Prof G Markets - You Think You're Diversified, AI Disagrees — ft. Torsten Slok

Episode Date: March 13, 2026

Ed Elson and Scott Galloway are joined by Torsten Slok to break down what he makes of the conflict with Iran and how it could impact the global economy. He also explains how AI could shape inflation, discusses the role wealth inequality is playing in the U.S. economy, and shares the risks he sees as most pressing for markets right now. Torsten Slok is Partner and Chief Economist at Apollo. Previously, Torsten worked for 15 years on the sell-side, where his team was top-ranked by Institutional Investor in fixed income and equities for ten years. He also worked at the OECD in Paris in the Money and 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. Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [e-mail] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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This and other information can be found in the funds perspective at getvcx.com. This is a paid sponsorship. How can we understand the decisions facing the United States and Israel and Iran as they weigh next moves in this war? War that was meant to prevent from reaching a bomb eventually might push them beyond the Rubicon and to have that one. I'm John Feiner. And I'm Jake Sullivan. and we're the hosts of The Long Game, a weekly national security podcast. This week, former Israeli defense intelligence officer Danny St. Trinowitz joins us from Israel to discuss

the war against Iran. The episode's out now. Search for and follow The Long Game, wherever you get your podcasts. Is the market due for a reckoning? Don't tell me about the probability or improbability of something happens because on certain moments, you can throw that all out the window. All assets become correlated. It doesn't matter what you thought the probability.

were given enough time, it's not that anything can happen, it's that everything will happen. I'm Preet Bharara. And this week, former chairman and CEO of Goldman Sachs, Lloyd Blankfein, joins me to discuss his new memoir and the economic impact of war with Iran. The episode is out now. Search and follow. Stay tuned with Preet wherever you get your podcasts. Today's number 40. That's the percentage of Americans who didn't read a single book last year. True story, Ed. I just read a book on the Dunning Kruger effect. ask me anything. Listen to me.

Markets are bigger than I. What you have here is a structural change in the world distribution. Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it. I don't think you're a non-expert on book writing at this point. How many books have you written now?

I want to say I've written more books than I've read in the last five years, that that would reveal me for the pseudo-intellectual douchebat I actually am. Supposedly, my publisher told me, 1% of the populace buys 90% of the books, which I believe. Wow. Do you read a lot, Ed? I try to. As Yoda said, there's do or do not.

There is no try. All right. I guess 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 Miss Sunshine here once. It has an agent at CAA. It's pretty soon as going to have a book agent.

I don't like it when people are on dependents. it 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, gay people like Palm Springs. 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 Neutra architecture. In case you don't know, that's a famous mid-century modern architect. Wow. Yeah, it'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, since I last saw I was in Vegas, which is great. I went for the opening of the Zero Bond Club there at the Wynn Hotel. Has anyone ever said anything more douchey than that?

And then I got up at O Dark 100 yesterday, flew to Minneapolis for a much different environment. A lot of white people resisting and unsubscribing. And that event was great. Sold out the Pandasia Theater, according to the folks who run the theater faster than any event. That was great. We interviewed Governor Walls. Wow. People that feel very unified in Minneapolis.

It was really, people feel very, I know, very strong community feel there right now. That was nice. What do they think of Tim Wals at this point? Oh, he's hugely. I mean, at least in this crowd, he's hugely popular. People feel like he's been, you know, really forcefully yet dignified. I think he's handled the situation. which is like sort of an impossible situation

or impossible needle of thread there. He got a standing ovation. We introduced him. He 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? Do you on Ozenpik? He's like, no, I've been running. I'm like, Wagoe or Ozenpik? Come on, boss.

I have a friend who shall go name who claims that he's just playing a lot of Padell. I'm like, yeah, Padell'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 Padell. Yeah, that's what obese people do in their 60s to trim down, Padell.

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 JLP 1. I actually would need to put on some weight. I looked in the mirror this morning. I'm looking too skinny.

