The Prof G Pod with Scott Galloway - The Credit Markets, Interest Rates, and Market Sentiment — with John Zito

Episode Date: June 16, 2022

John Zito, Partner and Deputy CIO of Credit of Apollo Global Management, joins Scott to discuss the state of play regarding the credit markets, growth companies, interest rates, and investment opportunities.  Scott opens with his thoughts on a passwordless future.  Algebra of Happiness: overcoming imposter syndrome. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Episode 171. Led Zeppelin played Stairway to heaven live for the first time in 1971 john lennon released imagine in 1971 people born in 1971 snoop dogg winona rider jared leto and elon musk true story i met snoop dogg in paris and said people call me the dog and he looked at me and said bonjour i'm getting old. Go, go, go! Welcome to the 171st episode of The Prop G-Pod. In today's episode, we speak with John Zito, the Deputy Chief Investment Officer of Apollo Credit and co-head of Apollo's credit business.

I asked John to come on because he's a very thoughtful guy. He kind of just breaks it down. But what I like about John, one of many things I like about John, is he listens and he's open to evolving. He'll ask you what you think, and he's sort of like a sponge around information. We discussed with John the state of play regarding the credit markets, interest rates, and broader market sentiment. Okay, what's happening?

What's going on? What's the 411? Let's break down an interesting business move that we found of note over the past few weeks. First up, Apple, the Cupertino firm, announced a variety of updates during its Worldwide Developer Conference the other week. But the one that really piqued our interest is that it is introducing passwordless logins across various Apple products and services later this year. The passwordless service, Passkeys, will use Face and Touch ID as a way to authenticate your accounts, a move that we think every developer

should be looking into. Convenience and seamlessness are a consumer's dream, and Apple's move into biometric logins opens up a whole new world for faster and safer transactions and utility on the web and in person. This is all part of the FIDO Alliance, which announced last month that Apple, Google, and Microsoft are all working to expand their passwordless infrastructure. The FIDO Alliance, FIDO Alliance, I should be a part of that, no, which stands for Fast Identity Online, has been promoting safer and more secure logins

for nearly a decade. And since these firms are all under this alliance, interoperability is possible. Notice how meta isn't in there. I think trust is super interesting. It's just immense, the amount of trust we place in Google. Google knows more about you than your mentor, boss, husband, wife, friend.

It knows if you're contemplating divorce, if you're thinking about getting engaged, it knows your STD status. It knows just so much of value if you're contemplating hair plugs. Not that I knew about that. Can you imagine how fucking ridiculous I would look with hair plugs? Seriously, I would look ridiculous. I put a picture of me with hair on Twitter and someone said, you know, I think you're better looking now. And it got like 100 likes, which literally made my day. Literally made my day. I thought, oh my gosh, I'm that person who started out not that good looking and now I'm just not good looking. I'm aging gracefully. Anything or anywhere that requires an ID to gain admission or entrance could eventually turn that system over to these big tech platforms. Again, I like this. We're willing to give up privacy to people who we trust with that

information. And you trust Apple. I think Apple is definitely the lead dog here. And by the way, I've said this a few weeks ago, I think the two biggest opportunities in technology, well, I'm going to add a third, are one passwords. I'm literally, wherever I am, trying to log in to see, I was trying to log in to see, I was trying to log in to see the January 6th hearings so I could feel worse about our country in the sense that we actually let that thing go down and don't seem to care about it anymore. You know, sedition, a president inciting and helping to organize and encouraging on a mob that overruns our capital and then goes hunting for the Speaker of the House and the Vice President. But no, it was just a dust-up. It was just a dust-up. Anyway,

it's trying to find it. Live TV. I don't know about you. I have literally given up on live TV because of passwords. I just can't figure it out. Hulu says, oh, wait, you're in a different location. I'm like, yeah, I'm in a different location like 350 days a year. And they say, well, you can't log in here. They've gone the opposite way from Netflix, which feels like you can log in anywhere, except for me, I can never remember my password. Anyway, it's neither here nor there. And I also think that the new thing or the next big trend that will probably,

Apple will probably conquer is charging. And they've purposely tried to make charging a nightmare such that you buy more and more accessories. But just the ability, I spend, just as I'm winding down, just as I finally have that mix of like comfort with my life and the edibles are kicking in, I think, okay, I can finally go to sleep. I'm not a good sleeper. I used to be a great sleeper.

