. Cloud revenue was up 21%, which is very strong. But the most important number here was the remaining performance obligations, which is basically code for booked revenue that is going to come in the next 12 months. That number was up 52%. So they're clearly partnering with a lot more companies who want to get their computing power. Morgan Stanley is now estimating that AI revenue will increase from 15 % of Oracle's total cloud revenue to more than half by 2027.

12:49So that's why Oracle's at an all-time high. The stock's up 50 % year-to-date. I think it's essentially emerging as one of the AI juggernauts. Well, you called it. You sort of said this was the big AI company that no one's talking about. And I would say probably Larry Ellison and maybe Reed Hastings are the least talked about CEOs who have been the biggest players in the world of tech. By the way, if you ever want to go to a great hotel in Palm Springs, which I know you're thinking about. Larry Ellison, this is what people worth$160 billion do or whatever he's worth. He has a winter home out there that's spectacular.

13:25He built this world-class golf course and spa, and obviously it kind of sits fallow, so he turned it into a hotel. He also owns an island in Hawaii. I don't know if you've seen this, but he owns the island of Lanai. I think it's the largest private island in the world, and I think he's built a Four Seasons on there too. I've stayed in Lanai when I'm back in my previous life. I used to go there with my ex-wife. We'd stay at the Lodge of Coeli and we'd go to Lanai. Hold me, Ed. Hold me. Anyways, stay at the Sensei. Look, they're doing an amazing job. The stock's trading at a forward PE ratio of 25.

14:02Microsoft and Amazon trade at 32, which kind of connotes that there might be some additional juice here in terms of the stock. Oracle and Nike are the two stocks I have in my nyu savings or 401k or whatever it is when i started there that's a matching program so i listened to the future scott and i started maxing it out i went into nike which is literally shit the bed and oracle which is good to hear is doing really well should we talk about limiting the number of hours young bankers work please i would i am so excited to get your take on this what do you think of it i'm of two minds here so so i i was part of my first job out of college was at Morgan Stanley.

14:41And I have never worked with a larger concentration of assholes. These were just like not nice people. And it defined the term abused children syndrome. And that was when I was young and in finance, they all fucking hated their jobs. I mean, there's like one or two people who are big deal makers and a lot of that. But for the most part, they were really smart people who are overachievers who got jobs in investment banks. And by the time they were 30, they were making back then$300 ,000 or$500 ,000, which is a lot of money, and they just couldn't leave. Most jobs are usually one of two things. They're either very interesting but a lot of pressure, a lot of stress, or they're incredibly boring, right, but easy, not a lot of stress.

15:26And investment banking was this unique combination of a job that was incredibly mind-numbingly boring with a massive amount of pressure placed on it. I remember being at the printer. This is, I'm dating myself, and we would have to, this is the person printing the S1. And there was this company called Bowen and all these other things. And they would take me to football games or out to dinners. And they always had like hot people who would want to take you to a baseball game. such as you would spend$120 ,000 printing the prospectus of the IPO Morgan Stanley was taking out at their printer. And my job was to go to the printer and spend all night proofing the prospectus.

16:03First, I proof it forward, then backwards, because literally it was cause for you to be terminated, i.e. fired, if base rental payments on page 68 of the prospectus had an an impostor fee and base rental payments on page 136 did not. And I worked probably, I don't know, 60 to 80 hours a week and some weeks, 100 hours. I remember there were some times where I would go in on like a Thursday and basically would just go, you know, kind of 60 hours straight. And you weren't allowed to leave as an analyst, you're the most junior person. You had to be there before anybody else and you couldn't leave until everyone senior to you left, even if you didn't have work to do.

16:46I had a chair thrown at me. What'd you do wrong? Do you remember? I think I remember. It was the Orange County Transportation Authority. We're issuing bonds and we had no chance of getting the business, but we had to get it out and we didn't get it out in time. And so this VP, his name rhymes with Stephen Dworkin, C above asshole, came into the office and threw a chair and or threw a chair at me, whatever, I probably deserved it. But like, that's the kind of shit you would just, if someone threw furniture at an employee in this day and age, they'd be fired. Now, having said that, this notion that somehow, if you genuinely believe, Jamie Dimon or anybody else, that these people shouldn't be working that hard, then institute a culture where you compensate and reward the managers based on feedback from their junior employees that they're providing some semblance of balance.

17:37Because the notion that you're somehow going to electronically track how many hours people are working is just bullshit. And also, I used to go in on a regular basis on a Tuesday morning and then leave on a Wednesday night. I would work 36 hours straight. Why? I immediately summed up, having gotten in at Morgan Stanley, where I didn't deserve to get a job offer, but I did, that I wasn't as well-skilled, well-educated as the other people. Not because UCLA wasn't a fantastic education, but because UCLA was the kind of place, because it was a public school and it had classes with 400 people where you could hide and not work.

18:11And I was one of those people. So I showed up to Morgan Stanley woefully underskilled, and I knew it. The other 87 analysts were just better than me. So I thought, okay, what are my advantages? And you always want to ask this as a young person, what are your advantages? My advantage was that I didn't have a girlfriend. friend. I didn't have many friends at that point living in LA. I was living at home with my mom. I didn't have any dogs, any hobbies. And I was also quite fit and very disciplined, where I could take a lot of pain. So I said, I know, I'm going to show these folks that I'm here to play.