Got to hit weights again. Ugh. And anyways, So did that, got home late last night. God, slept just okay. Got up and tired. Did Baltazar Belangerie, had my kiche and blueberry muffin breakfast. And I'm here stuck with you, Ed.

I'm here stuck with you. That sounds like a good life. Let's get on who we, what economist are we bringing on now? We got a big one. But before we get to our guests, we have a quick announcement, which is that Prof G Markets is now on Substack. 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 profgimarkets.com. Add free now. Very big news. There you go. Let's get into our conversation with Torsten Sloc, partner, and chief economist at Apollo. Torsten, thank you very much for joining us. Oh, 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, went 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 headwinds because of the trade war. There were headwinds coming because terrorists went up, and there were headwinds becoming because of trade war uncertainty also going up. That narrative has 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 center spending. We also have an industrial renaissance where politicians want to homesore a lot of production of pharmaceuticals, of chips 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 GDP growth by 0.9%.

So the backdrop for a conversation about what's happening geopolitically and what's happening to oil prices is that we already have an economy that's in quite good shape. In fact, co-PC inflation, which is what the Fed cares about, is at 3%. And now we're adding on top of that a conversation about how much more would inflation move up

because of oil prices moving up. So my answer as an economist to your question is that when you increase oil 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 core inflation by 0.1%. But that means that we already have a level of inflation that's at 3%, and it should be 2. 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 shock, but the sign. in front of this shock 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 oil prices. So even if oil prices go down a bit more, remember the base case was that we were a few weeks ago at 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 to do well, but just is going to continue to wrestle with this issue that we see. simply still have 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 stackflation, namely higher inflation and low growth, in this case,

lower 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 a number of different ways, both 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 in 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, well, 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 they, FOMC, themselves in the latest dot plot, meaning their own expectation to what will happen to interest rates, they only expect one cut in 2006. Our view is that we'll get zero cuts in 2006. And why is that important? Well, that's extremely 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 servicing 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 rate staying higher for longer. So the bottom line is for investors,

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 will 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 seemed to me as an observer as a very uncertain environment that perhaps would be a problem for investors. But then markets basically told us, and investors basically told us, like, 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 how Mene's regime, and now we're 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 six. So one thing, at least when we think about the Strait of Hormuz, yes, it may be that there

is a 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 firepower, that we will get in more and more stable situation. So yes, I understand what you're saying, and there was just another headline here that now the son of Khomeini apparently also was hit. So there's some 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's some limits to 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 Strait of Hormuz 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, or alternatively also if Iran simply ends up having any firepower that it could reopen again completely. And the other things that, of course, are also on the table is that we've just had recent conversations. Scott Besant talked about shorting futures in oil. There'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 there's a lot of things that policymakers can do if they do want to get oil prices to go down. And there's a lot of good reasons to expect that policymakers are worried about all the prices at $100 a barrel, in particular if this shock does persist. One of the stats I always 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's exactly the opposite in the U.S. At the U.S., we look out the window and we see ourselves. And the headlines, I'd say oil, 110 bucks, Dow futures off 1,000 points, which is what, 2%, 2%. The cost be the index or the equivalent of the S&P in South Korea was off 6%. I mean, the markets in Asia.

The Straits of Hormuz being closed is 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 driven by the shill and fracking revolution, meaning that we started producing so much more energy,

and in particular so much more oil, that we suddenly have a situation today where the U.S. is now an oil exporter. So therefore, comparing that to your good 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% 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, namely that Europe and Asia and also Latin America, for that matter, But when oil prices go up, these other economies are just hit a lot harder because their energy intensity has not declined as much as we have 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 that the meaning it's become more the service sector, it's 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.

Russia's bogged down in Ukraine. China is incredibly energy dependent, and their input costs of event cup 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, couldn't we just quite frankly no matter what happens, declare victory and leave and while our brand U.S. might suffer reputationalally, 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 of it, 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 yes. 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, three and a half or four dollars a gallon or even more, then of course the question becomes, in particular with the 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 US is relatively less vulnerable

to this oil price shock compared to what we're seeing in the rest of the world. We'll be right back after 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 feel yourself bouncing back like you used to, you're far from alone.

