Scott Galloway (2:44)

Yeah, it was kind of strange. So first off. Just some tips. When I was your age, I was uncomfortable with that sort of stuff because, let's be honest, you're a total whore and you feel like you should shower afterwards. And so basically it was a giant tech company and they had this enormous. It looked like a taco truck, but it's actually to demonstrate the price product. There's probably 40 people there and I could tell that you're not used to that. When you get to my age, you're literally willing to like whore out your ass. I mean, you just like, oh, there's money involved.

Ed (3:11)

Sure.

Scott Galloway (3:13)

And I could tell you're sort of like, this doesn't feel right.

Alice Hahn (3:16)

Yeah. But it felt better than I thought it would be. I mean, I really thought I'd feel extremely awkward talking about how great these products are, but I ended up, I think they did a great job.

Scott Galloway (3:26)

It's a good product.

Alice Hahn (3:27)

Of making. It's a good product. Exactly. So I didn't have to lie. And they did a good job of making it feel somewhat normal and natural. So I was actually pleasantly surprised by how not awkward the experience was. Still awkward, but way less awkward than I would have expected.

Scott Galloway (3:43)

Yeah, it reminds me of the time I was in Paris and I was staring at the Eiffel Tower.

Alice Hahn (3:48)

Here we go.

Scott Galloway (3:49)

With my partner. And I'm like, this is the third time we've been here and they still haven't found oil. Get it as if it's an oil. Oh my God. Ed. Eddie.

Alice Hahn (4:01)

And seriously, it's hard to follow these jokes when they have nothing to do with the preceding conversation.

Scott Galloway (4:06)

Yeah, if.

Alice Hahn (4:07)

If there was some slight link, I might have gotten it, but it sort of just came out of nowhere.

Scott Galloway (4:12)

All right, get to the headlines. I'm done. Get to the headlines.

Alice Hahn (4:16)

Before I do that, I want to remind our listeners we have a weekly newsletter, Profit Markets. It breaks down the key market moves with data driven analysis and crisp visuals every Monday. So reminder, please go subscribe now@profgmarkets.com we'll also leave a link in the description of this episode to make it easy for you to sign up. If you don't have time to listen to the podcast, this is a good way to sort of get your quick hit in your inbox in the morning. So please go subscribe to that. And with that, let's get to the headlines.

Scott Galloway (4:51)

Now is the time to buy. I hope you have plenty of the.

Alice Hahn (4:56)

Whereas all pharmaceutical stocks dropped after Trump said he had a plan that would significantly slash drug prices in the U.S. however, the stocks quickly rebounded after he signed an executive order that lacked any legal mandate for companies to bring down prices. Instead, the order asked them to lower prices voluntarily. AI startup Perplexity is in talks for a $500 million funding round that would value the company at $14 billion. That's more than 50% higher than its last valuation from just five months ago. And finally, Coinbase shares rose more than 20% on news that the company will join the S&P 500. It will be the first digital asset company to be included in the index. So, Scott, let's start with what happened with pharmaceutical stocks. First, they dropped after Trump said that we're going to have this big price decrease plan on drugs in the U.S. then he signed the executive order and the stocks rebounded again. Your reactions?

Scott Galloway (5:53)

The market is essentially saying what every foreign leader is saying, and that is with respect to the President. You are not serious people. A most favored nation status where he claimed that all our drugs would have the lowest price or match the lowest price of any, any price around the world would have absolutely not decimated, but substantially hit the profits of pharmaceutical firms who have been able to weaponize they've recognized the ultimate business model in America in terms of on investment isn't investing in people. It isn't investing in AI. It's investing in our whores that we called elected representatives. Because the disappointing thing about our elected representatives is not that they're whores, it's that they're such cheap whores. And when Cigna or Aetna or Pfizer give a few million dollars to different people, they can figure out laws that make it such that we have to pay eight times for Ozempic and Humira. What other nations pay for these pharmaceuticals, despite the fact that we invent, manufacture and distribute the majority of these drugs, we're number one in terms of IP for pharmaceutical development. But we have figured out a way, or these companies have figured out a way given Citizens United and the fact that you can buy elected representatives, you can buy lawmakers, a way to charge American consumers more. And then you have an infrastructure where essentially the bill is opaque and usually your company's paying for it. So what do we have? We have opaque pricing that has no consumer scrutiny, we have regulatory capture and we have profit seeking companies which are doing what they're supposed to do. So we end up with $13,000 per capita healthcare versus $6,500. And in exchange for that, we're more obese and we die sooner. So these companies, had they come under any sort of reasonable Threat that they might actually have to give Medicare or Medicaid the ability to negotiate these prices would have taken an enormous hit. And that's what happened right after the release. The data hadn't been absorbed and the stocks were down 2 to. And then people read it and said, oh, this is the President presidenting, doing jazz hands, saying fucking nothing, trying to get in the news, trying to pretend he's doing something with absolutely no strategy. This thing has absolutely no teeth. If you read the. If you read the executive order, it's that he's suggesting they do it. He's saying this would be a good idea. And what do you know, Stock prices ended up. Pharmaceutical prices ended up higher. Because what this said to the market was, Congress has the limpest dick in the world right now with their ability to go after health care costs, that even if the President makes a proclamation like this, there's no fucking way that this is actually gonna happen. This is, as you can tell, I'm a little bit triggered if you look at our deficit, which we have to get under control, otherwise you are just not gonna have nearly the prosperity or opportunities my generation registered. The only way we're going to get to that $2 trillion a year is the following. Full stop. G7 nations pay, on average $6,500 per capita for health care. We pay 13,350 million people. Times the $6,500 incremental, that's about $2.5 trillion in sum. Just the incremental cost to be more anxious, obese, and die sooner is costing US an incremental $2.5 trillion because of regulatory capture. So. And this stock market movement reflects the fact that we have the most onerous, usurious, damaging regulatory capture in history that creates ridiculous, opaque and insidious massive healthcare costs and a drag on the American economy. And this was the market saying, yeah, nice try, boss. Your thoughts?