By the way, my 14-year-old champion sleeper. Teenagers, oh, my God, it is true that you grow when you're sleeping. He goes to bed at like 9 p.m., I think, as far as I know. He's up there snapping people. And then he gets up on weekends at 11 o'clock the next day. He's literally sleeping for 14 hours. Just crazy. It's like Lea, our Great Dane, who's still growing. She sleeps a lot. I can literally see her grow. By the way, if you're on the road for more than two weeks, you come home and you have boys, you can physically see them grow. It's kind of fun and interesting with the dog. It's sort of sad.

I find it upsetting when I can see a register that my kids have grown because I haven't been home in a while. Anyways, enough about that. What is a huge innovation here? Charging. And just as I was saying, come back, Scott. Where are you? Come back. Join us. Join us. Oh my God, the dementia is here. Come back to us. Oh yeah, what was I talking about? Before, just before I go to sleep, I start charging, or I figure out how do I charge my phone, my AirPods. And inevitably, someone in the house has stolen my chargers, and I get angry again, and I can't sleep, and I'm constantly thinking about charging shit. And when I travel, I'm thinking, okay, do I need deodorant? Do I need money? Do I need a passport?

Yeah, sort of, maybe. But what I really need is the right chargers. So someone is going to figure that out. But it looks like Apple and a variety of other cats and dogs, cats and dogs being bonjour. Come on, that's good. Anyways, is also Google and some of the other players. And we trust them.

We're going to say to them, okay, you are the gatekeeper that we're providing security to. And I think it makes sense. I think these companies have immense trust and people, kind of privacy, if you will, has become a little bit of a luxury. And that is Apple, who only, or iOS, who only pulls about 200 data points a day versus 1300 at Android, can say, okay, pay for this and you have some security around privacy. But more really than that, you're paying for it to say, I'm a baller. I'm part of the billion wealthiest people on the planet. Because let's be honest, if you carry an Android phone, aren't you kind of saying to the world, things haven't worked out for me? Kind of like paying with a Discover card or rolling up

in a Mazda. I think I probably just alienated about 70% of the audience. But I think it's kind of saying, look, things haven't quite worked out for you. People who can afford an iPhone usually go for an iPhone. And what is this a victory of? Again, Apple is the best managed brand in the world because what could they have led with? They could have led with design or think different or freedom of all kinds of crazy shit that they could legitimately say, we're the cool brand. But instead, they went with privacy. Have you seen these ads talking about privacy? Privacy is not that exciting topic. I can't imagine there are ad agencies who are excited to bring privacy to life, but it's so smart. And what they're doing is this basic construct in branding, and that is laddering. And that is when you communicate something about

your company, you're doing two things. You're communicating something positive about your own company, but you're communicating something about your competition. And that plays a big role in deciding what you are going to communicate about your own company. And when Apple communicates privacy, they're not saying it's not because their privacy is that good, which it is. They're not saying that's the thing we're most proud of, which I doubt. What they're saying is, Jesus Christ, look at Meta and Google.

Because Meta and Google can't respond. There are three questions you want to ask yourself in your brand positioning. One, is it truly differentiated? Are we really, if you said, well, the iPhone has better design. Actually, I don't know if that's true. Samsung has amazing design, or it's faster, it's more util, or we have more apps. Are we really that differentiated? Maybe, maybe not. Is it relevant? Is it relevant? I remember Budweiser talking about, we have fresh beer. Are we really that differentiated? Maybe, maybe not. Is it relevant? Is it relevant? I remember Budweiser talking about, we have fresh beer. I'm like, does anyone really care?

Is that relevant? Is anyone worried about getting stale beer? Anyways, and then finally, if you're smart enough and fortunate enough to come up with the peanut butter and chocolate of differentiation, we're truly different here and relevant. People care about this point of differentiation. Finally, finally, is it sustainable? Can we own it? Can someone else just pivot and say, okay, you're right, we're this too? No, they can't. Google and Meta can't pivot to a privacy positioning. Apple can own it because there's just no way Meta or Google can credibly say, yeah, we value your privacy when

their business model is about violating your privacy. And again, see above, most of those people willingly make that trade. When I say that, I'm talking about Google. Most people don't willingly make the trade with Meta, who has been a net negative for society and hasn't been honest with people about what they're actually doing with that data or the fact that they have been so willingly reckless or blind or naive or mendacious about what can happen to your data because, oh, they didn't know. We need to do better. We're proud of the progress we've made and on and on and on. But password's a big deal. Charging, I think, is the next big sort of boring thing that's going to add a lot of shareholder value to anyone who figures it out. And then the other thing,

