You Think You're Diversified, AI Disagrees — ft. Torsten Slok

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“That's the percentage of Americans who didn't read a single book last year.”

It's your story, Ed. I just read a book on the Dunning Kruger Effect. Ask me anything. Basically, Markets are bigger than what you have here in this structure. Change it to the world history.

Cash is trash. Stocks are pretty attractive. Something's going to break. We've got about it. I don't think you're a non-expert on bookwriting at this point.

How many books have you written now? I want to say I've written more books than I've written last five years that that would reveal me for the pseudo-intellectual douchebag I actually am. Sposely, my publisher told me 1% of the published by 90% of the books. Which I believe.

Wow. Do you read a lot, Ed? I try too. As Yoda said, there's do or do not, there is no try. I guess in the past, in the past two months, I have not been reading enough.

But before that, I was reading very frequently. I'm going to have to get on to the writing the books game. A little more sunshine here once. It has an agent at CAA. It's pretty soon it's going to have a book agent.

I don't like when people aren't dependent upon me for their livelihood. So, Ed, what are you doing in Palm Springs? Got a speaking gig. Just got here yesterday, first time in Palm Springs. I'm shocked by how nice it is here.

I had no idea. I showed up to the airport and there's literally a gigantic mountain range right in front of me. Perfect weather, extremely pleasant. Really nice airport, by the way.

And then the drive was just incredible.

It's like this beautiful mountainous desert with also palm trees dotted all over the place. I'm just kind of shocked by how great Palm Springs is. I had no idea. Ed, gave people like Palm Springs and you didn't know that it's wonderful. I mean, come on, dude.

Well, now I know. It's wonderful. It's got amazing sunsets. It's got a nice vibe. It's got a lot of no extra architecture.

In case you don't know, that's a famous mid-century mountain architect. That's wonderful. How are you and where are you? And I also want to hear about Minneapolis. Oh, I bet you do. You jealous bitch.

I'm back in New York. I was in St. L. S. I was in Vegas, which was great. I went for the opening of the zero bond club there at the Win Hotel.

“Has anyone ever said anything more douchey than that?”

And then I got up at $0,800 yesterday. Food and Minneapolis for a much different environment.

And now event was great.

“So about the Penn Asia Cedar, according to the folks who run the theater fast in any event.”

That was great. We interviewed Governor Walls.

People are feel very unified in Minneapolis. It was a really people feel very, I know, very strong community feel there right now. That was nice. What do they think of Tim Walls at this point? Oh, it's huge. I mean, at least in this crowd, he's hugely popular.

People feel like he's been, you know, really forcefully at dignified. I think he's handled the situation well, in which it's like sort of an impossible situation or impossible needle to run there. He got a standing ovation. We introduced him. We got a standing ovation. He's also more importantly.

He's very good looking. I saw him in person.

You know, I had the same question I'm having with everybody that looks like someone the former person could eat. And that is, I said, what are you doing? You're on a zampig? I was like, no, I've been running. I'm like, uh, we're go via a zampig. Come on, boss. I have a friend who shall go nameless who claims that he's just playing a lot of pedell. I'm like, yeah, pedell's known for dropping 80 pounds.

Yeah, you've been three bucks plus. You've been three bucks large your entire life, but now you're playing pedell.

“Yeah, that's, that's what obese people do in their 60s to trim down, pedell.”

That's really good. You could write a whole old school about that. I'm sure that's becoming a trend. I do. I'm fascinated by GOP one. I actually need to put on some way and I look in the mirror this morning. I'm looking to scan I got hit weights again. And anyway, so did that. I got home late last night. I got slept just okay. I got up and tired. Did Baltic Abelangerie had my kish and blueberry muffin breakfast.

And I'm here stuck with you. I'm here stuck with you. Sounds like a good life. Let's get on. Who we? What economists do we bring in on now? We got a big one, but before we get to our guest, we have a quick announcement, which is that Profty markets is now on sub-stacks. So subscribers can now get ad-free episodes. We've been listening to you guys. You can also access live streams.

And it is an exclusive place to engage with us and other listeners. You can find us at ProftyMarkets.com ad-free now. Very big news. Very good. Let's get into our conversation with Torsten Slok, partner and chief economist at Apollo. Torsten, thank you very much for joining us. Well, thanks for having me. So I want to get into Iran, is where we probably have to start here, specifically oil prices,

which just skyrocketed over the weekend. When above 100 hit a peak of $118 a barrel, we'll see where things head. I mean, it's very, very volatile at this point. But as the chief economist at Apollo, I just want to hear what you make of what's happening in Iran, how it's affecting commodities prices and why it matters. Well, the broader backdrop here is that last year, GDP growth in the U.S. was facing hit wins

because of the trade war. Then when hit wins coming, because tariffs went up. And then there were hit wins becoming because of trade war uncertainty also going up. That narrative is changed quite dramatically in the last few months. Now instead, we have a backdrop where the economy is actually doing quite well. We have a lot of AI and data set up spending. We also have an industrial renaissance where politicians want to home shore a lot of production of pharmaceuticals,

of chiefs manufacturing, and also even more production of defense. And we also have a third

factor, that's an engine of growth, namely the one big beautiful bill, which the Congressional budget office estimates is going to lift you the peak growth by 0.9%. So the backdrop for a conversation about what's happening geopolitically and what's happening to all the prices is that we're already having an economy that's in quite good shape. In fact, co-PCD inflation, which is what the Fed cares about is at 3%. And now we're adding on some of that a conversation about how much more