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I've been using Zbiotics for about a year now. I'm trying to drink less. And for me, it takes about a third of that kind of not so great feeling out the next day. March is a marathon of social events from the slopes to the bracket watching parties to Guinness on St. Patrick's Day. Pre-alcohol is the tool you need to fully enjoy the end of winter. You can go to Zbiotics.com slash Prop G to learn more and get 15% off your first order when you use PropG at checkout. Zbiotics is backed with 100% money back guarantee, so if you're unsatisfied for any reason, they'll refund your money, no questions asked. Remember to head to Zbiotics.com

slash prop G and use the code PropG at checkout for 15% off. Support for the show comes from SOFI. Let's face it, student loans are slowing down your financial goals. It's time for a smarter strategy. That's where SOFI comes in. SoFi is helping you tackle student debt by refinancing your loans with flexible term options. We're talking about potentially saving thousands of dollars over the life of your loan, or you could lower your monthly payments so you can put that money towards things like saving for a home or building an investment portfolio. Right now, you can get fixed rates starting as low as 4.24% APR with SOFI's discounts. And the best part, there are no penalties or fees required. It takes just two minutes to check your rate with SOFI, and checking your rate

won't affect your credit score at all. They've already helped over 580,000 members refinance more than 50 billion in student loans. Visit SOFI.com slash markets to see how much you could save. SOFI.com slash markets and start making smarter money moves with SOFI. SoFi student loans are originated by SOFI Bank, NA member FDIC, additional terms and conditions apply, NMLS 696891. We're back with Profji Markets. We talk a lot about inflation, but I've always thought with AI and technology, there's a real fear around deflation. And that is, if we see anything resembling the return on investment, that would justify the level of investment,

that AI should be, as is typically technology, should be massively deflationary. What are the impacts of AI on inflation? So let's just talk about what are the transmission channels of AI to 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 Chat, GBT, or Jim and I or Claude,

and we can ask for a business plan, and it can spit it out literally in 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 becoming 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 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 a 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 suddenly it's becoming clearer and clearer

than we can also use it to do a lot of, more things than what we could before. So that's why there's a lot more conversations about, well, if I am a business manager and I suddenly 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 is that there are no jobs left in the U.S. economy that only consists of one task. They were automated a long, long time ago. For example, in 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 in parts of health care, 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 not, again, going to just be begging for more work rather than actually replacing workers.

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 the whole notion that the unemployment 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 unemployment 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 there where the 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, that will allow the unemployment rate to be 10, 20%. So that's why we're not. 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 on 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 a dramatic increase in the unemployment rate. It's actually the opposite that the tailwinds to growth that we spoke about earlier, namely the AI spending, industrial renaissance, and the one big bit of a bill are going to create an economy where the unemployment rate is expected to go lower. 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. I think the most recent example would be Block.

they said they were laying off 40%. AI washing. Yeah, right. So maybe there's an AI washing element to it. But they did say that they're laying off 40% 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 I'm 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 Citrini scenario where we're all out of jobs, unemployment rate hits 10, 20%, 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

inspire 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 reskill 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 S&P 493, over the last 12 months, they have gone nowhere.

So one way I'm looking at what is the macroeconomic impact and what do people expect the macroeconomic impact to be. One way of looking at that is that I still think 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 Bloomberg 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 the SMP 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 higher profit margins in the S&P 493.

So one way of looking at this is that, yes, all kinds of things can happen and the unemployment rate 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, then I do think that the government would be interested in regulating, not so much from the tech regulation, but 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 particularly the 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 unemployment 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 Cetrini research article, the blog post that went very viral, it just totally kneecap 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 peculiar, but when all the prices go up, $10.