Alice Hahn (9:47)

Are you saying we need to cut spending on Medicare and Medicaid? What is your suggestion there in terms of how this all relates, how deficits relate to healthcare?

Scott Galloway (9:59)

I mean, if you wanted to lift up the economy and flush an additional $2.5 trillion into other things, all you need to do is bring our health care costs in line with other G6 nations who are healthier. So this would have accretive benefits across the entire economy, including lower costs on social services, lower burden on government services, more profits to tax. This is all roads lead to the same place. Should we tax billionaires more? Yes. Do we need to cut Social Security? Scott Galloway. Should Never get Social Security 100%. We should raise the age you're gonna probably live to be, like 190. So the notion that you should start getting Social Security at 65 makes no sense at all. There are a lot of things we can do. Nothing gets us there unless we go after this.

Alice Hahn (10:50)

Just as an example of how crazy the prices are, there's this diabetes medication I was looking at called Jardiance. One month supply costs $611 in America. In Japan, it costs $35. It's not as if everyone in Japan is poor. And the prices, I mean, that's just an unbelievable difference. And again, the markets are telling us the true story here. I mean, Trump comes out and he says over the weekend that he wants to pursue this most favored nation policy, which basically means that drugs must be priced at their cheapest levels for the U.S. if that drug costs $35 in Japan, it should cost $35 in America. And it's such a shame, because I was actually very excited to see that. I mean, he's going after the right issues, which is we need to do something to lower the cost of drugs and the price of drugs in America and pharmaceuticals. And the fact that the market was reacting and getting worried about it and these pharma stocks were hurting as a result of those comments, to me, was a great sign. But then, of course, the whole thing came undone when suddenly he signs the executive order, and you learn actually there's nothing to do with this Most favored nation policy. All he's doing is saying, hey, guys, please reduce the cost of drugs. And then all the pharma stocks rip back up. Because basically Wall Street's reaction is great. That means prices are not going to come down. If you simply ask a company to reduce their prices, they won't reduce their prices. This is market dynamics. They're only going to do it if they have to. And the only way you can do that is by pursuing a legitimate legal framework that forces them to bring down their prices. And that's not what's happening. So it was a shame for me because I was about to be very supportive of Trump and this move and what he's addressing. And I was thinking it would be one of the first things where I'm like, yeah, he's got this right. But once again, he just shows that he lacks the competence to actually follow through with these things. And so it's going to continue business as usual.

Scott Galloway (12:54)

You got to give the guy his due. He does have sometimes the right instincts, like, let's ban TikTok. Oh, wait, TikTok's good for me. And I have a political donor who owns. Nevermind. Now I like it. Sometimes he has the right instincts. He has absolutely no ability to execute and thinks he's a deal guy. But to give you a sense of how outrageous is. On average, we charge about four times the price for pharmaceuticals of what other nations pay, that's the equivalent. So Saudi Arabia, the Kingdom, they produce a lot of oil. I don't know if you heard this. They produce a lot of oil. Now, why is it less expensive in the kingdom? Because, like, we make a lot of this shit. So let's take advantage of the good work our domestic citizens do providing the exceptional, or, you know, pulling out of the ground this exceptional blessing, this sitting on this sea of oil. So we'll give them less expensive gasoline. We produce more oil, I.e. pharmaceuticals, than any firm in the world. Do we in fact charge less for it? No. It would be similar to if Saudi Arabia decided they were going to charge $10 a gallon. Oh, we produce it. But I know Saudi Aramco figures out a way to weaponize the kingdom and the leadership and convince them that they should charge $10 a gallon despite being the biggest producer of oil. I've gotten off track here, Ed. Let's go to the next story.

Alice Hahn (14:19)

Let's talk about Perplexity, which is raising a round that would value the company at $14 billion. That's up from its $9 billion valuation from just months ago. Reminder, this is the AI company competing with OpenAI. The deal isn't finalized, but I think we can assume it's as good as finalized. I mean, these. These leaked journal reports are usually pretty spot on. So assuming it is, that would make Perplexity the fourth most valuable AI startup ahead of Perplexity. We've got OpenAI at $300 billion. We've got XAI at 80 billion. Though, as I've discussed, that number is kind of bullshit. But whatever, we'll ignore that. And we've got anthropic at $62 billion. Perplexity is number four. Scott, any reactions to this new round, this new financing round from Perplexity?

Scott Galloway (15:08)

I've always thought Perplexity's core asset is it's got a really clean positioning. It's the search AI or it's the AI search. Right. I think this is example of kind of the froth here. Their annual recurring revenue has grown from 5 million in January 2024, 120 million. So obviously it's going like crazy. They've got. They registered 160 million visits compared to OpenAI's 5 billion. So what is that? About 30 times more and Google's 85 billion. So as a multiple of revenues it's getting about 140 times ARR, whereas OpenAI trades at 25. So I think this is, I think if OpenAI gets public, which I believe they will, I think this is a tuck in acquisition and they rebrand it as the more pure play search component. Component of OpenAI or of anthropic. I don't think this is what I. Let me ask you because you and the team understand AI and the consumer facing applications better than I do. What's to stop OpenAI from launching a perplexity killer?