what inflation move up because of all prices moving up. So my answer as an economist to your question is that when you increase all prices by $35, and you stuff that into the Fed's model of the US economy, that is going to lift headline inflation by 0.7%. And it's going to lift co-inflation by 0.1%. But that means that we already have a level of inflation that's a 3% and it should be too. And now we're adding even more upward pressure on inflation. Therefore, the answer to your question

is that this is about the persistence of the shark, but the sign in front of the shark is that we will likely continue to have an inflation problem probably for the rest of this year simply because of an economy that's already strong. And on the back of that, now a geopolitical risk that is going to add more upside pressure to all the prices. So even if all the prices go down a bit more,

“remember the base case was that we a few weeks ago just a $65, it is still going to be the main”

risk that inflation is going to stay higher for longer. And therefore that the economy will continue

too much inflation. So it seems like a big problem as a result of that inflation. Let's assume that

oil prices are going to stay elevated to be clear. Trump has said this is going to be short term. They're going to come back down. Everything's going to be fine. But let's assume as you're saying oil prices stay elevated. It translates to higher prices at the pump which translates to even worse inflation, which is already pretty elevated right now. Doesn't that mean that the Fed is now going to consider raising rates in an environment where the labor market is already

showing signs of weakness, where it's already getting tighter and worsening, which to me sounds like actually a double whammy of a problem of both rising prices and also a shaky labor market. That is the definition of speculation, namely high-end vision and all growth in this case low employment. The reason why I still think this discussion is a little bit premature. It's because the labor market report that we had here for February was indeed impacted in a number of different ways

posed by a strike, also by a very cold weather, and there were also some seasonal issues in terms of looking at the birth death model of what were the reasons why the labor market in January in the last few years has been very strong and if February has been very weak. That was probably also why financial markets reacted to the employment report in the way they did, namely by saying, "Wow, this is not really as bad as the headline number is suggesting." But you're absolutely right.

“The key issue still is that inflation is just too high and that's why if I'm seeing themselves”

in the latest dot plot, they mean their own expectation to what will happen to interest rates. They only expect one cut in 2026. Our view is that we'll get zero cuts in 2026. And why is that important? Well, that's extreme important for financial markets, because in financial markets, if you have a business that has cash flows far out in the future, if you have a business in software, enterprise software, in life sciences that have

cash flows far out in the future and no cash flows today, you will have problems paying your debt service in costs. If interest rates are higher for longer. So that's why we're beginning to see both in debt and in equity, some differentiation between which names is it that's doing well, and which are not doing well as a function of who is it that's more sensitive to interest rates

staying higher for longer. So the bottom line is find vistas. The key implication of everything

that we're talking about here is that when inflation is higher for longer, interest rates will

“stay higher for longer, and that would have very important implications for asset allocation.”

Why do you say it's premature, exactly, because this to me has been the big question surrounding Iran, where we saw the Iran strikes. It seems to me as an observer as a very uncertain environment that perhaps would be a problem for investors, but then markets basically told us an investor's basically told us, we don't really know yet, and if anything, this has put more certainty on the situation, because now we've concluded something to this Iran chapter, we've

ended Hamanese regime an hour in a new chapter, and this idea of prematurity was a big debate, where I was looking at oil prices, I'm thinking they should be higher, like people should be more concerned, but then other people say, no, we don't know anything yet. Well, now here we're in a situation where oil prices have risen, maybe they'll come back down, but I guess the question for me, when I look at markets, the question for investors is, why isn't it good to have a premature

conversation? Is that not the way we should be thinking about something that is as uncertain as it is

“today? I think a key aspect of this discussion is the number of ballistic missiles and drones that”

have been fired by Iran, and that is literally, if you look at the charts for this, going down to zero, in other words, in the immediate days after the hit, they did fire a lot of different missiles and a different military weapons in a lot of different directions, but in the last few days, it is really converging down to a very low level, again, very close to zero. So one thing, at least when we think about this trade of Homoos, yes, it may be that there are very limited

amount of ships going east to west and west to east, but at least when you look at the data for this, that comes out every day, but I would still expect that as Iran simply loses more fire power, that we will get a more and more stable situation. So yes, I understand what you're saying, and there was just another headline here that louder than the son of Camini, apparently also was hit, so that's a more uncertainty on their side. I still come to the conclusion that from

a military perspective, if we think about the supply of oil, it looks like at least we're getting to a point where there are some limits to how much, how much worse it can get at least on the supply front. So let me put that differently. I would absolutely expect that, yes,

maybe the straight of Homoos is basically essentially closed at the moment. Then there are other ways

to deliver oil and from here, there's just a lot of upside risk in the probability that maybe it will be opening at least more either with military escort of the boats, as has been talked about,

completely. And the other things that, of course, I also on the table is that we have just had