18:44And at least once a week, I'm going to work the night through. And this was the kind of culture that rewarded that. So if you are really serious about having bankers or young bankers work less, it's pretty simple. Hire more fucking junior bankers so there's more bandwidth and create a compensation system for their bosses that changes the culture such that it's like, no, we were going to make you a VP, but we're not because the word is everyone in your group is, especially the junior people, are working fucking 80 hours a week, and we don't reward that here. We punish it. I do believe that there are companies that position themselves in the marketplace and people where they say, okay, this was the implicit deal at Morgan Stanley.

19:31It's still the implicit deal. I think at Goldman, maybe less so now. We own your ass. You have no life. All your relationships, they're going to suffer. Your health, probably going to suffer too. Oh, you love New York? Well, guess what? You're not going to experience much of it over the next few years because you're going to experience the bowels of Goldman or Morgan. And guess what? In exchange for that, we're going to get you further, faster economically and professionally than you would anywhere else in the world. And you know what? I signed up for that. That's what I wanted. And a lot of young people want that.

20:03So anything that risks health, okay, that's a whole other ball of wax. But there is an entire generation, including myself, of young people will say, you know what? I will give you everything in exchange. I want more. I'm surprised you're not more harsh on the junior analysts and junior bankers who have been complaining about this, who are saying how terrible it is. The hours are so long that we're struggling with our mental health. I mean, this is why this is all happening, is because people my age are complaining about it. And you mentioned that point that when you went into banking as an analyst, that's what you signed up for.

20:40You knew what you were signing up for and you came to play. And so the idea that you have people who are experiencing what is regular in banking, people my age who are saying that this is too much, they can't handle it, you have decided by going into banking that you want to be a millionaire, likely a multi-multi millionaire. That's something that you have decided you want for yourself. You have also decided that you want to make close to$200 ,000 in your first year out of college per year. These are things that you want. And if you want these things, be clear that you should be willing to work yourself so hard that you start to struggle mentally and physically.

21:21That's the game that you're signing up for. And if you don't like it, then go do something else. I think that's fine. But the idea that you would complain having gotten yourself into that position, knowing what the stakes are, knowing how difficult it is to build wealth in America, go, yeah, you're going to have a pretty shitty week. You're going to lose some sleep. Two things. One, I agree with you. And two, I don't want to ever hear you bitch about anything about this company yet.

21:49No, like at some point, the difference here, the only thing I will caveat this with is that in order for the American economy to grow, we've needed to bring in women. And it's also makes sense that women should be afforded the same economic opportunities as men. where that culture doesn't work is when women start using their ovaries. And that is when you create a culture of people expected to work 60 to 80 hours a week, what you're essentially saying is no one's allowed to have kids here. So while I can see that type of culture for the young analysts, it's unhealthy to create, I think, that type of culture with people as they start to think about starting families.

22:26Because distinctive, all the bullshit around the modern man, women disproportionately shoulder the responsibilities with children. So unless we create a work environment where we respect the fact that the species needs to procreate, we want to create corporate America an opportunity for women to maintain acceleration in their careers. I mean, if you look at compensation in corporate America, it's actually been trued up between men and women until women have kids. And then they drop way down. So I buy that all hands, hunger games, culture. You don't like it, go somewhere else. We're going to pay you a shit ton of money.

23:08We own your house. And I appreciate your perspective on it. I think things change when people get older, though, when they start thinking about families. Because if you're going to expect people to work 80 hours a week, what you're saying is we don't want mothers here. 100%. And that's a problem. Let's finish out with this new model that has been released by OpenAI, known internally as Strawberry, known now publicly as O1. Any thoughts on this new, very powerful reasoning model from OpenAI? I love the fact they're saying that we have a model that's going to take longer to figure shit out. It's like, you know, when you press on something online and it spins a wheel like, oh, it's thinking or it's finding you deals right now.

23:52It's searching for the best deal on the web. And it has a guy like with a magnifying glass and he's searching. It's like it gives you this emotional feeling that someone else is working for you. So I would just like to know, do they need to slow that thing down? Are they trying to pretend that this is being more thoughtful? I don't know. What are your thoughts? Well, I think that is the question. And no one's really been able to try it yet apart from internally. So I think we should try it out. But just a few stats that they have listed. They put GPT-4 and this new one, O-1, this new reasoning model, they put them up against each other to do the qualifying exam for the International Mathematics Olympiad.

24:32GPT-4 got 13 % of the problems right. This new one got 83 % of the problems right. They also had it do a jailbreaking test. GPT-4 scored a 22 on a scale of 0 to 100, and the new 01 model scored an 84. So it does seem like this new model, it's more mathematics minded, is just incredibly powerful. Look, I just get the sense that as technology becomes more about frictionless flow and network effects and agility, that if you have the ability to get out ahead in front, establish leadership, and then have access to cheaper capital, they can raise tens of millions of dollars. No one can keep up with them right now.

25:16They have a great team. They have a great leader in Sam Altman. It does feel like, like I said, it feels like they're running away with it. And we've been saying this for a while. We'll be right back after the break with a look at how the debate moved the markets.

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