The Week: The Half-Trillion-Dollar AI Loop

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1:08Scott Galloway:Morning decisions. How about a creamy mocha frappuccino drink? Or a sweet vanilla? Smooth caramel maybe? Or a white chocolate mocha? Whichever you choose, delicious coffee awaits.

1:19George Hahn:Find Starbucks Frappuccino drinks wherever you buy your groceries. Welcome to The Week from Prop G Media, where we break down what mattered and what it all means. I'm George Hahn, and it's Friday, August 14th. Today, NVIDIA's half-trillion-dollar bet on AI and what a weak jobs report tells us about the economy. Then, Scott on America's declining power at home and abroad. And finally, why we're surrounded by sex, but having less of it. Let's get into it. This week, the AI boom began to look less like a software revolution and more like a heavily financed construction project. Big tech is spending at an industrial scale.

2:10George Hahn:NVIDIA is helping finance its own customers, and no one can say exactly where the returns will come from. Last Friday, Prof. G. Markets ran its quarterly review with Oswath de Moneron, the NYU valuation professor Ed calls the dean of valuation. His point? That investors are now holding a very different kind of company than the one they bought five years ago.

2:35Scott Galloway:These companies five years ago, if you asked me what their invested capital was, I wouldn't even have cared. Because you knew that they could generate revenues and operating income with very little additional invested capital. Outside of acquisitions, even with R &D considered, these companies generated returns of 70, 80, 90 % invest capital. The only survivor from that group is Apple, which still continues to deliver that kind of return. And analysts are not happy with it because it's not investing. The other companies now are the equivalent of manufacturing companies. They're building huge capacity for whatever AI products and services.

3:11Scott Galloway:And like all manufacturing companies historically, they're now going to be judged on whether they can deliver the earnings on this investment, something they've never had to do historically. So measures like return on investment capital that used to be not that useful with tech companies now come into play. Questions are, are you earning more than your cost of capital? A laughable question five years ago with these companies now becomes a relevant question.

3:38George Hahn:On Monday, Scott and Ed laid out the bull and bear cases side by side. The S &P had just hit fresh record highs, but Scott pointed to a problem. The current level of AI spending would require$2.5 trillion in new revenue, more than what all of big tech generates today.

4:01Scott Galloway:The problem I think we're facing, and I think what people have to be cognizant of, is the market is now six stocks. and Alphabet and Amazon alone drove nearly half of S &P earnings growth. It feels like the metrics are overstating the positive case, if you will. And I like, to me, I think the data around the fact that things are overvalued or the bear case, if you will, the one piece of data that I just think is very hard to argue with is that if so much of the market is concentrated on the well-being of the prospects of AI and the investments in these hyperscalers, we need, if you look at the CapEx, to get a reasonable rate of return on the current CapEx by the hyperscalers, we're going to need to recognize or create$2.5 trillion in incremental revenue from AI.

4:54Scott Galloway:Right now, the cumulative revenue being produced by AI is$150 billion. So we need it to 15x just to get to a sustainable or justifiable ROI on the current CapEx. I think that is unlikely. And by the way, that$2.5 trillion number, just to put it in context, is greater than all of the revenue of big tech right now.

5:16George Hahn:Then, NVIDIA announced it had lined up half a trillion dollars from six major asset managers to fund the AI build-out. The money goes to NVIDIA's customers so they can buy more NVIDIA chips. Jensen Huang called AI chips an investable asset class. Larry Fink called it the next future for financial engineering. NVIDIA's stock fell nearly 4%. On Wednesday, Ed asked Jay Goldberg of Seaport Global what the deal actually is.

5:51Scott Galloway:When companies provide financing for their customers, There's a fine line between enabling demand and creating demand. And NVIDIA has been walking that line ever closer for a couple years now. I think it's perfectly reasonable to provide some form of working capital loan. You lend your, you know, you give them favorable terms. You let the customer pay six months, nine months. That's a form of financing. Or you loan them a little bit of money. It's common practice in a lot of, you know, capex-intensive industries. This one, I think, catches everyone's eye because it's so big, right? Half a trillion dollars, like you said.