“recent conversations, Scott Basin talked about shorting futures in oil, that's a very important”

strategic oil reserve that also hundreds of millions of barrels that also could be released. It's come down and was not filled up by Trump and back to the levels that Biden had, but the short answer to your question is, that's a lot of things that policymakers can do if they do want to get all the prices to go down. And that's a lot of good reasons to expect that policymakers are worried about all the prices at $100 a barrel, in particular,

if this shocked us persist. One of the stats I was think about is that 80% of news coverage in the UK or of their news programs tonight is about international and 20% about Britain. And it is exactly the opposite in the U.S. at the U.S. We look out the window and we see ourselves. And the headlines as I say, oil, 110 bucks, if doubt futures off a thousand points, which is but two percent, the cost be the index or the equivalent of the S&P in South Korea was off

six percent. I mean, the markets in Asia, the states of our most being close as an inconvenience for us, it's a disaster for Asian nations. Talk to us a little bit about how much our allies are being strained in Asia and what impact that might have globally. What is really unique to the U.S. is that over the last several decades, we have actually gone from being an energy importer to now becoming an energy exporter. This was to a last degree joined by the

shield and fracking revolution, meaning that we started producing so much more energy in a particular, so much more oil that we suddenly have a situation today, whether the U.S. is now an oil exporter. So therefore comparing that to your question here, Scott, with what's going on in Europe,

what's going on in Asia, even what's going on in China, remember China used to 20 percent

of their imports of energy used to come from Iran. So now China also needs to go out and find energy and oil elsewhere. So the short answer to your question is that the U.S. when oil prices go up, if you are an oil exporter, you actually benefit from oil prices going up, at least when it comes to earnings for energy companies. Whereas this is not the case in Europe, this is not

“the case in most of Asia, so that's why markets have traded the way they have named me that”

Europe and Asia and also that America for that matter. When oil prices go up, these other economies are just hit a lot harder because that energy intensity has not declined as much as we've seen in the U.S. So at the core of this discussion is the fact that the U.S. economy has become less energy intensive and at the meaning is become more the service sector is more become tech, it's more become services, it's become lawyers going to restaurants, those things have gotten

a bigger share of GDP overall. That's also happening in Europe, but the challenge is in Europe that they do not have the same energy production and the same energy resources that we have in the U.S. And that's why the U.S. has traded better than Europe and Asia in the last few days. So this is a deeply cynical view, but say that we create chaos in the Middle East, energy, we take out a great deal of the energy infrastructure in the Middle East, rushes

bog down and Ukraine. China is incredibly energy dependent and their input, cost of income, put, go up. Even if we quite frankly, at the end of the day being having two oceans, friendly neighbors to the north and south, energy independent, food independent, even if we manage, it couldn't we just quite frankly, no matter what happens, declare victory and leave and while our brand U.S. might suffer reputationally,

aren't we still going to be better off than anyone else right now? I mean, we just quite frankly,

“it's like, I think if the analogy is the U.S. dollar as much as people should post the dollar,”

it's like, well, what other currency would you rather be in? At the end of the day next year, this time isn't America still going to be probably in the best position of all of these nations.

In relative terms, the answer is just, but the dimension that likely also is important here

is of course the political dimension that if you now begin to see gas at the pump in the U.S. go up and become much more expensive from $3 a gallon, let's say in the extreme, that it goes up to $3 and a half or $4 a gallon or even more, then of course the question becomes, in particular, with a midterm election coming up, whether that calculation is something that potentially also could be of some importance. So you're right, in economic terms,

then it is indeed the case that the U.S. is relatively less vulnerable to this old private shock compared to what we're seeing in the rest of the world. We'll be right back off to the break and if you're enjoying the show so far, send it to a friend and please follow us if you haven't already. Support for the show comes from Zbiotics. If after a night of drinks, you don't fill yourself

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We're back with Proftry Markets. We talk a lot about inflation but I've always started with AI

and technology. There's a real fear around deflation and that is if we see anything resembling the return on investments that would justify the level of investment that AI should be as is typically technology should be massively deflationary. What are the impacts on of AI on inflation? So let's just talk about what are the transmission channels of AI

“through the macroeconomy and one very important channel is that AI at the moment has made it a lot”

easier to start a business. We can go together on the chatchipiti or Gemini or Claude and we can ask for a business plan and they can spin it out in a few seconds and we can even use the last language models as part of our business. So because of this in the last nine months, you've seen in the weekly data a dramatic increase in business formation. In the US economy, the number of new businesses is at the highest level in decades because people have been coming much more entrepreneurial,

people are inventing new businesses in a way that we just have not seen literally for decades. The consequence of this must be that we were going to be generate a lot more jobs associated with people's ideas now coming to life a lot faster. So the first observation is if we are already seeing in the weekly data at dramatic increase in the number of new businesses created, that must be associated also ultimately with more employment. The second transmission channel is for all of us.

How do we use all last language models at the moment? Well, we all use it, essentially, most of us as an extended Google search. But what is also clear is that something is becoming clearer and clearer than we can also use it to do a lot more things than what we could