I think voice around media. Think about what Spotify has done. All of music, an entire medium has been distilled down to a single icon and it's organized and sortable and searchable really easily. So I can type in Brian Adams or Tom Petty and immediately it will bring up exactly what I want. Whereas when I'm trying to find a specific program, when I'm trying to find the documentary on Carl Icahn, which for some reason I'm interested in, it's sort of easy. Comcast, I think it's Comcast. Do I have Comcast and Xfinity? I think so. I speak into my remote.

I just discovered voice. I type in Carl Icahn documentary, and it does a pretty good job. But I think at some point we're going to end up with some sort of external layer, top layer that says, all right, pay a big fee. You have access to almost everything. And it's going to be sorted by voice or with voice commands, get rid of the remotes, TV on, recommendations, or I like this, what else would I like, which is kind of what Netflix does. But I think voice would be especially powerful. And I think trying to figure out a way to do for TV what Spotify did for music is kind of the next big innovation. Anyways, here's three things,

passwords, charging, and voice-controlled sorting or segmentation or whatever you want to call it on video. Oh my God, that's why you tune in for the insights. Okay, that's a wrap on our view of some of the business stories of the week. We'll be right back for our conversation with John Zito. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover

what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. What software do you use at work? The answer to that question is probably more complicated than you want it to be. The average U.S. company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway? What is productivity software?

How will AI affect both? And how are these tools changing the way we use our computers to make stuff, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape presented by AWS. Check it out wherever you get your podcasts. Welcome back. Here's our conversation with John Zito, the Deputy Chief Investment Officer at Apollo Credit and co-head of Apollo's global credit business. John, where does this podcast find you? Nine West 57th, Midtown, New York. Nice, in the city. So let's bust right into it. First, a disclosure. I have done some work with Apollo.

They've been generous enough to let me co-invest in deals and advise them on some of their media and tech deals. Apollo, so why don't we start there? Apollo question mark. What does Apollo do, John? Hey, Scott. Thanks for having me and appreciate all the help over the years. So thanks for having us on the call. You know, Apollo, many people know Apollo for its private equity business. Started in 1990. Today, over $75 billion in private equity.

What many people don't know about Apollo is they have a $350 billion credit business, which does retirement services, asset management on the lending side. And then we have a fairly large hybrid business, which invests in securities that fit between both our safe yield business and our private equity business. But by and large, asset management across effectively every risk category you can think of, from really safe 3%, 4%, 5% lending to high returning private equity, which you all read about when we buy companies and then try to manage them efficiently. Let's step back. Give us a kind of, if you will, the cliff notes or masterclass.

And everyone knows that interest rates are going up and it's having an impact on the equity markets. Tell us what is going on right now and why we're seeing such an incredible drawdown amongst a certain category of companies, especially in the NASDAQ. Yeah, so the NASDAQ's down 30%. What's lost in that 30% number is the median stocks down over 70%. Lots of these companies and broad valuations have been supported by, really, since the GFC, a very supportive central bank in the U.S., but also central bank globally. What that means is that interest rates have been zero or close to zero overnight for a long period

of time. And over the last decade, we're trending lower year in and year out. When interest rates go lower, you're able to discount cash flows. Effectively, you have higher multiples on earnings. And when that happens, particularly for growth companies where lots of their earnings are on the outer years, it can significantly impact the overall valuation of a company if all of a sudden the cost of capital goes up in a very rapid way over a relatively short period of time, especially if it's unexpected. And just a year ago, effectively, everybody in the market thought there would be very little rate movement by central banks and that inflation was somewhat in check. Clearly, as we look around the globe and

you look at the data today, many people are arguing that central banks broadly, especially in the US, have really missed the boat. And you combine that with some geopolitical impact from the Russia-Ukraine situation, and that's created both commodity spikes in natural gas and oil. The housing market has been up both from COVID and from low rates, anywhere between 50% to 100%, depending on your market. And now the Fed's trying to catch up by raising rates very quickly. And effectively, they put in $11 trillion during COVID, and now they're trying to take out $11 trillion very quickly. And that's having a big impact on both liquidity in the markets and also the appropriate multiple and valuation for lots of these companies that effectively a lot of their cash flow and a lot of their value was terminal on the outer years. So just to summarize what you're saying,

if you are a company that is cash flow negative right now, and it needs financing, that financing is more expensive. And then the cash flows in the future are worth less. So in sum, a growth company costs more to operate in exchange for cash flows that are worth less. And that's being reflected in... You threw out a number there that struck me. The median decline in NASDAQ stocks is 70%. Did I get that right? Yes. Okay, so mean is average.