Alice Hahn (16:16)

I would argue that they already have. I mean, my gut reaction seeing just the 14 billion number was that it actually seemed quite small. I mean, 14 billion for this AI company we keep hearing about. And then I compare that to OpenAI at 300 billion. So OpenAI is 2000% more valuable than Perplexity. My sort of gut reaction was, oh, I wonder if that's small. And I think the question is, is the valuation accurate? Is the valuation fair? When you compare it to just how gigantic OpenAI is, my sense is yes, it is fair. When you look at the numbers, it's very obvious just how far ahead OpenAI is compared to perplexity. I mean, perplexity, they're getting 350 million monthly visits. ChatGPT is getting 14 billion. You look at the monthly unique visitors, perplexity's getting 17 million. ChatGPT is getting 374 million. You look at the amount of time that people spend on these sites, for perplexity, it's about six minutes. For ChatGPT, it's seven. So I think on the surface it might look possibly undervalued just when you compare it to OpenAI. But I think it's a reminder again to look at the underlying numbers which would tell you that, yeah, OpenAI is miles and miles ahead of Perplexity. If you were to read the headlines, you'd get the sense that it's a little bit of a race, that, you know, it's OpenAI versus anthropic versus Perplexity. But I think what's happening is OpenAI, as of said, for a long time, I believe they have for years been running away with it. I don't see any real indication that perplexity can catch up. I appreciate your comment that they were early to say this is AI for search, but I Think the whole AI game has developed so much since then to the point where everyone now recognizes ChatGPT is taking on Google. If I had to invest in one AI startup it's no question for me even at 300 billion it would be OpenAI.

Scott Galloway (18:18)

So the question is what is the point of differentiation? And the point of differentiation has to do with perishability or kind of real time versus I would legacy and that is if you think about ChatGPT, it's a generalist platform for content creation, writing code, producing visuals. Whereas perplexity as real time web search.

Alice Hahn (18:41)

ChatGPT has that now. I mean ChatGPT started out with and it was a big problem like you couldn't get up to date news. But they've solved that now because it's.

Scott Galloway (18:51)

Funny you say that because my brand perception is when I say can please distill and give me a sense for if there are winners and losers in the proposed UK trade agreement, I think of perplexity because I assume it's going to have more up to date information. And you're saying that's not accurate.

Alice Hahn (19:05)

By the way, I don't use perplexity myself so I think we just have a difference of use case. But if you're using ChatGPT today, I will tell you personally I use it in the same way I'd use search.

Scott Galloway (19:18)

This is a capital race. They're going to win.

Alice Hahn (19:20)

Let's move on to Coinbase. Last year it was fighting these investigations by the sec. This year, suddenly the SEC drops all those investigations under the Trump administration. Now it is in the S&P 500. As of this week it is replacing Discover Financial. Scott, your reactions to this news.

Scott Galloway (19:42)

Look, I was a hater and I like to think I've evolved as a human and I'm open to learning. I think Coinbase consumers have decided this is for them a legitimate asset class and they get to decide that. I do think the lack of regulation here is somewhat frightening that on April 9, just a few weeks after Trump launched his Trump Coin, they decided to shut down the unit of the Department of Justice investigating crypto fraud. So it's a bit of the wild west to be in the S&P 500. The S&P 500 has a committee that selects companies based on a blend of quantitative and qualitative judgment. And you're supposed to have at least a market cap of 21 billion, a lot of liquidity, a public float of greater than 50% shares available to the public. You're supposed to be profitable. And I Do think that the S and P, it's a really interesting construct, the synthetic grouping, if you will, because it essentially says we're going to do a lot of diligence on what are the best American companies. And then index funds can come into it and there's something sort of simple and magical, and that is they kick out a company like Discover and say you're no longer one of the best 500 companies which got acquired.

Alice Hahn (20:59)

So that's why they're doing this reshuffling.

Scott Galloway (21:01)

But yes, they got acquired by Capital One. Is that right? Yeah, yeah. So it's sort of. When you invest in an S and P index fund, you're not only getting diversification, but what you're getting is you're benefiting from this committee's attempt to be the arbiter of what in fact are the best companies. So when you buy an S and P company, the natural assumption is you are getting companies that are not only great companies, but quite frankly, they're still either maintaining their greatness or on the upswing. And then they kick out companies, which I really like. So this is a big deal. This is a. You know, when you're especially this kind of legitim, to a certain extent, this fairly unfairly legitimizes, in my view, the asset class, or when was it they announced ETFs or JP Morgan or some BlackRock last year. So this is yet another kind of signal of them legitimizing it now. At the same time, this could create. Be inflating the bubble even more. I mean, that if this shit does fall and become the ultimate Ponzi scheme, where there's no underlying cash flows to justify any of this shit or no real asset, it just means more retail investors are going to get hurt. Because the assumption is that if it's an S and P company, there must be some credibility to what they're doing. So I'm sort of. I'm lukewarm on this. I don't know how to feel about this. Add your thoughts.

Alice Hahn (22:21)

I'm pretty staunchly cold on this. I think this is really bad.

Scott Galloway (22:25)

I love that the young guy hates crypto. Who would have thought that? Who would have thought that?

