If you don't own assets, you're about to be in for a rude awakening. That's Scott Galloway's warning. You may know him as Prof. He's an entrepreneur, NYU Stern School of Business professor, and author of The Algebra of Wealth. Scott has gotten wealthy three different times because, per his own words, he's gone broke twice. He tried to time the market. He launched numerous companies, and he still made it out alive. Scott says, "Today's economy is different. It's quote prosperous but fragile. If you've got assets, it's good, but if you don't, it's a real struggle. So, how do you move from being on the earner side of the table to the owner side so you can build wealth and not get stuck in the rat race? We're going to talk about everything today: the chance of an economic crash, whether AI will pay off, should you buy a house right now, and if so, where, and why getting a corporate job may get you to financial freedom faster, contrary to what 99% of people are saying."
Hey everyone, I'm Dave Meyer. Welcome to the Bigger Pockets podcast. Today we have a very special show for you. Our guest today is Scott Galloway, also known as Prof G. Scott Galloway is a successful entrepreneur. He is one of the foremost economic thought leaders in our space right now and a prolific author, and he's the kind of guy who's just going to tell you exactly what he thinks. He does not pull punches. And today I've got a lot of questions for him about the economy in general, about housing, and how to get ahead in this confusing economy. Let's bring on Scott Galloway. Scott, welcome back to the Bigger Pockets podcast. So good to have you here again. Thanks for being here.
It's great to be with you, Dave.
It's been three years since you've been on the show, and of course, a whole lot has happened geopolitically and economically. And I'd like to just start at the top. How would you describe the moment we're in right now in the American economy?
Uh, I guess K-shaped, and it feels like prosperous but fragile. You know, I was walking through New York the other day, and New York had 65 million visitors last year, 85 billion in economic activity, 400,000 jobs. Broadway attendance is greater now than all the attendance to all the sports teams regionally. Job growth of 1.1 million, but the asterisk is inflation is at 4.6% versus 3.4% nationally. So, if you're in the right place at the right time in New York, it's never been better. Bankers' compensation is up 38%. But if you're the kind of person who has to show up for jury duty, you probably have inflation and your rent is just getting more expensive. And of those 1 million jobs created, most of them are in health care. So most of those people are taking care of old people. And I think that's a larger metaphor for the United States. And that is, if you're in the right place, if you have the right credentials, the right skills, it's just never been better. Uh, one of the reasons the middle class hasn't increased, and some people would argue it's decreased, and we don't like to talk about this because catastrophizing is a better narrative, is that a lot of the middle class has been elevated in a millionaire status.
There are a lot of people making a lot of money. GDP growth in the US is actually pretty strong. Unemployment isn't that bad. Now go to the fragility part. Whether or not you know, living on borrowed money from future generations, spending $7 trillion on $5 trillion in tax receipts, that feels like a recipe for disaster. And I would argue some of the damage we're doing geopolitically will take generations, if ever, to repair, and that our economic relationships and alliances aren't even being frayed. There's like enormous fissures. So K-shaped, if things are good for you, they're probably great for you, better than they've ever been. A lot of people just struggling, I think, to maintain wage growth with inflation and what I would call a series of macro or structural decisions that will haunt us.
I worry about many of the same things and do personally identify with the feeling of fragility. It does feel, even for those of us who are fortunate to remain employed, to have assets, to be doing relatively well in this economy, it just feels like something is about to break.
If we woke up tomorrow, Dave, and the S&P was off 20% in one day and was off 40% a year, we'd go, "Well, of course it is."
We have 10 companies, 40% of the S&P. Those companies are basically priced to perfection. And if you look at the capex of AI right now, which is driving, I think, 90% of GDP growth, 73% of earnings growth. The underlying assumption to justify the spend and the stock prices is that the AI sector is going to be a $2.5 trillion sector, which is bigger than all of tech right now. Right now it's at about 150 or 200 billion in revenues. We think it's going to 12x. And if it doesn't, say it ends up only being a trillion-dollar category, AI, if these 10 companies sneeze, the US market and ultimately the global markets, of which the Dow and S&P now represent 50% of global equity value, 70% if you add in debt, the whole world is going to catch walking pneumonia. Now, that may not be the worst thing. I almost feel like a managed correction, although there's no such thing, a correction as opposed to a crash might be a good thing because the problem is guys like me and you who own assets, it's been champagne and cocaine. If you own stocks and houses, you're fine. You're doing great. You're hedged against inflation. You've seen extraordinary gains. The problem is the entrance. The closest they've gotten to the party is they get to throw their credit card in and we swipe it. You know, if America was a household, it makes 50,000 a year in tax receipts, it spends 70 in government spending, it has 390,000 in debt. And that debt is not dischargeable when the parents die. The kids are going to get it. So, I like what Jamie Dimon said. When asked what a recession is, he said something that happens every seven years. We really haven't had a full-blown recession in arguably kind of 17 years. So the question is, is it a recession or a crash? And if you're a perma-bear like me, I keep waiting for it to happen. And the reality is I've been wrong.