“be for. So that's why there's a lot more conversations about well if I am a business manager”

and I certainly see all these possibilities appearing. Well, maybe I should go out and hire some people to do all the things that I suddenly want to do that I have not been able to do before. That's also a transmission channel that is going to create more employment because businesses can certainly do things that they have just not been able to do ever before. And the last thing that's of course also a transmission channel is of course, yes, there is some discussion

about the risk that we may have that tasks are replaced by AI. But what is very, very critical

automated a long, long time ago, for example, and the automakers, the automakers automated

their production facilities a long time ago because the robots could now take over and they're simply lying and therefore that one task has been replaced. But even for telemarketers, even of course for people who are being talked about elsewhere, like lawyers, like in parts of healthcare, yes, we can read documents and yes, we can read x-rays faster. But at the end of the day, the question is whether this is actually not again going to just be baking for more work rather than

actually replacing work or so in my view, they're exactly for all of us, no matter who you are, there is no one who has just one task in their job. We have like 20, 30, 40 different tasks, and some of them can be replaced. But they're all notion that the automaker rate is going to go to 20% or 10% because of this, I really view that as science fiction. And even if I'm wrong and the automaker rate does go to 10% it is absolutely clear that then governments will be

under so much pressure to step in and try to intervene either by taxing those who draw out the rents from AI or alternatively taxing their worth of benefits are and exactly reskilling the population or in the most extreme case, redistributing income because there is no government that

“politically will be allowed if that will allow the automaker rate to be 10%, 20%. So that's why”

what people are missing in this discussion is the fact that the government is going to step in if we do get any dramatic increase in the unemployment rate. And the last point of this is let's look at what the Fed is expecting. The Fed is expecting that the unemployment rate over the next two years is going to go down. The consensus on your Bloomberg screen, ECFC go, the consensus expects that the unemployment rate over the next two years is going to go down. So it is not the

expectation from the forecasting community that we're going to see dramatic increase in the unemployment rate. It's actually the opposite that the tailwinds to grow that we spoke about earlier in the AI spending in industrial renaissance and the one people who fulfill, I'm going to create an economy where they aren't worried. It's expected to go to Goldewa. I generally agree, but I have two pieces of pushback that I think a lot of people would have.

One, we are seeing anecdotally that many companies are laying off huge numbers of employees and they're saying that they're doing it because of AI and the most recent example would be block. They said they were laying off 40 percent. AI washing. Yeah, right. So there may be there's an AI washing element to it. But they did say that they're laying off 40 percent of the workforce. Amazon has said that they're laying off workers because of AI. A lot of companies are saying

that they're laying off workers because of AI. And perhaps it is an AI washing scenario where they want to look like they're using AI to turbocharge their businesses. But at the same time, jobs are being

lost and for someone who used to work at block and they are now not working at block. The reality is

“like for them, well, it seems like AI took my job because that's what I've been told.”

That's the first thing that I'd like to get your reaction to. And then the second is your point that even if the science fiction scenario does play out, the satrini scenario where we're all out of jobs, unemployment rate hits 10, 20 percent. You made the point that the government at that point would step in. But I think that there is probably a concern for a lot of Americans, which is that so far this government and this administration doesn't seem that interested to take

any action when it comes to AI. In fact, the policy that they have proposed is we want to make sure that we actually don't regulate AI. We want to put a moratorium on states coming up with their own AI legislation. We want to get out of the way. So for a lot of Americans, I think that was also inspired a lot of concern, which is can we really rely on government to figure this all out, to pay us a UBI dividend or to retrain us or re-skill us? I look at what's happening right now.

“I think I don't know if they can. A very important part of this discussion is that the AI”

companies, of course, themselves continue to see this as a very dramatic revolutionary technology.

But when you look at earnings expectations to the SNP 493, over the last 12 months, they have gone nowhere. So one way of looking at what is the macroeconomic impact and what do people expect the macroeconomic impact to being? One way of looking at that is that I still take that AI will certainly make a difference and it's also making a difference, of course, in my life, in your lives and everyone's lives in terms of how we're using last language models. But it is quite telling

that consensus earnings expectations on your Blueberg screen, which is updated every day is basically telling you that there is no expectation that this is going to show up in higher earnings in SNP 493, it's definitely showing up in high earnings in the magnificent 7. And there's also no expectation that is going to show up in high and profit margins in the SNP 493. So one way of looking at this is that yes, all kinds of things can happen and the unemployed can go to 5, 10, 15% maybe,

but that's just not anyone's expectation at this point. And if that were to happen on the government,

tech regulation by regulating the broader economy because of the political pressure that will come

upon politicians, democrat republicans, everyone Europeans, Japanese, Canadian economy everywhere you go, everyone will be under the same pressure, namely to try to reskill people, which is a different conversation relative to the discussion about privacy for the tech companies. So yes, I do understand what you're saying that the particular privacy and the regulatory environment on tech may have looked in a certain way more recently, but this is a much bigger macroeconomic

“aggregate demand issue, namely if the unemployed rate goes up, then I think the political”

pressures will become much more substantial to do something about it. I get the sense that the reaction from the markets to the satrini research article, the blog post that went very viral at just totally kneecapped the markets, I assume your view is that that was a major overreaction. When financial markets think about what will happen in the future, in some cases we have a very, very strong and quantified answer, for example, and