Median is we put the company in the middle of performance. So the company that has performed no better or no worse than half of the NASDAQ on either side is off 70%. That's right. And we know many, many people on this call know that several companies they follow are probably down closer to 80% to 90%, some of which you've talked about on your calls historically. And again, you have some pretty unique situations, right? In the credit markets, you have interest rates above 3% for the first time since 2018. And that's only happened a handful of times in the last decade. Most investors in the market have never really seen a permanently or a sustained rising interest rate environment where the Fed has not come in to bail out volatility.

And so you've gone from this unique perspective where you went from 10-year rates going to their all-time lows, 50 basis points during COVID, to over 3% in less than two years. And we saw this a little bit in 2018, right, when you kind of had the Brexit vote. And after hitting 1.5%, we went to 3%. And immediately, post the holidays, the Fed came in and said, you know what, we thought we were going to raise rates. We're not going to raise rates. And they didn't have inflation. So they're able to support the system and support growth. But you're in an environment right now where the BB bond index is 50 basis points lower than the actual treasury market. Okay. Slow down there. What do you mean by that? So the average coupon on the double B high yield market is lower than the yield on a newly issued treasury bond. And in the investment grade market, you're 50 basis points lower than the matching treasury yield.

So that's never happened before. Not in over 25 years that we've tracked it, it's never happened before. Not in over 25 years that we've tracked it. It's never happened before. And so what's happening is you have lots of long dated bonds, longer dated bonds that trade at 60, 70, 80 cents on the dollar because they were issued with very low coupons and now interest rates are going up. So you've had multiple trillion dollars of issuance at very low interest rates. And now as interest rates go up, it's creating tons of volatility in the credit markets. So what I find unusual about this, or let me put forward a thesis and you agree or disagree. Everyone, obviously the increase and the sudden increase in interest rates has created volatility in the markets as people reevaluate what the cost of finance and the cash flows are worth in the future. But historically, interest rates aren't that high. And if you look at what's going to be required to rein in inflation, aren't we in for more increases in interest rates and more pain? Or does the market already perceive that risk?

If you look at forward expectations, I think that inflation will go from eight to seven to six. increases in interest rates and more pain, or does the market already perceive that risk? If you look at forward expectations, they think that inflation will go from eight to seven to six, and then by the middle of 2023, we'll start trending towards a mid threes type number. The rate expectations are that we'll have a 75 basis point move, another 11 rate hikes between today and the end of the year. The market effectively is saying you're seeing a flattening of the yield curve. This is probably the highest percentage of people in the market. The FT this morning said 70% of the market anticipate a recession at some point in 2023. And so the Fed will raise rates until effectively they've hurt financial conditions enough that we start to see deflationary pressures to help

offset what we've seen is really a ton of inflationary pressures from a lot of structural reasons and just effectively lack of supply in certain parts of the market, both commodity and housing. It feels as if, well, first off, we should never use the word transitory again, right? I mean, even everybody said there's nothing transitional about what feels like inflation. Everything, what I've been, I just came from a conference called the 0100 Conference, which was a bunch of senior level supply chain

and operations executives. And the word I get from them, I would have, my natural instincts would be that because of rising prices, there'd be a lot of incentive to figure out how to be agile and figure out a way to get to ship products to their ultimate destination. And what they're saying is that it's actually supply chain problems have gotten worse, which indicates to me that inflation is here for a while, which will only motivate the same central banks who kind of gotten it wrong so far to be even more and more aggressive. And granted, I'm a glass half empty kind of guy, but one, do you agree with that? And B, what is the bull case that the markets will recover? Yeah, I mean, look, I think the Fed's done a majority of the work already. I actually think