And something I always try to ask myself is what could go right, because the economy so far has been extraordinarily resilient and continues to grind on. But I would argue that the soft tissue and the fragility is that it feels as if the West, the US, and accidentally the global economy has become a giant bet on AI. It just seems like it's rampant speculation without any fundamentals. And I don't want to say that AI is not an incredible technology. It is. Like if anyone has used it, you can tell that it is going to be transformative. I used to be, Scott, before I was doing this show, a data analyst. That job is not going to exist for entry-level people anymore. But the idea that the bets that these companies are making and the very unclear motives about what the executives at these companies are doing makes it feel like everyday people are absorbing risk into their retirement savings and into their portfolio that they might not even necessarily know that they are signing up for. And it really, for me, calls into question what do normal people do, even though we don't know if there's going to be a crash or a collapse. I think it's fair to say that risks are rising. And so in an environment of rising risk, what do you do?
So the first thing is, when Trump was—I'm not a fan of Trump—when Trump was elected in 2016, I thought this guy is not bright. It's going to be terrible for the markets. And I sold most of my equities. So, they had run up a lot because I bought a lot of Amazon, Apple, and Netflix in '08 and '09 and had done really well on those. So, I lost whatever it was living in New York, 34% of that in taxes. And then six months later, I recognized that the economy and the market is bigger than any one person, even the president. And the market surged and I bought back in. I basically reduced my net worth by 20 or 30% by having an emotional reaction to the markets. And the advice I have to anyone is, yeah, the market is expensive. Yeah, it's fragile. You always want to be in the market because no one has the ability to time it. And if you go back in history to the big tech crash, 2000, The Economist called it perfectly. It described exactly how it was going to play out. And it called it perfectly, but it called it in 1997. And over the next two years, the NASDAQ doubled. So about the time guys like me say, "Watch out for a crash," oftentimes the markets scorch up. It goes from crazy valuations to insane valuations. So generally speaking, to believe you can time the market is a hallucination. So you always want to be in the market. Now what I would argue, and this is, you know, what I'm doing, is to be in the S&P is not diversification. What I argue is that your Kevlar against this type of risk is diversification. I never really appreciated the power of diversification. And I've been wealthy three times because I've gone broke twice and I was fortunate enough to get it back. But I'm not going back there. I don't have the youth, the mental strength to start over again. So what I do is I don't put any more than 3 or 4% of my net worth in any one thing. And my advice is, if you're like me and maybe a little bit older and think, okay, I'd like to get rich, but what I really don't want is to get poor, really think about diversification not only across stocks but across asset classes and across geographies. Having said that, I'm kind of with Buffett. I think cash is trash. I think you may want to look at debt because people are finally getting paid for debt right now, but for the most part, I believe you always want to be in the market.
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Does your definition of diversification, Scott, contain any real estate?
You're pressing on my soft tissue. So, you know, my advice to everyone is basically around investing is low-cost index funds. I'm like, don't kid yourself. You think you're smarter than the market, you're not. And if you think you're smarter than the market and start investing in individual stocks or hedging, just keep in mind you're competing with the person on the other side of the trade who is a PhD in liquid dynamics from MIT who got hired by a hedge fund and has supercomputers and AI helping them. That's who you're competing with. So low-cost index funds. Having said that, I, like so many people, think I'm smarter than your average bear and I make individual bets. Me too. I just can't help it. I just can't help it. I think, "Oh, I'm onto something." And I do get some psychic reward from it. And then I think about my winners and I talk about them, and then when I go back and look at everything, I'm like, "Okay, I performed 2% below the S&P if I'm honest." But I'm a big believer in demographics. And one of my economic role models was Peter Drucker. And the demographic shift that I see and that I'm investing behind is the following. I think income inequality is only going to get worse. And that the fastest growing cohort in the world isn't going to be Latinos or Southeast Asians or old people. The fastest growing cohort is going to be people worth over $10 million. The number of billionaires has, I think, quintupled in the last 10 years. The number of centa-billionaires, I think it's up two or 3x. And it's like, okay, what do they buy? They buy Hermès. They go to St. Barts. They're actually fairly boring people. They kind of do the same thing. And very wealthy people want to own homes in one of five places or a second home: Dubai, London, Palm Beach, New York, and Aspen. And so my kind of alpha, if you will, is I have spent a disproportionate amount of my net worth on homes in four of those five cities, thinking that one, I like to fix them up. I get psychic income from that. Two, I get an additional kicker, and that is I'm trying to make it hard for my boys to avoid me. Like when they say to their friends, we can go to Masalano Surf or we can go to Aspen. Yeah, we have to have lunch with my dad, but it's free. And then I think in five to seven years, I'm going to sell some or all of these places. But what I see is very, very wealthy people are the most homogeneous people in the world. They look, dress, smell, feel the same, and they all want to live in the same places. And I believe they're all aggregating around a handful of places. And so I have put a lot of money into residential real estate. If I had it to do over again, like everyone, I would just buy single-family rentals. I think real estate, just because of its tax advantages, is just a great way as long as you don't over-lever yourself. You look at it and think, okay, let's assume the market goes down 20, 30, 40%, would the bank own it? So rental real estate, I think it is hard to find a category that on a risk-adjusted basis is a better way to get rich slowly.
Exactly. That's what we say on the show. It's not get rich quick, but it's get rich for sure over the long term if you just keep making those bets. Which of those five cities are you missing?
I don't own a home in Dubai. And by the way, I've owned these homes for anywhere between four and 10 years. And the two markets that have performed the worst—oh, you're a smart guy. So I'm in London, New York, Palm Beach, and Aspen. Rank those in terms of returns over the last 10 years.
I would say I would put Palm Beach at one.
Ding, ding, ding. Hands down.
I own real estate there. In the last 10 years, it's tripled.
The amount of capital just going into that area of the country has just been absolutely insane.