I know this might sound a little bit peculiar. But when all the prices go up, $10, we have a fit model, we could take the fit model out, and the fit model tells you what will happen to the PE, what will happen to inflation, what will happen to unemployment. But in this instance, we now have a discussion about what will AI do to the future, and there is no fit model, there is no model I can take out, and suddenly there is a vacuum, and with the vacuum, then suddenly of course things

are thrown into the vacuum where people say, wow, it could be this, it could also be that, it could also be this, this is what happened of course, materials. We'd had some ideas that was a long academic literature about what's the impact of tariffs on inflation, GDP, unemployment, but that wasn't really helpful in particular, the way the tariffs were implemented. So the key answer to your question here is that there was no framework, there is truly no framework for

thinking about AI, and that made the doors wide open for someone like that report and other reports to go out and say, oh, we think the framework should be this, other people say, no, we think the framework should be this. I mean, there's no where the complete counterpoint to that report is, of course, what Jay Powell has been answering a little of the every press conference for the last several meetings, Jay Powell, when asked about whether you see AI, his answer has been, I see everywhere, AI,

except in the incoming data. There is no signs of AI in employment numbers. There is no signs of AI in the productivity statistics. Yes, productivity went up last quarter, but that was only manufacturing, not in services, which is really weird, because it's in services and goods, the knowledge economy, that you're supposed to see the benefits from AI. So the short answer to your question is, this is really from a research perspective, what's so fascinating is when there is a question

that is unanswered, in this case, what's the implication of AI and everyone is trying to think about it, anyone who comes up with something that just looks a little bit like a framework, they will immediately get a lot of attention, and in particular, that's a very anxiety-inducing framework, because this will then be everyone was a G, maybe we will all lose our jobs because of this.

“So that's why the answer to that point on a my view is that it made sense that the market's moved”

so much because people basically don't still don't have a framework for thinking about what AI would do.

This scenario is where AI could be widely successful, but there are also scenarios where AI could be a complete failure, and those scenarios are actually so let me put this differently. We're going down the fairway, and it used to be the case that the tail risk and we're hitting the rough only had a 10% probability and I was a 90% chance, we'll go straight down to the whole and where the flag is. Now we have this scenario where the tail risk have just gone up,

they are now in our view more like 30% and that's a 70% chance that we stay on the fairway. And one of those other tail risk is not only AI, it's also geopolitical risk. It's therefore also all these other things, it's rates, it's government debt levels. It is essentially all things that are basically beginning to matter outside of my traditional spreadsheet where I sit and produce a U.S. economic outlook.

So in very, very quantified terms, U and I and everyone in financial markets trying to quantify shocks that hit the economy all the time, and then more I can go to a textbook from someone in NYU that is written about say, "Hey, what is the implication of this?" Then I have more comfort about what the consequences will be, but at this point, AI, no one has a

“textbook, no one has a quantified framework, and that's why all these more less scientific approaches”

are getting so much attention. I'd like you to bring up the tail risk and the probability here, because that seems to be playing a big part in how people are pricing assets at this point. I also wonder, I mean, my view is generally the same as yours. I think Scott agrees. We thought that there was an overreaction. We thought that software was generally sold off too much. And we think that investors are kind of losing their cooler bit. At the same time,

your point that the probability of the tail risk has gone up does seem to have importance

and significance for those of us who believe were still on the street, because ultimately what

it means is that the conviction that we have that AI will be generally a positive and that it won't cause unemployment to go way way up, that that probability is perhaps a little bit lower.

notion that this won't cause mass mass instability in the in the labor market and in the employment

“market and does that level of conviction change the way you see the world at this point?”

Absolutely 100% it is absolutely a valid point that if we think about any risk, what is the most likely outcome? We have an almost distribution. Sometimes that's really, really flat and I know for a fact that this is what will happen other times it's really, really, really looking like I really could have tail risk that could bring us anywhere. And the very, very flat distribution we have around AI is absolutely telling you exactly as you're pointing

out at, namely that there is a risk that this could go either really, really wrong in the sense that this will not be succeeding and maybe we just will have another advanced Google search for the next 10 years. Oh, it could also be a complete other scenario where we will see indeed and much more dramatic impact on the level market. I still assign and very, very low probability to that scenario because that also under estimates human ingenuity. I mean, if I became unemployed

tomorrow, I would not just sit and if you became unemployed tomorrow, we would not just sit at home and say, oh, I'm just waiting too bad. I'll be unemployed for the rest of my career. I would begin to say, okay, but what am I doing then? People come up with other things to do. How can I adjust to the US economy? What if it certainly is very AI-driven? How can I contribute an economy where I suddenly now need to live with that I lost my job and now I need to go and find some place to work or some

place to find value that is driven in an AI-driven world? So in that case, it's both underestimating scenarios for high unemployment that we're all becoming unemployed. They're both underestimating the fact that the government is going to step in, but it's also underestimating the individuals to lose their jobs. The individual will lose their jobs. Of course, they will go and do something else. That's why the more traditional new technologies come around. The more traditional way of

looking at this is just that, hey, of course, the new technology will come around and we will just all begin to adjust to this new technology. So that's why I'm still strong enough to view that you're right. There is a tail risk that something could happen and we do have a flat on normal distribution than we have normally. But I still think that those tail risks are at least the most extreme scenario for unemployment going up to again 10-20%, it seems extremely unlikely.

It seems like every time we have a war, the markets go down and then they rip back stronger. And so the dip is shallower and doesn't last as long. And two-frequent guests on the pod and draw a sword can in Josh Brown from McAulter Management have one of our favorite tanks,

“and that, as you should always ask yourself, what could go right? What is the bulk case here?”