We have a Fed model. We can take the Fed model out. And the Fed model tells you what will happen to GDP, 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 Fed 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, with tariffs. We had some ideas. There was a long academic literature about what's the impact of tariffs on inflation, GDP, unemployment, but that wasn't really helpful, in particular not the way that tariffs were implemented. So the key answer to your question here, Ed, 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, the noteworthy complete counterpoint to that report is, of course, what Jay Powell has been answering at literally every press conference for the last several meetings. Jay Powell when asked about, where do 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 in 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, when there is 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, if that's a very anxiety-inducing framework, because this will then be, everyone will say, gee,

maybe we'll all lose our jobs because of this. So that's why the answer to that point, and my view is that it made sense that the markets move so much because people basically still don't have a framework for thinking about what AI will do. There are scenarios 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 there was a 90% chance who would go straight down to the hole and where the flag is. Now we have a scenario where the tail risk have just gone up. They are now, in our view, more like 30% and there'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, is therefore it's also all these other things, its rates, its 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, you and I and everyone in financial markets trying to quantify shocks that hit the economy all the time. And the more I can go to a textbook from someone at NYU that has written about, say, hey, what is the implication of this? Then I have more comfort about what the consequence 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'm glad you brought 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, and 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, you know, investors are kind of losing their cool a 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 we're still on the straight. 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. And so I guess my question for you is, what is your level of conviction in the belief and the notion that this won't cause mass, mass instability 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 a normal 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. Or it could also be a complete other scenario where we will see indeed a much more dramatic impact on the level market. I still assign a very, very low probability to that scenario

because that also underestimates 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?

Well, if it certainly is very AI-driven, how can I contribute in 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 the 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 who lose their jobs. The individual will lose their jobs. Of course, they will go and do something else.

That's why the more traditional, when new technologies come around, the more traditional way of looking at this is just that, hey, of course a new technology will come around, and we will just all begin to adjust to this new technology. So that's why I'm still strongly of the view that you're right, there is a tail risk that something could happen, and we do have a flat and normal distribution than we have normally. But I still think that those tail risks are at least the most extreme scenario of unemployment going up to, again, 10, 20 percent. 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, Andrew Ross Sork and Josh Brown from Rittold's management, have one of our favorite sayings in that is you should always ask yourself, what could go right? What is the bowl 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 catastrophize. 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, and 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 Ed a minute ago that the U.S. economy is facing some very strong tailwinds from AI spending, the industrial renaissance, and the one big, beautiful bill. None of these things depend on what the Fed is doing. The Fed can raise interest rates.

They can low interest rates. who will still have AI spending, will still have an industrial renaissance, meaning home-shoring of a lot of manufacturing production. And the one big, beautiful bill, which the CBO, again, estimates will lift GDP growth by 1% his point, will also happen no matter what the Fed is doing. So I think what can go right is that we actually have still fairly strong growth.

That is what the Fed is expecting. That's what the consensus is expecting. That's what we are expecting. And with that backdrop, I think a lot of things can go right in the sense that the economy just continues to do well. So ironically, to that question, Scott might be that instead of worrying about a recession, maybe we should begin to worry about overheating that inflation is actually going to still continue to be a problem because the starting

point with these tailwinds to growth is that inflation is 3%. So why is that important for markets? Because we saw in 2022 that inflation suddenly became a problem again. You saw the 60-40 portfolio underperforms spectacularly because then stocks went down and race went up at the same time. So that's why a very critical part for investors to think about here that if inflation is at risk of moving up later this year because of the strong economy and adding now on top of that geopolitical risk and oil prices moving higher, well, then investors in their 64 portfolio

should really begin to pay attention because in that case, we could run the risk that the market ultimately will be shifting from expecting Fed cuts to now expecting that the Fed might have to hike. And if that's the case, rates both across the curve in 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 a high concentration that we have of the magnificent seven in the S&P 500 at the moment where the 10-P stock make up 40% of the index because they have proven, of course, to be particularly vulnerable to higher inflation and to high interest rate. So I would say what can go right is, ironically, also a risk, but it's a risk that is very different from the risk that we see

the economy entering a recession. So another sector that's really taken a beating is your sector, is private credit and or business development firms, the TPGs, the KKRs, the Apollos of the world, which had performed really well over the last several years. I read an analysis that was actually better to be a shareholder in these firms than an investor than 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 in some of it is a concern that a lot of these firms own the software companies that there's this AI or existential AI fear around.