Alice Hahn (22:29)

Look, I think it's one thing that we have a market that is predicated on assets that have no underlying or fundamental value. And for the sake of this argument, let's just like, let's ignore Bitcoin and let's just focus on all the other stuff, the $1.2 trillion worth of non Bitcoin Crypto assets that are floating around out there that are being traded on Coinbase. So Ethereum, Tether, Ripple, but also the Meme coins, Dogecoin, which is the 8th largest cryptocurrency by market cap. One of the most traded coins on that platform, Trump Coin, Pepe Coin, Cumrocket Coin, which I know you love, Fart coin. All of these things exist on Coinbase. And the way Coinbase makes money is it takes a little fee when you trade this crap. So look, it's one thing to have a marketplace for these assets, and I don't have a real problem with that. I think it's dumb, but I don't think it's wrong. I don't think it's morally wrong. It's an entirely different thing in my view, to push that marketplace and those assets into the retirement accounts of practically every investor in America. I mean, no one doesn't own the S&P 500. Everyone owns the S&P 500, which means everyone owns Coinbase. Not a lot, but a little bit. It's going to be around 0.1 to 0.2% allocation, which is going to translate to around $10 billion in net purchases by these index funds. Now the reason I think this is such a problem, it's really reminiscent to me of the 2008 financial crisis. Because if you look back at what happened there, the problem wasn't just mortgage backed securities and these mortgage backed security derivatives and these CDOs, those were actually like in real terms, it was just a very small slice of the economy. The problem there in 2008 was the institutional adoption of those bullshit assets. It was the fact that the banks were embracing them and aggressively marketing these CDOs. And that's what led to the investment world building this giant infrastructure around these shitty assets. And that's what caused all the pain. In the end, it wasn't the assets themselves, it was the fact that we built all of this up and we got all these retail investors and these regular people tied to these assets. So I look at what's happening here, I look at MicroStrategy entering the NASDAQ now, Coinbase entering the S&P 500. I really see no difference. I mean, these are like highly financialized, highly derivative assets that offer no real value in the real world. Again, we're just going to exclude Bitcoin for the sake of the argument. Still $1.2 trillion in assets there. And now you have these institutions embracing them, which means that the rest of America is coming along for the ride now. So if you own the S&P 500, you now own Coinbase, and that's very similar to 2008. I'm not saying we're going to see this 2008 crash, but the dynamics that are at play here are basically the same. So, you know, as you know, as everyone knows, I have my issues with crypto. I've talked about why I don't like it personally, but thus far it's not been a huge problem for me because thus far it's been opt in. Like if you don't want to own this stuff, you don't have to just don't get involved. But that's no longer true now. Like I don't like crypto, I don't want to own Coinbase, but I now own it. And to me that's a massive failure of leadership on the part of the S&P 500, who I believe should hold different levels of standards for that portfolio. I think they have a unique level of responsibility in the investment world. This has to be grounded. This portfolio has to be grounded in fundamentals. It has to be grounded in value. And you can't just sling these very precarious assets into people's retirement accounts. So like I was against crypto before, I didn't think it was that systemic of an issue. Now that this has happened, combined with MicroStrategy in the NASDAQ, I believe this is systemic. To me, it's now turning into an actual problem.

Scott Galloway (26:52)

I think you're the problem of the Democratic Party right now. And that is you're more interested in acquiring social status through a political orthodoxy than increasing the material or emotional well being of Americans. Do you think that. Are you still worried about every American owning fossil fuels?

Alice Hahn (27:07)

No, that's a real business that has real value in the real world.

Scott Galloway (27:11)

Are you cool with tobacco companies being in the S and P?

Alice Hahn (27:16)

People like to smoke. That's actual value in the economy.

Scott Galloway (27:21)

Actual value. So your issue here is that there's no underlying cash flows or your belief is it's not an income producing asset?

Alice Hahn (27:30)

Yeah, my issue is that we are now attaching the value of people's retirement accounts to a company that makes money on trading cumrocket and fault coin.

Scott Galloway (27:40)

That's a good point. Literally. I respect the fact that when you go to parties, you're like the guy, you're like the 26 year old that doesn't like crypto. Literally that the guy who sucks. It's like no one knows what to make of you. You're like you might as well, like, start singing show tunes and saying, does.

Alice Hahn (27:56)

None of what I say resonate with you? Or do you think I'm being pedantic or what do you think?

Scott Galloway (28:00)

I like what you're saying because I find that I'm a little bit taken in by, you know, what it is. I think that people my age and because I desperately want to reach young men and I'm going through a midlife crisis, so I want to feel younger than I am, that I try to be a little bit hipper and younger. And I mean, look at me. I'm dressed like an aging skateboarder right now. I look fucking ridiculous. But I think a lot of people want to be seen as younger and hipper, and so they embrace crypto because it makes them feel young.

Alice Hahn (28:38)

Yeah, for me, it's like a combination of that and Beanie Babies. Like, we're just buying and selling Beanie Babies and driving up the price. And again, I don't want to outlaw Beanie Babies, but I don't think Beanie Babies and platforms whose main way of making money is by taking fees off of Beanie Babies being traded. I don't think that should be in People's 401ks.

Scott Galloway (28:59)

Let me put it this way. If this shit ends really badly, I think a lot of us are going to have our head in our hands and go, well, of course it did, of course it did.

Alice Hahn (29:10)

Which again, feels so 2008 to me.

Scott Galloway (29:12)

And most importantly, this whole conversation has inspired my favorite line from a song in the aughts, and that is, I'm so 2008. You're so 2000 late. I love that line.

Alice Hahn (29:23)

Was that Black Eyed Peas, dude?

Scott Galloway (29:25)

I don't know.

Alice Hahn (29:25)

That's Boom Boom Pow.

Scott Galloway (29:26)

If it's not Tom Petty or Tom Petty, I don't care what it is.

Alice Hahn (29:33)

We'll be right back after the break for our conversation with Alice Hahn. If you're enjoying the show so far, be sure to give the profgen markets feed a follow wherever you get your podcasts.

Scott Galloway (29:49)

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Ed (31:05)

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Alice Hahn (31:32)

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Ed (31:39)

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Alice Hahn (31:46)

Discover the Azaro Wanted Collection for Father's Day at Macy's. Welcome back. Here's our conversation with Alice Hahn, China economist and director at Greenmantle.