It's just, the bottom line is I think there's a tendency and there's even a term for

the effect. You just sound smarter when you're catastrophized. I'm guilty of this. I'm a glass-half-empty. I think your career just goes further faster if you're in the, if you're a storyteller in the, in the world of economics or teaching or podcasting to catastrophize. Is there a scenario where things go right? I strongly believe, back to the discussion with Adam in the go, that the U.S. economy is facing some very strong tailwinds from AI spending,

the industrial aeronassans, and the one big beautiful bill. None of these things depend on what the fate is doing to vacant race industries. They can lower interest rates. We'll still have AI spending. We'll still have an industrial aeronassans being home-shoring of a lot of manufacturing production. And the one big beautiful bill, which is CBO, again estimates, will lift you to pick growth by 1% point. We'll also happen, no matter what the fate is doing. So I think what can go

right is that we actually have still fairly strong growth. That is what the fate is expecting.

“That's what the consensus is expecting. That's what we are expecting. And with that backdrop,”

I take a lot of things to go right in the sense that the economy just continues to do well. So I'm runnically to that question, Scott, might be that instead of worrying about the recession, maybe we should begin to worry about our heating. That inflation is actually going to still continue to be a problem because the starting point with these tailwinds to grow at least that inflation is 3%. So why is that important for markets? Because we saw in 2022 that in my inflation,

something became a problem again. You saw the 6040 portfolio underprivileged spectacularly

because then stocks went down and raised went up at the same time. So that's why I'm very critical

part for investors to think about here that inflation is at risk of moving up later this year, because of the strong economy and adding now on some of that geopolitical risk and oil prices moving higher. Well, then investors in the 6040 portfolios should really begin to pay attention because in that case, we could run the risk that the market also may be shifting from expecting fat cuts to now expecting that the fat might have to hike. And if that's the case, rates both

across the curve and the long end and the short end will be going up and stocks, of course, like we saw in 2022 will be going down, especially with the height concentration that we have of the magnificent 7 in the S&P 500 at the moment where the 10 biggest stocks make up 40% of the index because they have proven of course to be particularly vulnerable to higher inflation and to higher

is very different from the risk that we see the economy answering a recession. So another

“sector that's really taking a beating is your sector is private credit and or business development”

firms that TPGs the KKRs, the Apollo's of the world, which had performed really well over the last several years. I've read an analysis. It was actually better to be a shareholder in these terms in a investor and then an LP, which I thought was interesting analysis. I wonder if that no longer holds true. And some of that is a concern about private credit or my understanding is that some of it is a concern that a lot of these firms own the software companies that there's the say I or

existential AI fear around. Do you think without mentioning Apollo, do you think that that sector has been oversold and secondary question in the probably longer discussion fears around private

credit being over invested right now? I'm not worried about private credit. So let's think about

the following way. You and I have a hundred dollars. We can go to public markets and in public markets, we can buy investment credit, we can buy high yield credit. In other words, in public markets, you could buy something that's safe and secure, meaning investment rate, it has a high rating, why does it have a high rating? Because these companies generally have very strong fundamentals, they generally have earnings and names of that. Of course, examples are Apple, Microsoft,

it's Bank of America, companies that have cast those companies that have revenue that are able to pay their service in cost. At the other end of the spectrum, in public markets, you can buy software. You can buy things at the bottom that is high yield. That of course has much more

“shaky credit fundamentals. That's why it's high yield, but the bottom line is, therefore,”

there is a very important conclusion here, Naming, that it is all about the underwriting standards.

Naming, what type of credit risk is it that I'm undertaking and in so far, of course, the credit risk that you're taking is, of course, much more substantial. Why is that the case? Because software generally is more vulnerable to cast flows out in the future, because the software business, I come to you with my iPhone and I tell you, hey, I can invent an app. It will only create earnings three years ahead. Can I borrow a hundred dollars from you to invest in this?

You will then begin to say, okay, you'll only generate earnings in three years time. That means that I'll be losing out of the opportunity cost for the year one, two, three, well, I can get the Fed funds rate. So you will already be far behind when you have higher interest rates

“before I even begin to make money on my software companies. So that's why the answer to this”

problem for software is that companies that have cash flows far out in the future are much more sensitive to the discount rate. And therefore, to what the Fed funds rate is doing. And that's why the Fed funds rate going up created a broader problem for software and enterprise software. And likewise, when AI of course came along, these companies, of course, took it up away. And that's exactly why we are in this situation that we're in at the moment. We'll be right back and for even more

markets content, sign up for our newsletter at ProftyMarkets.com. Line the price it goes for it. We're back with ProftyMarkets. So some of the conversations that we've had here, some of the points that we've discussed, make me think of this divergence between the stock market and the stock market economy and the real market economy. For example, we talked about what

the price of oil would mean for the US and the fact that that would actually be a good thing for energy companies because we're in that exporters at this point. That would be a good thing for shareholders of energy companies. But of course, it would be a very bad thing for regular Americans who are going to have to pay more at the pump. You have written a lot about this widening gap in the economy. And I love a lot of the charts that you've put out on this subject. So I would

love to get your thoughts on how wealth inequality has affected the US, how how bad or not bad it has gotten over the past few years and how it changes your approach to thinking about markets and the economy. Yeah, there is a case shaped situation that unfortunately for US consumers in three different dimensions. Number one, if you look at wealth since 2019, growth in wealth in savings across income distribution shows very limited growth in savings for the bottom of

income distribution and very substantial growth in saving since 2019 for the high end of income distribution. So that's a different way of saying there's a case shaped situation where high income households continue to see wealth go up because they own stocks, they own homes. And also they also own fixed income. So if you own private credit or public credit or