Do you think without mentioning Apollo, do you think that that sector has been oversold? And a secondary question in their probably a longer discussion, fears around private credit being overinvested right now. I'm not worried about private credit. So let's think about the following way. You and I have $100. We can go to public markets. And in public markets, we can buy investment credit 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 examples are Apple, Microsoft, it's Bank of America, companies that have cash flows, companies that have revenue that are able to pay their debt servicing 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, namely that it is all about the underwriting standards, namely what type of credit risk is it that I'm undertaking?

And in software, 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 cash flows out in the future because a 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 $100 from you to invest in this? You will then begin to say, okay, you 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, where 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 company. 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 they fed funds rate going up created a lot of problem for software and enterprise software. And likewise, when AI, of course, came along, These companies, of course, took a double whammy. And that's exactly why we are in the situation they're in at the moment.

We'll be right back. And for even more markets content, sign up for our newsletter at profjimarkets.com. We're back with ProfiMarkets. So some of the conversations 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. You know, 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 net 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 U.S., 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, unfortunately, for U.S. consumers in three different dimensions. Number one, if you look at wealth since 2019, growth in wealth in savings across the income distribution shows very limited growth in savings for the bottom of income distribution and very substantial growth in savings since 2019 for the high end of the 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 fixed income, of course the cash flow you get is higher simply because interest rates

are higher. 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 wage growth, the Atlanta Fed has measures of wage growth across the income distribution and low income households are at the moment, unfortunately, seeing lower wage growth relative to high income households are seeing higher wage growth. So this is also a case-shaped situation not only on wealth, but also on income growth. And lastly, you're also seeing a case-shaped situation when it comes to inflation. So the New York Fed calculates baskets of inflation across the income distribution, and they show that low-income households generally have been facing higher inflation, because

they generally have a bigger weight in their consumption to housing, to food, and to utilities, which are groups that generally have seen higher inflation. So across the board, it has, for the last five years, been a very significant development that the higher end of the income distribution has been doing better on wealth, on income growth, and also on inflation exposure relative to the low end of the 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 also their income through wage growth and again also through the inflation exposure. So this inherent feature of the US economy at the moment just happens to, have been something that has been magnified, again, especially in the last few years. I'd 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 you that the 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, there's both weekly data. There's something called Red Book, the same store 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-consum. is still doing well. So from that perspective, there is a very important answer to your question, namely that in 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 Fed 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 a number. doing quite well. And that's what the Fed 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 interest rates 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, 10 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 Because one very important aspect of this looking ahead is whether the headwinds and the challenges for the low end of income distribution gets so big that it also may begin to drag down the aggregate number. 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?

me at this point. So if the backdrop is that we are quite bullish on AI spending, industrial renaissance and the one big bit of a bill, I really see most of the other things, and we can also add to your list tariffs, which we had also some developments, of course, more recently. Most of these other things, 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 oil prices staying at $100 a barrel? What is even the duration of the section one, two, two tariffs that now are in place for 150 days. Will they go away?

When they're not going away? What is the duration of the tailwinds that I talked about? Are they going to continue? Because AI is going to continue to do well. If AI, of course, turns out to not deliver on the significant promises soon, then, of course, that will also begin to be at less of a tailwind and potentially even the most extreme case, be a headwind if this shock suddenly longer 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. I'm wavy. 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 geopolitical risk, certainly now we're spending all our time on it, but the persistence, maybe it 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, it's about identifying those shocks that will last the longest and then trying to write those waves, write 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 Tradeball was a major investment theme 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, meaning how 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 it something that will go away potentially tomorrow? Is something that could go away tomorrow?