Scott Galloway (32:06)

Alice, where does this podcast find you?

Ed (32:07)

I'm in London, but the weather is getting warmer, which is nice. I'm going to head to Ibiza and a couple of warm places for conferences, which is good.

Alice Hahn (32:15)

That's fun.

Scott Galloway (32:15)

Yeah, I've heard. Fortunately, I leave just in time for the nine days of nice weather in London. I know, so let's bust right into it. I'm just curious to give us sort of the state of play in China on the ground, the citizens, businesses and government officials and their response to the trade war and tariffs. And what is the general vibe, if you will, in their response and perception of what is going on?

Ed (32:43)

Well, it's a great question, Scott, and I was actually in China a month ago at a track Two, dialogue between Australia and China. So I had the chance to meet with government officials and talk to people on the ground. Barring obviously what has happened the last 24 hours, I would say that when I was there in the midst of the huge tariff hikes, 50 and then 100% on top of the 30% or more after Liberation Day, what the vibe was on the ground was that China will defend its position at all costs. There was a revival of Cold War 2, Korean War rhetoric about being able to defend against US hegemony. But more importantly than that, there was a confidence that they had the fiscal monetary capacity to offset some of the shock. Now, with tariffs risking at the height of 145%, this was going to be a very daunting task. But I was struck by the fact that A, the policymakers had spent the last eight years not only aggressively rerouting trade through third party countries, but finding ways to cushion the blow as they saw in Trade War one. And secondly, there was this feeling on the ground that there was going to be more policy support, especially especially for the private sector, for the tech sector. I saw tech executives being more positive and ebullient about the future pathways, more so than any time since 2018. So that was the feeling on the ground. Obviously, I would say in the last 24 hours, we're seeing remarkable improvement in sentiment, I would say, because we now have a complete diminishing of the risk that was being held for Chinese companies as well as the Chinese macro situation, which was these exorbitant tariffs. So I would say I was struck by how confident China felt and comparatively speaking, when I'm in the US would speak to my American counterparts, the reaction is very dismal on the ground. So it's been a tale of two very different stories.

Scott Galloway (34:27)

Well, just to that point, didn't Trump Blank isn't. I mean, at the end of the day, didn't Xi basically say, bitch, I'm on top for lack of a better term, and. And when.

Ed (34:41)

I completely agree with you, Scott, even though I always like to be contrarian, especially in conversations with intelligent people like you and Ed, I would say that China has become James Dean in that film Rebel Without a Cause. It won the game of chicken because it had escalation dominance and it had more political appetite to increase the tariffs. And Trump clearly didn't. He had to listen to the Bill Ackmans, the billionaires of the world, who were reminding Trump not only was this going to hurt his base, but shelves would be completely empty. And I think that he caught nod to that. And he was very much convinced, convinced by that. So the Chinese, I think, feel very vindicated in their strategy, which was to do tit for tat tariffs, like, for like. And in the last 24 hours, that position has been successful for China. We've seen Trump obviously blink in these tariffs. And I could foresee even more negotiations downward if these fentanyl talks move swimmingly, which Vesset, for instance, thinks they will.

Alice Hahn (35:34)

Alice, the reductions that we're seeing on these tariffs, 145%, 30%. There's US tariffs on China, China bringing theirs down from 125% to 10%. Those are supposed to last only 90 days while talks continue. And the thing that I can't really figure out is, like, what are we even talking about with China? Like, what deal is supposed to be made? What are we trying to get from China, and what is China trying to get from us? Can you give us some color on what these talks are even about and what the goal of these talks would be?

Ed (36:11)

Trump ultimately wants a big, beautiful deal. He was pen pals with Nixon back in the 80s. He admires the fact that Nixon went to China and made this big, beautiful deal. So he ultimately wants to see a deal. The people around him, I would say Jamsing Greer, for instance, really cares about trade imbalances and market reciprocity. He will want to reduce the deficit. He will want to increase segmental or sectoral specific tariffs on certain Chinese products, especially in dual use or very tech competitive industries. I could see that happening up to 100% or more in some of these sectors. And similarly, he will want market reciprocity. Besant is in the same camp. I would say he would want to see China reducing its restrictions on foreign, especially American investments going into China, allowing more equal participation for US Investors in China and similarly China buying more American products. So it's not a surprise that Besson said, we had a great deal in phase one. I think that they will go back to aspects of that that ask China to increase agro purchases and purchases of energy products and similarly find ways for China to reduce the subsidies on certain goods, which they believe to be unfair trade practice elsewhere. I think that Trump really cares about fentanyl. He will want to see some kind of cooperation on China reducing the subsidies for the precursors to fentanyl. I'm a bit more optimistic now that there could be some kind of cooperation that would enable that discussion to happen. And on the Chinese side, could you.

Alice Hahn (37:40)

Break down, Sorry, I just want to because the fentanyl thing is so is confusing. Could you explain to us, like, what is the actual connection between China and fentanyl? Like, in what sense is China propping that up?

Ed (37:53)

So China subsidizes industries that produces the precursor chemicals for fentanyl, effectively creating these cheap fentanyl products that then get flooded into the American market. Now, China says it's cracked down on fentanyl itself, exports to the U.S. but the precursor chemicals are still being produced by China. So I could foresee more collaboration on that front for China to again reduce or even cut off all exports of those chemical components. And that would be seen as a win for Trump and for his political base on China's side. All that they care about is that they want to achieve a degree of supply chain self sufficiency, especially when it comes to the harder areas like semiconductors. They want to keep growing and not have these huge trade risks that Trump poses. And they want to extract geopolitical concessions potentially in the long term over Taiwan. That is a long term game. But I think the two first priorities are how do we grow stably and how do we maintain supply chain dominance and resilience.

