Why the U.S. Can’t Break Up with China — ft. Alice Han | Prof G Markets

Today's number, 7%. That's the expected year-over-year decline in tourism to the US in 2025. True story, Ed. I was in Paris and saw a mime and he began masturbating. Later I heard that he was arrested, but he came quietly.

I like that one. It's okay. Just okay. Just okay. Oh my god, it's getting so bad here. Maybe we're coming to the end of the jokes. Oh, bite your tongue. Bite your tongue. Maybe I should, I probably should go to like the cleaner ones. Ed, how are you? What did we do yesterday, Ed? We did our first big branded advertisement deal, which was fun. Less awkward than I thought it would be. Scott and I talking about some software product. I'm not sure if we're supposed to talk about what the product actually is. But yeah, you and I, you and I sold some ads yesterday. 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 cuz let's be honest, you're a total [__] 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 product. There's probably 40 people there. And I could tell you're not used to that. When you get to my age, you're literally willing to like [__] out your ass. I mean, you're just like, 'Oh, there's money involved. Sure.' And I could tell you're sort of like, 'This doesn't feel right.' 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. It's a good product. 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.

Yeah. It reminds me of the time I was in Paris and I was staring at the Eiffel Tower. Here we go. 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 room. Oh my god. Ed. Ed. Ed. Seriously, it's hard to follow these jokes when they have nothing to do with the preceding conversation. Yeah. If there was some slight link, I might have gotten it, but it sort of just came out of nowhere. All right, get to the headlines. I'm done. Get to the headlines. Before I do that, I want to remind our listeners, we have a weekly newsletter, ProfG Markets. It breaks down the key market moves with data-driven analysis and crisp visuals every Monday. So, a reminder, please go subscribe now at 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.

Pharmaceutical stocks dropped after Trump said he had a plan that would significantly slash drug prices in the US. 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 5 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 US. Then, he signed the executive order and the stocks rebounded again. Your reactions?

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 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 return on investment isn't investing in people. It isn't investing in AI. It's investing in our [__] that we called elected representatives. Because the disappointing thing about our elected representatives is not that they're [__], it's that they're such cheap [__]. 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 3%. And then people read it and said, 'Oh, this is the president doing jazz hands, saying [__] 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 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 [__] way that this is actually going to 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 going to 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 healthcare. We pay 13,350. 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 two and a half trillion dollars 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 health care costs and a drag on the American economy. And this was the market saying, 'Yeah, nice try, boss.'

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?

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 going to 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.

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 US. 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.

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 it. Never mind, now I like it.' He sometimes 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 it 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 [__] 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. 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 a few 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 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 [__] 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?

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 an example of kind of the froth here. Their annual recurring revenue has grown from 5 million in January 2024 to 120 million. So obviously it's growing 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 goes 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 of OpenAI or 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?

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 2,000% more valuable than Perplexity. My sort of gut reaction was oh I wonder if that's small and I think the question is, you know, 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 is 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 I've 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.

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 legacy. And that is if you think about ChatGPT, it's a generalist platform for content creation, writing code, producing visuals, whereas Perplexity has real-time web search.

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 funny you say that cuz my brand perception is when I say can you 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. 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 use search. This is a capital race. They're going to win.

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.

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 the 9th, 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&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. So that's why they're doing this reshuffling. But yes, they got acquired by Capital One. Is that right? Yeah. Yeah. So it's sort of when you invest in an S&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&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 legitimizes, to a certain extent this fairly or 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 [__] does fall and become the ultimate Ponzi scheme where there's no underlying cash flows to justify any of this [__] 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&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. Ed, your thoughts.

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

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

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 eighth largest cryptocurrency by market cap, one of the most traded coins on that platform. Trumpcoin, Pepecoin, Comrocketcoin, which I know you love, Fcoin, 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 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 [__] 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 dollars 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 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 look, 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.

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? No. That's a real business that has real value in the real world. Are you cool with tobacco companies being in the S&P? People like to smoke. That's real. That's actual value in the economy. 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?

Yeah. My issue is that we are now attaching the value of people's retirement accounts to a company that makes money on trading Comrocket and Fcoin.

That's a good point. I literally, I respect the fact that when you go to parties, you're like the guy, and you're like the 26-year-old that doesn't like crypto. Literally, that's 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 none of what I say resonate with you or do you think I'm being pedantic or what do you think?' 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 [__] 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.

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. Let me put it this way. If this [__] 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.' Which again feels so 2008 to me. And most importantly, this whole conversation has inspired my favorite line from a song, and that is, 'I'm so 2008, you're so 2008.' I love that line.

Was that Black Eyed Peas?

Dude, I don't know. That's Boom Boom Pow.

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

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

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Welcome back. Here's our conversation with Alice Han, China economist and director at Greenmantle. Alice, where does this podcast find you?