the confidence in the consumer has already been hit pretty hard, both through financial assets, through crypto assets. You've seen a lot of pain in that ecosystem, and I think you'll start to see a lot more on the labor market. What's been a very tight labor market with financial assets down significantly, you're already seeing things like Coinbase cut 20% of their workforce. Lots of these companies, the cost of labor for lots of these tech companies from 2019 to 2021 is staggering. Coinbase went from $300 million to $2 billion of costs. Peloton went from $300 million to over a billion of costs. You name your growth company, they took their labor costs and quadrupled or quadrupled them to grow. Because the market rubric was, if you grow top

line, your valuation will go up. And that's all changing now, right? Now people are saying, let's transition to profitability. Let's transition to a different rubric. We want to see you actually generate profit or extend the option on the growth of your business. And that's going to be a completely different rubric that the public markets are demanding. And that's going to impact labor. It's going to impact advertising spend. There's a multiplier effect on what's happening with financial assets that will flow through the market, but it's just lagged. And what else is being lagged is the consumer actually hasn't felt those 11 rate hikes yet that are coming. The market says you're going to have 11 rate hikes, but that hasn't flown through your cost of financing yet.

I talked to a CEO of a home builder this morning. They said all of their models say that once mortgage rate gets to 6%, demand goes down significantly. Well, guess what? We're at 6% mortgages now. So part of the things that the Fed is trying to do through effectively tightening the financial conditions I actually think is working. The market can't see it because the inflationary data is still fairly high. But if you start, you see tons of firings, tons of normalization of CapEx, housing prices plateauing, crypto and financial assets declining, it's very unlikely you're going to see the same type of spending that you saw a year ago. And we're already seeing in our private

portfolio. We're seeing in travel, you're still seeing actually pretty decent spending as people have, I think, just wanted to travel more post-COVID. But in the big ticket items, we've actually seen a significant slowdown. And I think you'll continue to see that come through. You've seen some dramatic moves in things like used car prices, which are up over 100%, which we think could normalize in pretty short order as you start to see somewhat of a slowdown. Last time I went through what feels like a meltdown like this across the internet was in 2000. And a lot of companies just went away. It feels like what's different here is that these companies have fairly strong balance sheets. So they raised a lot of money.

A lot of them have a lot of cash. A lot of them don't have a lot of debt. We financed, we were the largest creditor in the Chewy PetSmart transaction, which for a year and a half, everybody told us Chewy was, they paid 3 billion, but Chewy was not worth anything because it had negative EBITDA. And we had to go through all the data with everybody. The leveraged finance market and the debt market do not like negative EBITDA, high top-line growth businesses. They hate them. In this case, lots of the markets, lots of the businesses, they'll have no debt. In fact, they've over-equitized. They raised money to sustain themselves through 2022 and probably into 2023.

And that's when things will get much more difficult, right? You're going to need new money. You're not going to want to raise a down round. You're going to want as non-dilutive capital as you can get. We can come in. We bring two things to the table. One is we bring transition capital to profitability, which I think will be the new mantra within a lot of these companies is really,

how do you now take your $20 billion top line business and turn it into profit? And two is we bring a ton of expertise from our private equity business in operational transition. And we think there's hundreds of companies that are going to need this in the scale of hundreds of billions of dollars in these structured solutions that will hopefully be not dilutive or less dilutive than a down round. And we can bring other expertise to the equation. So I'm going to use an example and just walk through kind of a use case.

And this might be the wrong example because I don't know the semantics of their cap table or balance sheet, but Uber, great brand, global brand, a big top line number, has grown, has never made any money. And I don't know if they have any debt, but if it's an adult conversation around,

all right, raising capital just got a lot more expensive for you because any equity you try and raise is going to be highly dilutive because your stock price has been crushed. So get your act together, tighten up, raise prices, cut costs, and we'll come in. And because there's no debt on the balance sheet, I don't know if that's true. You know that Uber is worth, call it, you know, $5 or $10 billion. So, it's actually a decent investment strategy to come in and say, all right, we're senior in the cap table. We know that this business is worth X. You need capital, and we're going to figure out a way to right the ship here, and we'll be, you know, not an inexpensive form of capital, but given that the cost of capital from equity is quintupled in some instances, this is the new form of financing and a bridge to profitability. Is that an accurate description of what you see might happen amongst this growth sector? Large public company businesses, those have more established capital structures with some debt and moderate amounts of debt and large market caps relative to the debt.