Or is it something that has more legs and therefore something that I can ride the way one longer? If you, when you tell your clients, is there a key theme for 2026? Is it diversification? Is it, you know, not letting your 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, Tors and Sock, 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 someone 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 it diversification? What is your sort of your made Torson's major themes for people just starting out in terms of how they wanted to be thinking about building wealth? The main insight in finance in the last 10, 15 years is factor investing, namely identify what are the factors that drive markets. And let's take that to our 6040 portfolio. The 6040 portfolio has stocks. It has bonds. And historically, the 6040 portfolio made a lot of

of sense because when stock prices went up, bond prices would go down. Likewise, when stock prices went down, bond prices would go up. So there was a natural hedge inside my 6040 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 6040 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 7 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 the public credit, which is a $9 trillion market, that that would mainly be financials and banks

that were investment-grade public credit. But because the hyperscalers are now also issuing investment-grade credit, that means that my IG holdings in public markets is changing, It's no longer just banks, it's also hypers. So suddenly I'm not only exposed to AI in equities, 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 pharma, it was inventing new medical products, and that, of course, has also changed. Now two-thirds of venture capital is also AI. So now I suddenly wake up in the Department of Finance, and I look at my portfolio, and I have AI in equities,

I have AI in fixed income, in the public IG index, 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? There's a lot of different things that are non-AI or not AI. One of examples, well, one example, of course, is gold is not AI, Brazilian stocks is not AI, European credit is not AI,

Australian equities is not AI. And also in private markets, there's also things that are not AI, and I mean high-quality investment credit. both in the credit market and also in equities. So there's a lot of different things that we can do. But if the main lesson, if we go back to think about finance over the last 10, 15 years, is that we have learned that we got to invest in different factors and suddenly we have one factor staring us right in our face,

namely AI is everywhere in people's portfolios. Then the key recommendation today is to diversify and make sure that you also have things in your portfolio that are not AI. Torsten Slocke is partner and chief economist at Apollo. Previously, Torsten worked for 15 years on the sales 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 and 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. And thank you so much. We really appreciate your time. Thank you, Torso.

Thank you. Edward, do you think? I really like the guy. I loved his final advice, not AI. It's such an important point. Agree. AI is literally everywhere, and all of the paradigms,

all of 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, the magnificent seven,

those top companies make up such a ridiculously large percentage of the overall stock market and the S&P, we've talked about how we need to 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-I investment thesis was bang on. I love insights that are sort of hiding in play. insight. And the insight there was that 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 and 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, whatever it is, autonomous 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-A-I, you're buying, you're buying AI because that's what's going to determine if these things continue their run or if they get cut in half. So I thought that was, I agreed. I thought that was really insightful. Plus, this Northern European accent makes them sound very smart, Ed. Very smart. I'm not exaggerating. I used to, I used to whenever in business school, or when I would teach, when anyone had like a Northern European accent and glasses,

I'm like, this guy's going to work for McKinsey. McKinsey hires people with Northern European accents, it over-credentialed, you know, a PhD from the University of Lausanne, and you've got to get the metal German glasses in the Northern European accent. It's like, yes, that guy will soon be advising Gaddafi on how to maintain control of this autocracy

for half a million dollars a week. went over big. It's so true. 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 the hell is 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.

All right, Ed. I need to change, though. I need to go with the Danish, the Scandinavian accent, because it's actually more powerful. If I could give my kids anything, is that right? No, the first thing I'd give me is a gift to gab. But in terms of dating, I'd want to give them a Scottish accent. Ugh.

I'm telling you, Ed, my dad, you have a Scottish accent in 70s, California. Married and divorced four times, Ed. Married and divorced. If he had some just like southern draw, like an educated, an uneducated southern accent, I think I'd still have my dad, Ed. I think I'd still have my dad. Torsten Slok. Private credit.

All right. Get me out of this. K. Hall. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Chalon, Isabella Kinsel, Chris O'Donoghue, and Mia Silverio. Jake McPherson is a social producer.

Drew Burris is our technical director and Catherine Dillon as our executive producer. Thank you for listening to Property Markets from Proftery Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.