No Mercy / No Malice: How Does the End Begin?

0:00:02 Support for this show comes from Notion.
0:00:07 There’s only one of you, only so many hours, only so much focus.
0:00:10 What if you had a teammate who could work just like you do,
0:00:13 with all the contacts you have, but faster?
0:00:15 That’s what Notion AI feels like.
0:00:20 Notion is the connected workspace where teams create, plan, track, and ship together.
0:00:25 Now, with Notion Agent, you can get an AI teammate that finishes the job.
0:00:28 Notion Agent can do anything you can do in Notion,
0:00:33 completing multi-step actions end-to-end to move work forward while you focus on hard decisions.
0:00:37 You assign the task, your Notion Agent does the work.
0:00:42 Try Notion and Notion Agent for free at Notion.com slash box.
0:00:47 This episode is brought to you by Peloton.
0:00:50 A new era of fitness is here.
0:00:54 Introducing the new Peloton Cross-Training Tread Plus, powered by Peloton IQ.
0:01:01 Built for breakthroughs, with personalized workout plans, real-time insights, and endless ways to move.
0:01:06 Lift with confidence, while Peloton IQ counts reps, corrects form, and tracks your progress.
0:01:10 Let yourself run, lift, flow, and go.
0:01:14 Explore the new Peloton Cross-Training Tread Plus at OnePeloton.ca.
0:01:17 Listen closely.
0:01:21 That’s not just paint rolling on a wall.
0:01:23 It’s artistry.
0:01:32 A master painter, carefully applying Benjamin Moore Regal Select eggshell with deftly executed strokes.
0:01:38 The roller, lightly cradled in his hands, applying just the right amount of paint.
0:01:42 It’s like hearing poetry in motion.
0:01:45 Benjamin Moore, see the love.
0:01:50 I’m Scott Galloway, and this is No Mercy, No Malice.
0:01:54 America has become one giant bet on AI.
0:02:01 Just 10 companies are responsible for 40% of the S&P’s value.
0:02:04 This makes our economy fragile.
0:02:09 How does the end begin, as read by George Hahn.
0:02:18 The top 10 stocks in the S&P 500 account for 40% of the index’s market cap.
0:02:29 Since ChatGPT launched in November 2022, AI-related stocks have registered 75% of S&P 500 returns,
0:02:35 80% of earnings growth, and 90% of capital spending growth.
0:02:42 Meanwhile, AI investments accounted for nearly 92% of the U.S. GDP growth this year.
0:02:51 Without those AI investments, Harvard economist Jason Furman noted, growth would be flat.
0:02:55 As Roshir Sharma concluded in the Financial Times,
0:02:59 America is now one big bet on AI.
0:03:01 Adding,
0:03:08 AI better deliver for the U.S. or its economy and markets will lose the one leg they are now standing on.
0:03:11 This concentration creates fragility,
0:03:16 and how the end begins becomes more visible.
0:03:25 The S&P, NASDAQ, and Dow Jones Industrial Average are some of the most damaging metrics in modern history
0:03:30 as they create the illusion of prosperity, even as depravity rages on.
0:03:37 The cloud cover for a masked, secret police terrorizing communities is these indices.
0:03:44 As long as your 401k is going up, then everything must make sense and be okay, no?
0:03:46 No.
0:03:53 Trump could not send troops into U.S. cities if the S&P were down versus up 13%.
0:03:59 AI stocks and the sugar high they have inspired across the entire market
0:04:05 numb Americans from the nagging tooth pain that we are descending into fascism.
0:04:09 Yeah, those evil people who wipe your grandma’s ass,
0:04:13 pick our crops, and build our homes can be treated inhumanely
0:04:17 as long as NVIDIA remains worth more than the entire German stock market.
0:04:25 Valuations for the MAG-10, the original group of seven leading tech stocks,
0:04:32 plus AMD, Broadcom, and Palantir, are high, but not yet at historic peaks.
0:04:39 The 24-month forward P.E. ratio of the MAG-10 is 35x.
0:04:43 In 2000, at the height of the dot-com bubble,
0:04:48 the top 10 stocks traded at 52x forward earnings,
0:04:52 Implicit in these valuations, however,
0:04:56 is an assumption that AI will help these companies cut costs
0:05:00 or grow revenues by $1 trillion in the next two years.