And that has certainly been magnifying the difference between high income and low income

households on the wealth side. Secondly, you also see when you look at weight growth, the land effect has measures of weight growth across income distribution and low income households at the moment unfortunately seeing lower weight growth relative to high income households are seeing higher weight growth. So this is also a case shaped situation not only on wealth, but also on income growth. And lastly, you also seeing a case shaped situation when it comes to

inflation. So the New York Fed calculates baskets of inflation across income distribution and they show that low income households generally have been facing high inflation because they generally have a bigger weight in their consumption to housing to food and to utilities which are groups that are generally have seen high inflation. So across the board it has for the last five years

been a very significant development that the high income distribution has been doing better

on wealth on income growth and also on inflation exposure relative to the low income

“distribution. That's why when you look at the actual data also from the New York Fed”

for actual consumer spending, you see that high income households have had higher growth in consumer spending relative to low income households. So the answer to your question is that there is at the moment unfortunately a situation where low income households are not in great shape and high income households of course have now for the last several years been seeing significant changes in especially their wealth relative to the also income through weight growth and again

also through the inflation exposure. So this inherent feature of the U.S. economy at the moment it just happens to have been something that has been magnified again especially in the last few years. I would be curious to hear how that dynamic has changed the way you think and also speak about markets because you know from my perspective when we say something like this will be a tailwind for the U.S. economy or this will be a tailwind for stocks. That is inherently

kind of saying this will be a tailwind for rich people more and more and so I increasingly find

“myself stumbling over the saying that this will be a generally positive tailwind because I remember”

at the same time we've got this other dynamic which is this might not do anything for the rest of America. In fact it could come back to bite them whatever the situation is. So I guess my question is how has that dynamic changed the way you think about markets when we talk about

tailwinds how do you reckon with the fact that most of the time a tailwind is ultimately a tailwind

for rich people. So in the consumer expenditure survey it shows that sub 20% of incomes account for roughly 40% of consumer spending and the bottom 20% account for 8% of consumer spending. So in aggregate what becomes important when we look at the incoming data and there's both weekly data that's something called redbook that seems to all retail sales that tells you something about what's going on with the consumer on a weekly basis that is the net result of these two

ends of the distribution and that data continues to show that net the impact is of this that the US consumer is still doing well. So from that perspective there is a very important answer to your question name that in aggregate aggregate consumer spending has still been holding up quite well. Yes you're right that is now the function of some very different developments at either side of the distribution but the fit would likely say that we have to focus on the aggregate numbers

and the aggregate numbers net net as a result of everything that's going on inside the consumers across the income distribution it still shows you a consumer that's actually doing quite well

“and that's what the fact will then have to focus on and say because of that then we just need to”

still think about whether we should cut or raise into stories as a function of whether the net meaning aggregate consumption is doing well. So in that sense it is just something that has cut more and more attention in particular the last five, ten years because of the magnified difference again between the upper leg of the K and the lower leg of the K. That doesn't mean that the net net result is going to change or anything else but of course one very important

aspect of this looking ahead is whether the hit wins and the challenges for the low end of the income distribution get so big that it also may begin to track down the aggregate number and but that's just not what we're seeing at the moment. My final question we've discussed a few risks we've talked about wealth inequality income inequality Iran AI private credit what is at the top of your list in terms of gravity and concern when you look at the risks to the U.S.

economy at this point. So if the backdrop is that we are quite bullish on AI spending industrial awareness and then one big bill for bill. I really see most of the other things and we could also answer your list terms which we had also some developments of course more recently. Most of these other things and even geopolitical risk what is it what it's all about for investors is just trying to figure out what is the duration of this shock. What is the duration

of all prices staying on $100 a barrel? What is even the duration of the section one two two tariffs that now I'm placed for 150 days will they go away when they're not going away?

AI is going to continue to do well if AI of course turns out to not deliver on this significant promises soon then of course that will also begin to be a less off of tailwind and potentially even the most extreme case be a headwind if this shock suddenly long or has no longer has this

“duration and persistence that is head up to this point. So that's why I think a lot about this.”

I know this may sound a little bit unwaver but I think about a lot of these things in terms of what is the persistence of these things that we're talking about and let's say that your political risk certainly now is spending all our time on it but the persistence maybe will take a long time but let's just agree that it probably is not as long as the persistence of the AI shock. So that's why for investors is about identifying those shocks that will last the longest

and then trying to write those waves right those themes that come along with those shocks and with those thematic investments that needs to be done on the back of these different things that we're talking about. So trademark was a major investment seen that lasted a lot longer last year than what I had expected but it turned out to be also again a thematic area for investors

that one could write and basically benefit from if you begin to think about the length

and therefore the persistence and for that matter even the pervasiveness I mean how the depth the depth of a lot of these shocks. So in a nutshell in these things that we talk about and we have discussed here for the last half hour it really is all about leaning back in your chair and thinking what is the persistence and the strength of this theme that I'm trying to invest on is something that will grow away potentially tomorrow is something that could go away tomorrow or is

something that has more legs and therefore something that I can write the wave on longer.