We can facilitate there like we did in Carvana. Publicly, we were around Twitter, and we've been around a couple other large technology situations. On the company that just raised a Series C, Series D, thought they would go public in 22 is the other part of the equation where we can be helpful, right? We can go in and effectively be a pre-IPO bridge through a debt instrument that enables them to bridge the gap between now and 23, 24 and effectively be not as dilutive as a down round. So the bigger the company, the more established the capital structure, they'll have a little bit more debt. If they're private, typically most of those private companies have no debt.

So you would be the only debt in the capital structure and be senior and be less dilutive than an equity risk. So you brought up, you mentioned the name Twitter. And you've been publicly, Apollo's been publicly associated with helping to structure financing or provide financing for the acquisition of Twitter. you can, I'd just love to get your view on what's going on there. Because I've never, well, maybe you have, I've never seen a company that's supposedly where both parties have agreed to do a transaction at $54.20 and it's trading at, what, $38? I'd love to get your take here. And I realize this is sensitive. Yeah, yeah. So, like many others, we were publicly in the news as a potential financing source. And that really comes to any large financing in the credit market. Typically, we are called, just given how flexible we can be with cost of pricing the risk at where the risk should be appropriately priced, given our role in just broad financing markets.

Personally, I think I'm probably more bullish on the platform, maybe. But I do think there's a ton of opportunity and a ton of value to unlock. But to be clear, we never really looked at it as part of the equity or be part of the equity co-investment. It was always part of a debt instrument. In terms of does the deal get done, obviously, with the market volatility since closed, the implied break price is going lower. So obviously, as the implied break price goes lower, you see the market price down. But we know as much as the public market knows, which is there's a definitive agreement in place. As the implied break price goes lower, you see the market price down. But we know as much as the public market knows, right, which is there's a definitive agreement in place.

There's very few outs. We'll have to see what happens. If you talk to a lawyer, odds are they think that a deal gets done. So let's move on. You talk about housing. So very sensitive to interest rates. Rents up for one and two bedrooms nationally of 20 and 28 percent, respectively. We've seen just an unbelievable run in housing in terms of prices. It feels like, and we're seeing mortgage rates escalate pretty quickly.

What are your thoughts and your predictions around housing prices? Yeah, again, housing is hard to generalize. It's market by market. As you know, being down in South Florida, there's some structural reasons from COVID that I think generally markets should be up just from structural supply, demand, and balances. So by market, you have to be very specific by market when you make these generalizations. But certain markets that are typically lower tax and have benefited structurally have had just massive demand boost with short supply. And I think there's structural reasons, not just rates-driven, why you've seen house prices go up.

Generally, there's just broad demand to leave urban areas, which I think is starting to slow down. And you're seeing that, to your point, on rent prices, particularly in New York City, where rents are up 35% to 40% for a two-bedroom apartment. So I think it's more going to be a plateau to slightly down. I don't think you're going to see a 2008, 2009 type financial housing crisis. There's tons of equity in the homes, the financing, the ability to access funding. The banks have really cleaned up their act with respect to access to funding the idea of 100 ltv loans no money down ninja loans all of the fun acronyms we went through in 2008 and 2009 are by and large not around anymore so you don't have that extension of of credit like you did back then.

Now, you have an asset class that's up 50% to 100% that on average lends $0.80 on the dollar against it. So you kind of have to make a judgment call on, okay, how much of the rise was from rates and how much was from structural demand impact from COVID. But we've been underinvested over the last decade in household formation. So some of this has caught up. The liquidity of the asset class, it went very liquid and everyone felt like they had a ton of equity

in their home. And that feeling is going to subside as asset prices have declined, housing plateaus, all effectively every asset that sits on a consumer's balance sheet is declining or has stopped going up. But you guys are at the helm of the bobsled.

I remember Bernanke saying that people don't understand, you know, equities get all of the headlines, but it's the credit markets that kind of drive the economy. So given your insight and your visibility into the credit markets, what is your view on the next 24 months of the American economy? I think a lot of the hard work has been done. I think it's extremely likely that we go into a slowdown. I think the consumer hasn't felt it, and our policy is driven by backward-looking data. I think the Fed's doing all the right things to slow inflation now, but they're effectively raising rates into a recession. And look, on Monday, we had the most extreme combined equity and treasury sell-off we've seen in 40 years. A 60-40 bond portfolio,

which is how most Americans have their savings set up, annualized is down 25% this year. That's the worst in 35 years. And the worst in 35 years was down 2.9%. We're annualizing it down 25 on a 60-40. What's happening is all asset categories, ex-commodities, are going down at the same time. And it's really impacting the traditional asset allocation model. We'll be right back. relationships, mostly romantic. But in this special series, I focus on our relationships with our colleagues, business partners, and managers. Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into Housework, a special series from Where Should We Begin, sponsored by Klaviyo.

Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge,

to give you a primer on how to integrate AI into your life. So, tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. So, that begs the question, and a lot of it depends on your age and your financial profile, but let's do just a couple. So someone who's coming into their prime income earning years, just starting to invest, how do you protect yourself against inflation? Or maybe there's no protection, but should they be looking at increasing their allocation of fixed income? Do you think this is a great time to invest in the equity markets and try and take, you know, try and go into the growth through stuff? What would be your advice to, quote unquote, a young person just coming into their income and earning years around trying to build economic security over the medium or long term? Yeah, look, when I look at the equity markets, it's hard to get that excited about it because you really haven't seen multiples re-rate for what could be a more normalized interest rate environment in the 2% to, let's say, 3.5% range. It's shocking when you look at the

three-year, five-year charts on just the S&P 500. We're still 10% to 20% above where we were in 2019. We really haven't corrected all that much, and interest rates have gone up significantly, and we're still not back to 19%. To me, it feels a lot worse than 18, 19% and interest rates have gone up significantly and we're still not back to 19. To me, it feels a lot worse than 18, 19 with interest rates where they are and where I think the economy is going and given how aggressive the Fed has been. So without that support, I would think the market should be lower than 19. With fixed income, you can buy Oracle bonds now at 6%, at $0.65 on the dollar, long duration. I think that's going to be compounding at double-digit rates of return on an over $200 billion market cap company. So just to unpack that a little bit, so 6% coupon, you effectively—

Oh, no, it's a lower coupon. It's a lower coupon. So it's a 2% to 4% coupon, right? And they're trading at 65% to 70%. Meaning the yield is now 6%. The yield is now 6%. Understood. But again, if interest rates normalize, if we go into a recession, if anything happens with respect to, I think the new mantra is going to be not buying back stock,

it's going to be buying back debt at steep discounts to par. I've been in leveraged finance for 20 years, and people have been doing it for much longer. You've never had an opportunity to buy debt where you effectively are buying it at steep discounted prices on good companies. Typically, when you're buying something at 60 or 70, it's a distressed or stressed situation. And so this cycle is going to be much different with respect to capital allocation from companies and how they manage their balance sheet given lots of their debt, is now trading at significant discounts to par. And I think generally speaking, if equities have returned 8%, 9%, 11%, depending on your time frame, debt's now going to return probably somewhere between investment-grade debt is going to be

yielding 6%, 7%. High-yield bonds are going to be yielding in the high single digits. To be senior in the capital structure, lock in income, I think it's a very good opportunity. And as we haven't really seen the capitulation yet, but we're getting pretty close, where you're going to see the markets will price in a lot of the recession risk. It'll be priced into the dollar price. It'll be priced into the yield you're returning because the markets typically will predict that recession earlier than the actual data does. So just when John says senior in the cap structure,

the reason that's good is if the business goes out of business, you're first in line to get your money back. So you're saying that just the risk-return ratio is getting very attractive in the credit markets. Is that accurate? Right. That's right. So yeah. So even in severe downside scenarios, you're typically going to get your money back because you're senior to the equity in the capital structure. So housing, plateauing, profitable, but boring low growth companies doing just fine, or they've been hit a little bit, but not a lot. The growthy stuff hit really hard. I love that stat. The median is down 70% in the NASDAQ. That's staggering. And then let's go even further down the food chain in terms of

volatility. So crypto question mark, what do you make of the crypto markets right now? This is like any asset class where you have severe amounts of leverage, right? Staking is effectively leverage. You've seen asset liability mismatches not dissimilar from traditional financial crises at the banks. And you're seeing that happen with Celsius over the weekend, right? The, the, the, it was a mania with respect to valuation. It was a mania with respect to how much, you know, if you're getting a 20% interest rate to stake something and you think it's a low risk, you know, buyer beware, right? When interest rates were 1%, you were getting double digit returns to effectively pledge an asset into lots of these

non-regulated banks. And all of that's coming, all of the leverage is coming out of the system and it's coming very quickly. We've been big supporters of blockchain technology. We're trying to support that ecosystem with respect to financial services and financial assets. That's things like custody. That's things like tokenization of illiquid assets. Lots of things are going to happen over the next decade with respect to really the liquification of alts. And we want to be at the forefront of that part of the ecosystem. Describe what you mean by liquification of alts. That means if you want to sell a home,