Alice Hahn (38:55)

Does rebalancing the trade deficit really get in the way of those goals for China? I'm just trying to think about what a big beautiful deal looks like for America. And it sounds like we sort of rebalance the deficit in terms of trade. China just buys more of our stuff. They also get their act together on fentanyl, whatever that would look like. In what sense does that get in the way of China's goals?

Ed (39:21)

I actually don't think it gets in the way of China's goals because I think it is in China's interest to rebalance. They've said this for over two decades now, but when push comes to shove, they've been faced with some kind of slowdown or economic crisis, be it gfc, be it Covid, be it trade War one. And they've walked back on some of these rebalancing efforts. So I think it's in China's interests and policymakers are realizing this. When I was in China a month ago, they were starting to say that overcapacity was an issue and that they needed to do more to rebalance. I had never heard them say that before. In previous days, they were saying this was free market competition and the west should be so happy to have cheap Chinese renewable technologies, green technologies. The fact that they're saying that seems to me to suggest that they need to rebalance. They Realize that, and that actually this is an opportunity for China potentially to buy more American products, to address some of that trade imbalance that the US Is rightly, I think, complaining about and find ways to maybe even invest in the US If Trump and the Republicans allow it to create manufacturing jobs in the US Because China has the logistical and manufacturing know how. So I think that the Chimerica relationship has the ability to have a second chapter in its relationship and not go through a full scale divorce or decoupling. But again, it all comes down to politics, Ed. And that is where I'm not so sure.

Alice Hahn (40:42)

Yeah, I was gonna say, I mean, the way you lay it out, it sounds like a kiss and makeup between the US And China is actually very easy. I mean, based on everything you've just described there, our goals are not really at odds with each other. So I guess my main dumb question is, what's getting in the way? Like what's the problem? Why can't we just figure this out?

Ed (41:06)

The problem on the Chinese side is that they cannot countenance a massive slowdown in the economy. So instead of going through the, I would say the American model, for instance, sort of 1930s depression or even World War II, where you saw a massive crisis that then enabled the consumer share of GDP to continue to rise rather than the manufacturing share of gdp, which is why America is now a consumer and services led economy. The Chinese are unwilling to countenance that. They don't even want to have a Japanese style lost decades, which is a slow version of what we saw in America. So instead they want to walk on this tightrope between rebalancing a little bit here and there through subsidies for consumer goods like the trade in appliances. And at the same time they will increase Chinese exports, increase potentially infrastructure spending on certain infrastructure. And this means that they have this impossible task of balancing the two because ultimately they don't want to go full on in the rebalancing mode, which is something that they recognize that they need to do. That is a structural bug in the system and it's going to be very hard to shake for political reasons on the US Side. Why they can't kiss and make up is because we have different parties with different interests. As we mentioned, Trump wants a big, beautiful deal. As I've said before, he's the biggest dove in a house full of hawks. Besson wants to make sure that people around him and Wall street are happy, that the markets are happy. And Jamison Greer wants to have a more level playing field. People like Navarro And Latnik are a bit more crazier, I think, and don't really know what they want to do, which is why we saw the April 2 tariffs. So we have really heterogeneous outcomes coming out of the US which again is deeply, deeply confusing, not just for us, but for the Chinese as well.

Scott Galloway (42:55)

My sense is, I mean, it's pretty clear what my bias is. I'm not an enormous fan of the current US President, but when I have, I've spoken to some, I have some data here, I've spoken to or anecdotal Evans. I've spoken to some European companies who are contemplating working with not only Chinese companies, but divisions of these Chinese companies, including their cloud units and working with these units that they would have never considered before. So distinctive how this trade war calms down. Isn't this just an enormous opportunity and gift for Chinese companies who are now getting meetings they otherwise wouldn't have had the opportunity to get in Europe and Latin America?

Ed (43:33)

I mean, I completely agree. I think Latin America was always going to be under Lula in China's camp. It's not a surprise that Lula is now in Beijing signing a trillion dollars of deals in Chinese investment in Brazil and purchases of Brazilian agricultural products as China again tries to diversify away from the U.S. yes, towards Latin America. But I think the real winner is going to be the ability to launch a successful Chama offensive with Europe. I think Europe was very sickened by Trump's treatment of Zelenskyy in the Oval Office and its behavior towards Europe. Not just Trump, but Vance, their behavior towards Europe since then. And I think Europe, as is its historical want, is going back to strategic autonomy. It's trying to hedge between these two superpowers, China and the US And I think in this current climate is probably veering more towards China on trade because it sees China as the adult in the room. And I think what's going to be interesting, Scott, at the end of June is two really important meetings. We're going to have NATO at the end of June and then the China EU summit at the end of June now in Beijing, not in Brussels, because they ultimately wanted to show respect to Xi Jinping who originally couldn't make it. So I think this is going to be a real stress test for transatlantic relations and it could mean that we see further the reduction in trade and non tariff barriers between the EU and China come end of June, which is something that Trump won't be very happy about. He's already saying that the EU could be nastier than China. So I think that the EU's next in the firing line, so to speak.

Scott Galloway (44:59)

And just moving to the broader Chinese economy, there were reports that felt legitimate that China this came the threat of a trade war came at a terrible time for China, that China has some real structural economic issues distinct of the tariff war. Talk about the state of the Chinese economy right now, I would say, Scott.