6:27Scott Galloway:It's just not entirely clear. If you are coming from the point of view that AI is a bubble and nobody can articulate what the ROI on that investment is or what even the use case is or the business model, if you come from that viewpoint, this looks very much like NVIDIA is creating demand that might not exist otherwise. Now, NVIDIA's take is, no, no, we're not creating a demand. We see a mispriced asset class, if you will. The lenders don't know how to lend to this. They're missing the point. They're missing the opportunity. They don't understand it. We will step in and help bridge that gap. I get the logic, but it's such a big number, and there's so many questions around it.

7:12Scott Galloway:It's hard to see this as something that's not. NVIDIA giving money to customers so they can buy from NVIDIA, left hand paying the right hand.

7:20George Hahn:Wall Street is already pricing AI as an economic transformation. The labor market tells a more complicated story. That transformation may not have arrived yet, but worker insecurity certainly has. The July jobs report landed weaker than anyone expected. The economy lost 23 ,000 jobs against expectations of 80 ,000 gained. Unemployment fell to 4.1%, its lowest in two years, but only because fewer people are looking. Labor force participation dropped to 61.4%, the lowest since February 2021. May and June were both revised down. Labor economist Catherine Ann Edwards told Ed there was nothing good to pull out of the report.

8:17George Hahn:But she pushed back on the idea that AI is already driving the numbers. One thing that I bring up when we talk about AI is if you were to go back and look at the average productivity of the U.S. worker over the past 90 years, you will not see a single technological innovation. You won't see air conditioning. You won't see cell phones or computers or the Internet or Microsoft Office. You don't see it because it takes a long time for productivity to be absorbed into the workplace and used by employers. That doesn't mean there's not an employer out there that is using AI, but using it effectively.

8:56Actually adopting it to the degree where you are changing how you demand your workers as opposed to just exposing them to some new technology and seeing what happens. Those are a very different process, right? Like just because your boss said like, here's Claude, try it out. There's a gap between here's Claude, try it out, and we're going to lay off 200 people. Like there's a very big step there. And most of the time, it's not a jump. It's just you're kind of like crawling towards this new type of productivity. I think my kind of, you know, trying to pour a bucket of cold water on AI and its effect in the workplace is not to say that AI is not an incredible tool that will change the future, but that it's in some ways a distraction from the problem that we refuse to see, which is that the U.S.

9:44has a very cruel policy when it comes to supporting the unemployed. So all of this uncertainty of the things we know and the things we don't, if you were worried about U.S. workers, you wouldn't be looking at the bottom line of companies' earnings portfolios. You would be looking at our unemployment system and demanding a better one.

10:01George Hahn:Ed asked Edwards what she would do about that insecurity. Her answer wasn't universal basic income. It was a stronger unemployment system, one that helps people return to work. We have a short-term unemployment system right now that has a decent base but terrible execution. It just is in desperate need of reform and attention. But how I would characterize policy related to unemployment is if it's not a recession, nobody cares. And I mean nobody cares about unemployed people outside of a recession. But, no, the way that it should work is that if you lose your job, you shouldn't be terrified of what the unemployment system looks like, of what your options are.

10:40We need a robust system, a short-term system that triages into a long-term system that then moves into things like helping workers move, helping workers get reeducated, helping workers start businesses. I think my problem with universal basic income, not just in practice, but also in tone, is that it's very much like a tech CEO said you're unemployable, so here's some money while you sit idle. I just don't think it should be the posture of policymakers or pundits to be so derisive and dismissive of the U.S. worker. Lots of robots have taken lots of people's jobs, but that doesn't mean that they never work again or shouldn't work again or should be treated like they could never be useful.

11:20It's really demeaning the posture of most of these UBI schemes. And if you dig underneath one level down, it's like, well, it's like too hard to get them a job. So we might as well just like throw some cash at them. That cash won't be enough, and it doesn't come with the type of respect that people want for themselves of earning money. So if workers don't want to give up, I don't think their government should either. And that's why I'm always opposed to UBI.