“If you, will you tell your clients is there a key theme for 2026 as a diversification? Is it”

not letting our emotions take over? If you were to advise I'm not saying institutions but just

30-year-old finally starting to invest has some assets and has a few minutes with you know

torsion stock one of the economists or the lead economists for one of the largest financial institutions in the world. Any overarching themes around 2026 in terms of some thinking I either want to I don't know insulate against these shocks or play offense or is it you can't time the markets is a diversification what is your sort of your made torsions major themes for people just starting out in terms of how they want to be thinking about building wealth? The main insight

in finance in the last 10-15 years is factoring investing namely identified what are the factors that drive markets and let's take that to our 60-40 portfolio the 60-40 portfolio has stocks it has bonds and historically the 60-40 portfolio made a lot of sense because when stock prices went up, bond prices would go down like wise when stock prices went down, bond prices would go up so there was a natural hitch inside my 60-40 portfolio where when one thing went down the

other thing would go up and vice versa that has paid people well for a long time but think about the 60-40 portfolio today today in the S&P 500 the 10 biggest stocks make up 40% of the index and that is essentially one factor namely AI so now the vast majority of returns in the last several years have of course been driven by the magnificent seven and the AI story so let's just agree that in the equity market AI plays a very important role but let's now look at my bond portfolio in public credit

it used to be the case to public credit which is a nine trillion dollar market that that would mainly be financials and banks that were investing great public credit but because the high-press scalars are now also issuing investment great credit that means that my IG holdings in public markets is changing it's no longer just banks it's also high-press scalars so suddenly another only

exposed to AI inequities I'm actually also exposed to AI in my bond portfolio and finally if I

have venture capital it used to be that venture capital was mainly life sciences it was biotech it was farmer it was inventing new medical products and that of course has also changed out two thirds of venture capital is also AI so now suddenly wake up in the department of finance and I look at my portfolio and I have AI inequities I have AI in victim income and the public IG

“and I also have AI in my venture capital portfolio so AI is everywhere so that's why the main”

recommendation is everyone should today invest in non-AI and what is non-AI that's a lot of different things that are non-AI or not AI what I examples well one example of course is gold is not AI Brazilian stocks is not AI European credit is not AI Australia and equities is not AI and also in private market space also things that are not AI namely high quality investment great credit both in the credit market and also in equities so that's a lot of different things that we

can do but if the main lesson if we go back to think about finance all the last 10 15 years is that we have learned that we've got to invest in different factors and something we have one factor

recommendations today is to diversify and make sure that you also have things in your portfolio

that are not AI. Torsten Slok is partner and chief economist at Apollo previously Torsten worked for 15 years on the south side where his team was top ranked by institutional investor in fixed income and equities for 10 years he also worked at the OECD in Paris in the money in finance division and the structural policy analysis division before joining the OECD Torsten was with the IMF in the division responsible for writing the world economic outlook

Torsten studied at University of Copenhagen and Princeton University Torsten thank you so much

we really appreciate your time. Thank you Torsten. Thank you

“Edward you think. I really like the guy I loved his final advice not AI it's such an important”

point. AI is literally everywhere and all of the paradigms all the frameworks that we used to use in terms of diversification they just don't make sense anymore and I hadn't thought of that point specific I mean we've thought about it in terms of stocks we've talked a lot about the fact that those top 10 top seven at the magnificent seven those top companies make up such a ridiculously large percentage of the overall stock market in the S&P we've talked about how we need a diversify

away from that I hadn't considered the bond point the fact that AI has also crept into people's debt portfolios and fixed income I think there needs to be a focus from investors to diversify away from that so I thought his not a high investment thesis was bang on. I love insights that are sort of a hiding in plain sight and the insight there was it I think a lot of us think a lot of advice is just by the S&P or diversified buying the S&P is essentially buying AI in the seven doors and

30, 40% is these 10 companies and while they're in different businesses they're in media they're in software they're in you know a ton whatever it is a ton of us or enterprise at the end of the day their stocks are up and totally susceptible to AI so even if even if the majority of the revenues

“are non AI you're buying you're buying AI because that's what's going to determine of these things”

continue their run or if they get cut on half so I thought that was great I thought that was really insightful plus is northern European accent makes them sound very smart at very smart I'm not exaggerating I used to I used to whenever in business school or who know a teach when anyone had like a northern European accent and glasses I'm like this guy's going to work from a Kinsey you know McKinsey Harris people with northern European accents it over credentialed you know a PhD from the University

of the Sun and you got to get the metal German glasses in the northern European accent it's like yes that guy will soon be advising Kadafi on how to maintain control of this talk or see

for half a million dollars a week whenever big so sure there's something so weirdly sophisticated

about that accent I can't really put my finger on it but it just makes you think this guy knows exactly what that was going on here I don't know if you've heard this but like a bad British accent can make a Princeton douchebag sound intelligent I need to change though I need to go with the Danish the Scandinavian accent because it's actually more powerful if I could get my kids anything it's all right now I'd give them the first thing I'd give them is the gift to gab but in terms of

dating I'd want to give them a Scottish accent I'm telling you my dad you have a Scottish accent in 70s California married in divorce four times I'd married in divorce if he had some just like

“southern draw like an educated an uneducated southern accent I think I'd still have my dad”

had I think I'd still have my dad touched in slack private credit all right give me out of this k-hole this episode was produced by Claire Miller and Alson Wysson engineered by Benjamin Spencer on a video editor as Jorge Cartier a research team is down to long as he's about a cancel Cristina Donohue a mere sovario Jake MacPherson as a social producer drew bars as our technical director and Katherine Dylan is our executive producer thank you for listening to property markets

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