Ed (45:19)

The state of the economy is a story of two really divergent Chinese pathways. Number one is what I would call a structural macro slowdown. And that is driven, as you mentioned, Scott, by these challenges, the real estate sector being one of them, but also the fact that private consumption remains remarkably weak, only 40% of GDP compared to 70% or more in the US. And it's structurally going to be very challenging for the government to try to rapidly rebalance and increase the consumption share of gdp, which I'll get to in just a bit. But its over reliance on exports I think will remain a theme moving forward. It needs to have that export engine, the overcapacity engine, to maintain growth. As long as it has these GDP targets, it will need to have a degree of overcapacity. And I think in this environment of weak and low interest rates which are favoring the exporters, this is going to continue the financial repression story that we've seen seen for households for decades. What I would say though, and sort of counterbalancing towards this is what I would say is a bullish tech story or bullish tech side to China's growth. And I think that this is going to potentially increase some of the rebalancing towards consumption. The reason I say that is because not only are we seeing more services, some of this geared towards AI and the usage of AI in healthcare, in elderly care and retail and manufacturing, but we're seeing these tech companies come up with really inventive ways and to create new markets, markets. I'm optimistic that Chinese tech will be very, very resilient and it will find more ways to be even more self sufficient and have supply chain resilience. But it could create more products and services that again could boost consumption, reduce the cost of certain services and goods. So I'm bullish on some parts of the tech story and bullish on some parts of the consumption boosting story. But I see these structural challenges still in play and that means a net disinflationary environment for the rest of the world because China needs to produce more. And if the US is going to buy it, then it's going to have export to Other economies, maybe the European market for instance. So it's two very different pathways for China. But I come out from this trade war feeling that the Chinese policymakers have more resolve to again expedite some of these structural trends towards consumption and in case of backlash against overcapacity, to reroute through these third parties. We saw 20% year on year increases to exports to ASEAN. I think that this will continue to gear up as they try to avoid any future tariffs from the emissions.

Alice Hahn (47:49)

Stay with us.

Scott Galloway (48:03)

In most ways, Google and Apple are ruthless competitors. But then a high powered Apple executive gets up on the stand at the trial that might break up Google and argues that actually Google's fine and the best thing you can do is leave alone.

Ed (48:17)

Why?

Scott Galloway (48:18)

Because Google being Left alone means $20 billion a year for Apple. On the vertcast this week, we talk all about what's going on at the Google trial, plus the latest from the efforts to break up Meta, what's going on with Netflix and lots more. All that on the Vergecast. Wherever you get podcasts.

Alice Hahn (48:42)

We'Re back with profit markets.

Scott Galloway (48:44)

My sense is that China, even before this tariff or trade war, was divesting away from the U.S. i believe the percentage of their exports had fallen from 24% to 17. Is that a concerted strategy that we just, they're not good partners and we need to divest away from the United States? Is it? Which I think is a terrible thing. I think the less, the less inextricably linked we are, the more likely we are to declare war on each other or take bigger risks with each other. But could we see that 17% number drop to single digits in the next few years?

Ed (49:22)

So Scott, I love this question because I think we always need to look beyond the data. So back in 2018 we saw the US share of Chinese exports being 20%. It's now around 14% if not under. That is not the full story because the Chinese surplus trade surplus to the US has increased quite a bit since 2018. So what we've actually seen is that China is rerouting its trade through other parties in Latin America and Southeast Asia to again, they call it tariff washing to avoid some of these tariffs or restrictions that the Americans have put into place. So that number I think again is a bit of a misleading number. And again, we shouldn't forget that if we just look at the trade imbalances, China is a bigger trade surplus running country with the rest of the world and the US US than it was in 2018. Again, it's a Sign that it doubled down on this export engine because as you mentioned, Scott, consumption wasn't doing well. Local governments were debt ridden and needed to pay their debt burdens and the real estate sector was suffering. So I think Chimerica has become even bigger. The divorce settlement has become even bigger. But what Trump has shown today, or rather yesterday, is that it can't afford this divorce settlement because China keeps increasing.

Scott Galloway (50:35)

The coming out of this war. We tend to talk about who loses or gains more. And I think a lot of people are coming to the conclusion that over the medium and the long term, China's probably going to get the better of the deal. But distinctive what's good or bad for the US or China with respect to this tariff war? Who do you think are the other big winners and losers? It feels like Europe will be a big winner because it seems like the Chinese are excited or ambitious to establish better relations with them. But are there other nations in Southeast Asia that vis a vis this trade washing or I think that's the term used, are just sort of unnatural winners here are going to do really well, like trade off of, you know, selling, selling bullets to the warring party, so to speak?

Ed (51:15)

Yeah, that's a great question. I think in Southeast Asia it has to be India because Apple and other companies are going to continue to diversify the supply chains and find alternatives for their components outside of China. And this is already happening. I think this ramps up quite exponentially the plans to again then move some of the factory processes to India. I think Vietnam and Indonesia and Malaysia again, when it comes to final assembly or even manufacturing, will be beneficiaries. We've already seen massive greenfield investments from Chinese companies. I think that that continues in those countries in particular. So we should see a ramp up of their manufacturing output going to developed economies, including the US and in Latin America, I think Brazil is going to be a huge beneficiary. It's not a surprise that Lula is in Beijing signing that. We've seen in the last few years Brazil overtake the US in terms of being the biggest exporter of wheat, soy and corn to China, which is their biggest market. So I think some of the Latin American agro producers are going to be beneficiaries of this as China again tries to diversify away from the U.S. and similarly, I think that Europe could extract certain concessions. This is why I'm bullish at the end of June that there could be some kind of a deal over EVs or even Chinese investment in Europe. Europe, there's been discussion about potentially launching price minimums to get rid of these tariffs, this 40% and onwards tariffs on Chinese EVs that the Europeans have imposed. And similarly, I could see the Chinese being more lenient on some of these tech transfer details for Chinese companies to effectively enable IP transfer to their European counterparts and partners when they establish factories in Europe, especially relevant for batteries and other EV components. So I'm bullish that there are some beneficiaries in all these different regions. But again, I think that America had its chance, Trump, under Trump, to really squeeze China when it comes to trade and even some of these tech sanctions. But again, because Trump blinked, I think he rendered that null and void.