0:05:05 I believe we’re either going to see a massive destruction in valuations
0:05:09 infecting all U.S. stocks and global markets,
0:05:14 or we’re going to see a massive destruction in employment
0:05:18 across industries with the highest concentrations of white-collar workers.
0:05:21 Both scenarios are ugly.
0:05:25 If MAG-10 valuations are cut in half,
0:05:31 the S&P and global markets would decline by 20% and 10%, respectively.
0:05:37 In the U.S., the immediate impact would be felt by the wealthiest 10%,
0:05:40 who own 87% of the stocks.
0:05:43 Those households won’t struggle to pay their bills,
0:05:47 but they may be the tail of the whip on the economy,
0:05:51 as wealthy households have the luxury of decreasing their spending dramatically
0:05:56 versus middle-class households who spend the majority of their income on basics.
0:06:04 If the top 10%, who account for half the consumer spending in the U.S.,
0:06:08 hit the brakes, the nation gets whiplash.
0:06:13 I estimate that if the wealthy see their portfolios drop by 20%,
0:06:17 we could see a 2% to 3% decline in GDP.
0:06:21 For context, from peak to trough,
0:06:26 the Great Recession registered a 4.3% drop in GDP.
0:06:33 If the MAG-10 justify their valuations by delivering $1 trillion in cost-cutting,
0:06:35 Latin for layoffs,
0:06:39 the impact will hit white-collar workers first,
0:06:41 but the contagion could spread.
0:06:45 Assuming an average white-collar wage of $100,000 per year,
0:06:50 that’s 10 million jobs lost and a 6% increase in unemployment.
0:06:56 That estimate is conservative compared to the white-collar bloodbath
0:06:59 predicted by Anthropic CEO Dario Amodei,
0:07:01 who told Axios,
0:07:05 AI could wipe out half of all entry-level white-collar jobs
0:07:11 and spike unemployment 10% to 20% in the next 1 to 5 years.
0:07:19 The IMF warns that 60% of jobs are already exposed to AI in advanced economies
0:07:21 and 40% in emerging markets.
0:07:24 According to Okun’s law,
0:07:28 for every one-percentage-point increase in the unemployment rate,
0:07:33 real GDP falls by approximately two percentage points.
0:07:36 But AI could be a different story,
0:07:39 with some experts predicting jobless growth.
0:07:42 According to a J.P. Morgan report,
0:07:45 AI made due to white-collar work
0:07:48 what automation did to middle-skilled jobs
0:07:53 like sales, manufacturing, and construction in the 1980s.
0:07:57 The canary in the coal mine may be recent college graduates.
0:08:01 Stanford economists found that early career workers,
0:08:03 ages 22 to 25,
0:08:06 in the most AI-exposed jobs
0:08:12 have experienced a 13% relative decline in employment.
0:08:15 If this trend accelerates,
0:08:19 today’s challenges around wealth inequality and political volatility
0:08:20 will seem quaint.
0:08:28 A 2018 study that examined 51 innovations between 1825 and 2000
0:08:32 found 37 were accompanied by bubbles.
0:08:36 The destruction that followed in each bubble’s wake, however,
0:08:39 varied greatly, depending on several factors.
0:08:43 Bubbles inflated by political policies are more destructive
0:08:46 than those inflated by new technologies,
0:08:50 according to economic historians William Quinn and John Turner.
0:08:55 The size of the capital investment is also important.
0:08:59 British railway investment in the 1840s
0:09:02 was 15% to 20% of GDP.
0:09:05 When that bubble burst,
0:09:07 unemployment doubled.
0:09:10 In the U.S.,
0:09:15 railroad CapEx averaged 2.4% of GDP in the 1870s.
0:09:20 That bubble drove the financial panic of 1873.
0:09:22 In both cases, however,
0:09:24 those investments paid
0:09:28 delayed dividends in the form of rail capacity
0:09:32 that helped distribute the promise of the Industrial Revolution.
0:09:33 In contrast,
0:09:35 as the economist noted,
0:09:39 the CapEx by electronics firms in the 1980s
0:09:42 fueled Japan’s asset price bubble,
0:09:43 but the spending
0:09:47 ultimately served no useful function.
0:09:48 Finally,
0:09:52 the severity of a crash depends on who takes the losses.