11:47George Hahn:We'll be right back after the break.

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15:21George Hahn:Welcome back. Monday's Raging Moderates episode was a mailbag. Listeners submitted questions for Scott and Jess on the 2028 field, on election fraud, and on whether the system can correct itself. Scott's answer to the last question came down to trust. On American democracy, he's optimistic. On American power, he isn't.

15:45Scott Galloway:I believe like Tim Snyder, we're in the midst of geopolitically committing superpower suicide. And that to go from being the operating system and the leader of 60 to 70 percent of the world's GDP in military power to 30 percent because we've alienated 40 percent Europe and Latin America who just feel like they can't trust us anymore. And they have to they have to build their own defense systems, their own agreements, their own governance. And the fact that we're getting Europe to pay more for NATO is a good thing. But be careful what you wish for, because, for example, our poor execution in the Middle East, where now U.S.

16:19Scott Galloway:military bases are no longer seen as security but as bullseyes, that's just going to reduce our power around the world. The fact that people are going to try and diversify potentially from the dollar, from trade with us, can't count on us, trade around us as opposed to through us. I think that's going to hurt our GDP for decades, because even if we get someone reasonable in office, they're going to say, well, we can't risk that a Trump-like figure is going to come back in. I mean, look at Canada. 70 percent of their exports into the U.S. And similar to the statement from Otter and Animal House, who bashes the guy's car, parent's car, he's like, you fucked up, you trusted us.

16:58Scott Galloway:I think there's so many nations in the West that feel like they fucked up. They trusted us.

17:02George Hahn:A listener in Dublin then asked why Americans can't tell the difference between socialism and communism, pointing out that even nuclear aircraft carriers and Medicare don't exactly pay for themselves. Scott's answer was that the labels are doing less work than people think.

17:20Scott Galloway:I don't know if we need a modifier to capitalism. The capitalism is the best, is the worst system in the world, except for all the rest. And what we have here is capitalism on the way up and socialism on the way down, where we privatize the gains and socialize the losses. That's cronyism. So I think we need someone who can paint a vision of a capitalism that works as it does in Northern Europe, as it has here for the last 200 years, but recognize that the key to capitalism is you have really robust markets. And the only way you have a robust, sustainable market is if the three middle quintiles, which is the identifier for the middle class, has money and opportunity to buy the products that the very wealthy people figure out a way to make most appealing to this enormous entity called the middle class.

18:11Scott Galloway:And the only way you do that is to dispel the myth that the far right keeps trying to promote that the middle class is a self healing organism and a self-creating entity, species that naturally bubbles up on its own in free markets. It doesn't.

18:27George Hahn:Thursday's Conversations episode was with Dr. Deborah So, a neuroscientist who studies human sexuality. Her new book is called Sextinction. Its opening claim, society has never been more sexualized and we're having less sex than ever. In the U.S., one in three men and one in five women report not having had sex in the past year, and the drop is steepest among young men. Scott presented a thesis. Mating has been digitized into a winner-take-all market. She agreed and said the apps are only part of it. The whole trend of looks maxing is based on this erroneous idea that young boys need to look like a super hyper alpha masculine giga chad guy when most women don't really care that much about what a guy looks like.

19:20Like, yes, you want someone you're attracted to. But for women especially, that handsomeness and that attractiveness is based on many other factors as opposed to just purely how tall you are, how strong is your jawline, how muscular you are. If anything, most women don't want to date a really jacked guy because they find that scary. So social media, dating apps, I think, and now we have things like AI chatbots, which I talk about in Sex Stinction, also pornography, creates this entire ecosystem that I think is a hall of mirrors and then also offers these potential replacements for in-person sex or in-person connection.

19:54George Hahn:This week, markets offered more money, technology offered more efficiency, and the internet offered more connection. But if fewer people feel secure, included, or connected, who exactly are these systems working for? That's The Week. I'm George Hahn. See you next Friday.

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