you can theoretically tokenize that home and we could transact without having to go through the whole closing process. We do it all via some encrypted, authenticated service that we feel comfortable transacting where you would send me a token that represents your money market account, and I would send you a token that represents the title to my home or to my car. That can go the same for private assets in the alternative space, right? There's regulatory hurdles to these things. There's lots of things that need to be done between now and then. But I do see lots of illiquid assets becoming more liquid for regular way

people, not just institutional. And that can happen via blockchain. So in our remaining time, I want to do a lightning round. I know you. I know you're smart. I know you're successful. I also think you're thoughtful. And the reason I do lightning round is I'm hoping that people's synapses will overrun or synaptic fires will overrun their filter. So I want you just to give me a quick five or 10 second response to the following thoughts

or questions. All right. Best advice you've ever received. Show up early. Thoughts on advice you would give to a new dad? Be prepared to be humbled. Advice you would give to your 25-year-old self? Chill out.

Chill out. Most important influence on your life? My mother. John Zito is a deputy CIO of Apollo Credit and co-head of Apollo's global credit business, where he oversees Apollo's credit business and multiple fund products, including the Credit Strategies Fund, Apollo Accord Fund, and certain global liquid managed accounts. Prior to joining Apollo in 2012, John served as the managing director and portfolio manager at Brandcourt Advisors and previously spent five years as a portfolio manager at Veritas Fund Group. He joins us from Midtown Manhattan, where he is in the office four plus days a week.

John, I appreciate your time. Thanks, Scott. See you soon. Algebra of happiness. The notion that you aren't deserving of things is something that you, everyone's an imposter until they are that person. And then they realize, okay, everybody else here is an imposter. Can you imagine running for president? Can you imagine actually believing you should be president? I mean, these people must be sociopathic or have real imposter syndrome. But here's the thing. Here's the thing. I absolutely did not deserve to get into UCLA,

and I got in. And granted, I almost failed out. But what I found over time is that the majority of people there didn't deserve to get in. I definitely didn't deserve to get a job at Morgan Stanley, but I got it. And then once I was there, I realized no one else deserved it either. And then I didn't deserve to get into business school and on and on. The way you deserve things is that you go for them. And then you find out that you can get them. And you also find out that in most instances, if you're really trying hard, you're not going to get it. And that's okay. I applied to nine schools. I got into two. I got waylisted at one. And so the way you get past this

is one, going for it and then getting it and realize that the people evaluating you are smarter than you think. The reason you have that job, the reason why you might be eligible for promotion is because the people around you are not being fooled. They actually do appreciate you. Now, having said that, I think gratitude helps solve imposter syndrome. I think being grateful makes you realize that, okay, or helps do away with those insecurities, realizing, okay, a lot of this isn't my fault, so I'm grateful. And just saying that to the universe and demonstrating gratitude and helping other people bust out of that imposter syndrome is really important. I think it's especially important with young people. I think young people,

do I mean this? Young people have suffered more from imposter syndrome. Actually, I don't know if I believe that. The majority of the millennials and Gen Z I work with have absolutely no problem with self-confidence. I want $400,000 a year and to bring my cat to work. Anyway, so I take that back. If you do suffer from imposter syndrome, gratitude, going for it, and recognizing the people around you that let you into the program, that gave you the promotion. Yeah, maybe you're not as awesome as they think, but also they're not as dumb as you are worried about. They picked you for a reason.

You deserve to be there. You deserve to be dating that person unless he or she is an asshole and then you deserve to upgrade. But yeah, you don't deserve to be there. And you know what? Neither does anybody else. Our producers are Caroline Shagrin and Drew Burrows.

Claire Miller is our associate producer. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Prop G Pod from the Vox Media Podcast Network. We will catch you next week on Monday and Thursday. A quick side note regarding our ever-growing empire. Yesterday, we launched the No Mercy, No Malice podcast, which is essentially a summary or a readover of our No Mercy, No Malice newsletter, which has about a quarter of a million subscribers, where we talk about relationships and economics. One of the things I'm most excited about is the read is done by George Hahn, the inimitable and very deep, dreamy voice, George Hahn. But this will be shorter form, No Mercy, No Malice,

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