0:09:56 A second British rail bubble in the 1860s
0:09:57 hit banks hard.
0:09:59 The recent NFT bubble
0:10:02 was a case study in the greater fool theory,
0:10:05 but the contagion didn’t reach the broader economy.
0:10:10 You can’t predict when or if a bubble will burst,
0:10:11 but Azeem Azhar,
0:10:13 founder of Exponential View,
0:10:16 and researcher Nathan Warren,
0:10:17 created a framework
0:10:20 that compares historic bubbles with AI today.
0:10:22 In their estimation,
0:10:24 AI is a boom,
0:10:26 but booms can sour quickly,
0:10:29 and there are several pressure points worth watching.
0:10:34 If AI CapEx exceeds 2% of GDP,
0:10:35 that’s cause for concern.
0:10:39 It’s currently estimated at around 1.3%.
0:10:42 A sustained fall in enterprise
0:10:43 or consumer spending levels
0:10:45 is another pressure point.
0:10:48 A flawed, though perhaps directionally correct,
0:10:51 MIT study rattled the AI ecosystem
0:10:55 claiming that 95% of firms
0:10:58 have yet to see measurable ROI
0:11:00 from their AI pilot programs.
0:11:04 We’re approaching a valuation red line
0:11:06 if and when P.E. ratios
0:11:09 reach the 50x to 60x range.
0:11:11 Finally,
0:11:16 if internal cash covers less than 25% of CapEx,
0:11:18 Azhar and Warren believe investments
0:11:21 in data centers will come under pressure.
0:11:24 The AI infrastructure build-out
0:11:26 has accelerated recently
0:11:28 with an estimated $1 trillion
0:11:29 in new commitments.
0:11:32 Some firms are making deals
0:11:33 with money and assets
0:11:35 that don’t yet exist.
0:11:38 See OpenAI promising Oracle
0:11:39 $300 billion,
0:11:41 money it doesn’t have,
0:11:43 for infrastructure Oracle
0:11:45 hasn’t built.
0:11:47 In other cases,
0:11:48 revenue comes from
0:11:49 circular financing,
0:11:52 where dollars rotate between firms,
0:11:54 obscuring true market demand.
0:11:58 See NVIDIA’s $100 billion investment
0:11:59 in OpenAI,
0:12:01 which OpenAI will use
0:12:02 to buy
0:12:04 NVIDIA chips.
0:12:06 Circular financing deals
0:12:07 were common
0:12:09 toward the end of the dot-com bubble,
0:12:10 when similar deals
0:12:11 contributed to a crash
0:12:12 that destroyed
0:12:14 77%
0:12:17 of NASDAQ market value.
0:12:19 If we are on the precipice
0:12:20 of a bubble popping,
0:12:23 NVIDIA and OpenAI
0:12:25 will likely be ground zero.
0:12:26 But the fallout
0:12:28 would be widespread,
0:12:29 as an ecosystem
0:12:30 that resembles an Ouroboros
0:12:32 lives and dies
0:12:33 by a shared narrative.
0:12:35 In his book
0:12:37 Irrational Exuberance,
0:12:38 Robert Schiller wrote,
0:12:40 The word bubble
0:12:41 creates a mental picture
0:12:42 of an expanding
0:12:43 soap bubble,
0:12:44 which is destined
0:12:45 to pop suddenly
0:12:46 and irrevocably.
0:12:49 But speculative bubbles
0:12:50 are as easily ended.
0:12:51 Indeed,
0:12:53 they may deflate
0:12:53 somewhat
0:12:55 as the story changes
0:12:57 and then reflate.
0:12:59 The operative word
0:13:00 is story.
0:13:01 Entrepreneurs,
0:13:02 a.k.a.
0:13:03 storytellers,
0:13:05 deploy narratives
0:13:07 to capture imaginations
0:13:07 and capital
0:13:09 in order to pull
0:13:10 the future forward.
0:13:12 Valuations aren’t
0:13:13 a function
0:13:14 of balance sheets,
0:13:16 but of the stories
0:13:18 that give those balance sheets
0:13:19 meaning and direction.
0:13:21 In the case of AI,
0:13:23 a key storyline
0:13:24 is shifting.