Scott Galloway (53:18)

So Alice is the Chinese analyst for Green Mantle and advises people at the highest level around their investments and their strategies. I've been actively looking at European and Chinese stocks and I'm absolutely fascinated with BYD. I just can, you know, I see these TikToks of every single. You know, I see the performance of a car that seems to be superior to cars that cost four times more. I'm curious what you think of byd, what it says about Chinese manufacturing, if it has the same talk about the BYD phenomena, What do people locally think of the brand and what does it say about the state of kind of Chinese manufacturing right now? And I'm fascinated with this company. I would love to get any color you might have on it.

Ed (54:05)

Well, Scott, I've got people in the region, so you should definitely go and visit. We can get you into an EV if you want, in China very soon and give it a test drive. But on the ground, I mean, it's one of the huge success stories. And I think that they've pressed play on autonomous drive driving, which is potentially going to give them even more upside when they begin to roll that out in China and then globally and beyond that. I was reading an interesting diagram of the way in which BYD is involved in so many different industries. And this is a way in which I think Chinese manufacturing can be seen as more competitive and advantageous is the fact that you've got companies like Huawei and BYD that don't just produce cars or smartphones. They're involved in LiDAR, they're involved in AI, they're involved in semiconductor, R and D. The fact that you have companies that are basically like the Intels or even the Fords or the Tesla of the world doing many different parts of logistics and components, I think is deeply, deeply impressive. And I could see them being extremely competitive outside of China in other Countries outside of the U.S. obviously, the U.S. will continue to have restrictions on China, but I could see definitely more upside for these companies like BYD moving forward. And to your point, Scott, if you look at the forward multiples, I was looking at it today on Chinese companies, they're around 12, still very low by historical standards and much lower than Japan and India. I could see a lot of upside in Chinese tech companies moving forward.

Alice Hahn (55:34)

Last question from me, Alice. Sort of similar to Scott's question, the predominant theme so far this year has been basically sell America question mark. And that's sort of the economic, geopolitical markets question every investor is asking this year. And it just, you know, brings up this question like, how is the world order gonna shape up and how do the tariffs going up and then coming down affect all of that? Given everything you've seen this year, the election, the tariffs, the fact that the tariffs just came down, what's happening in the markets? If you had to put your money on one country, and we'll call it over the course of like 20 years between America and China, which country would you bet on?

Ed (56:18)

Well, at the risk of being facetious, Ed, can I say Chimerica? If that country still exists, yes.

Alice Hahn (56:23)

Okay.

Ed (56:24)

Because the two again back to this relationship in which they just reinforce each other because one side's strengths is the other side's flaws. When I think about Chinese tech manufacturing capacity, China is undoubtedly the leader and I think it will continue to be. So basically, it's astounding that China has quietly met or even surpassed all of its made in China 2020, 25 goals, even though it's not talking about it anymore. I remember back in the day in Trade War one where there was a huge backlash. China silently achieved many of those goals. And meanwhile in the US I still think that the US has a degree of exorbitant privilege. It's going to be very hard to fully rotate out of the US the fact that stocks now, the S and p are above April 2nd and maybe even will come up to an all time year to date high suggests that people are trying to get back into the U.S. it's not fully convinced that this is the end of US hegemony and that there's still an appetite for US assets. I'm still bullish long term about the US in terms of its knowledge economy, in terms of immigration. When it gets its act together, like with the COVID vaccine, it does it very, very well and again remains a strong consumer driven economy in the way that China isn't so at the risk again of signing facetious. I would say I'd put my money on chimeric America. It's hard to see any other economy, even eu, competing with that. I think the Europeans, even, although people were saying buy Europe earlier this year, have faced a big hurdle with Mertz's fiasco. He finally got elected, but it showed underlying weakness in Europe and I think Europe is next when it comes to tariffs. So I would say Chimerica, if that's at all possible.

Alice Hahn (58:07)

That works for me. Alice is a China economist and director of Greenmantle, a global macro and geopolitical risk advisory company. She graduated in History and Economics from Hall Harvard and holds a Master's in East Asian Studies from Stanford University, where she focused on Chinese political economy and fintech. Alice always learned so much from you. Thank you for joining us.

Scott Galloway (58:28)

Alice. Just one quick thing. I think it's really important to point out that we discovered you. We discovered you.

Ed (58:35)

I know. I was gonna say, can I. Can I make that publicly known somewhere? I've got so much. I'm against the digital equivalent of fan mail on LinkedIn and whatnot, thanks to you guys. So I really appreciate that.

Scott Galloway (58:50)

Where I'm headed with this is when Ed needs a job and Scott needs help finding a nursing home. Remember, we discovered Alice Hahn. Literally, your views. We have these old white guys with all these credentials on the pod. They get like 15,000 views and Alice Hahn comes on and you get 200,000 views.

Ed (59:11)

No, but I thank you guys. I mean, I'm used to being in the rooms with old white men who are twice my age. It's the norm now.

Scott Galloway (59:19)

It's the norm. Yeah. Anyways, congrats on all your success and thanks for your great work on this show.

Ed (59:24)

Yeah, thanks so much, guys. Appreciate it.

Alice Hahn (59:28)

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 assistant. Associate Dan Shalon is our intern. Drew Burrows is our Technical director and Catherine Dillon is our Executive producer. Thank you for listening to Property 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. Happy.

Scott Galloway (60:06)

And kind reunion as the water. Nobody knows your customers better than your.

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