0:13:26 A Prof G analysis
0:13:27 of ChatGPT data
0:13:28 found that
0:13:30 work-related prompts
0:13:32 fell from 47%
0:13:33 in 2022
0:13:35 to 27%
0:13:37 in 2025.
0:13:39 ChatGPT
0:13:41 has 76%
0:13:42 market share.
0:13:44 As my markets
0:13:45 co-host Ed Elson
0:13:46 said,
0:13:48 The bull case
0:13:48 for AI
0:13:49 is that it’s going
0:13:51 to transform work,
0:13:52 but what we’re learning
0:13:53 is it’s mostly
0:13:54 just affecting
0:13:55 your personal life.
0:13:57 The trouble
0:13:58 isn’t the shifting
0:13:59 narrative,
0:14:00 but the fragility
0:14:02 of America’s bet
0:14:02 on AI
0:14:04 and wealthy consumers
0:14:05 driving growth.
0:14:07 If McDonald’s
0:14:08 goes out of business,
0:14:10 the fast food industry
0:14:10 will continue
0:14:11 to meet demand
0:14:13 for cheap calories.
0:14:14 The industry
0:14:15 is robust,
0:14:15 i.e.
0:14:17 anti-fragile.
0:14:18 J.P. Morgan,
0:14:20 now worth more
0:14:22 than the 10 biggest banks
0:14:23 in the EU combined,
0:14:25 is too big to fail.
0:14:27 America’s bet
0:14:28 on AI
0:14:29 is now a bet
0:14:30 without hedge.
0:14:31 If companies
0:14:32 that aren’t
0:14:33 the MAG-10,
0:14:34 i.e.
0:14:35 the S&P 490,
0:14:37 report their
0:14:37 scaling back
0:14:38 AI investments
0:14:40 as the adoption
0:14:41 layer fails
0:14:41 to launch,
0:14:43 the connective tissue
0:14:45 between AI,
0:14:46 trillions in market cap,
0:14:48 and the broader
0:14:48 economy
0:14:49 severs.
0:14:51 The experts
0:14:53 have already deemed
0:14:53 the grid
0:14:54 and electrons
0:14:56 as the gating factor
0:14:57 to our AI future.
0:14:58 However,
0:15:00 they’re ignoring
0:15:02 a more glaring possibility.
0:15:04 AI may be more
0:15:05 like VR
0:15:06 than GPS
0:15:08 and just not offer
0:15:09 the ROI
0:15:10 built into
0:15:11 these valuations.
0:15:12 Also,
0:15:14 citizens burned
0:15:15 by tech executives
0:15:16 writing books
0:15:17 on gender balance
0:15:18 as they launch
0:15:19 products that result
0:15:20 in teen girls
0:15:20 cutting themselves
0:15:22 may decide
0:15:23 character AI
0:15:24 and porn
0:15:25 are disastrous
0:15:26 for our sons.
0:15:28 If China’s
0:15:29 AI program
0:15:30 produces another
0:15:32 Sputnik moment
0:15:32 similar to
0:15:33 DeepSeq
0:15:34 earlier this year,
0:15:36 valuations for
0:15:36 U.S.
0:15:37 AI firms
0:15:38 could tumble.
0:15:40 And if reports,
0:15:41 including Apple’s
0:15:43 The Illusion of Thinking,
0:15:44 extinguish the hope
0:15:45 that artificial
0:15:46 general intelligence
0:15:47 is near,
0:15:48 AI,
0:15:49 and by extension
0:15:50 the American economy,
0:15:52 may experience
0:15:53 a significant
0:15:54 correction.
0:15:56 We are the biggest
0:15:57 economy in the world
0:15:59 and the most powerful
0:16:00 nation in history.
0:16:01 However,
0:16:04 concentrating wealth
0:16:05 in so few hands,
0:16:07 betting on so few
0:16:07 companies,
0:16:09 makes us fragile.
0:16:11 When asked what
0:16:13 one piece of advice
0:16:14 I’d give young people,
0:16:15 I offer,
0:16:17 nothing is as good
0:16:18 or as bad
0:16:20 as it seems.
0:16:22 Our economy
0:16:23 rests on the belief
0:16:24 that AI
0:16:26 is even better
0:16:27 than it seems.
0:16:29 Careful.
0:16:34 Life is so rich.
0:16:45 Life is so rich.