WEBVTT - Apollo Chief Economist Torsten Slok Talks Importance of Iran War Risk

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Our next guest out with some research. Always a must read.

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<v Speaker 2>It's always on the Bloomberg. Everybody talking about it on

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<v Speaker 2>Wall Street. We talk about it a lot in the newsroom.

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<v Speaker 2>Torsten Slock is with US, chief economist and partner to

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<v Speaker 2>Apollo Global Management here in studio. Good to have you

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<v Speaker 2>here with us. So many different places to start, and

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<v Speaker 2>I do want to talk about the sixty to forty portfolio.

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<v Speaker 2>President Trump, we watch and what he's doing with policies.

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<v Speaker 2>We talk about AI a lot. We're going to get

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<v Speaker 2>into that. You know, the FED. Do you just look

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<v Speaker 2>at it all or like first thing in the morning,

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<v Speaker 2>what do you want? Do you want to check what's

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<v Speaker 2>going on in Asia? Like is it everything that is

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<v Speaker 2>a priority right now?

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<v Speaker 3>Yeah? No, absolutely, I mean the agenda is certainly first

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<v Speaker 3>of you, Ryan, is very important. Shift's going to sail

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<v Speaker 3>through the straight up a mussa. Not how much all

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<v Speaker 3>of this is going to get to live. But that

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<v Speaker 3>continues to be a very important risk because if we

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<v Speaker 3>do run dry in tanks, especially in Europe, then we

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<v Speaker 3>may run out of marine fuel, of jet fuel, fertilizer

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<v Speaker 3>of helium and Obviously this creates a jump risk in prices,

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<v Speaker 3>especially for energy, and that's still a.

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<v Speaker 2>Risk even though that like back and forth, I know

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<v Speaker 2>it's a market to look through it.

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<v Speaker 3>You're right, Carol, because this hasn't been an issue for

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<v Speaker 3>a while because we've been so busy with the FIT

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<v Speaker 3>and with AI. But in the background this continues unfolding.

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<v Speaker 3>It still be very, very important because it literally is

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<v Speaker 3>the case that we could have some tanks get your

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<v Speaker 3>critical levels. Yes, there's still, of course fuel running in

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<v Speaker 3>the pipes and the systems have to function, but we

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<v Speaker 3>don't know what that level of critical level of inventory is.

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<v Speaker 3>And the risk is when we don't have twenty percent

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<v Speaker 3>of oil that's supposed to be delivered every day coming

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<v Speaker 3>through the strait up a moose or babel Monte. The

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<v Speaker 3>consequence is that we still have this in the background

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<v Speaker 3>as again jump risk and oil prices in particular and

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<v Speaker 3>also for agricultural prices. So yes, this just adds to

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<v Speaker 3>the other things about WASH's press conference and AI and

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<v Speaker 3>all the other things we can talk about, but one.

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<v Speaker 4>More on one of oil any Ron before we get there.

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<v Speaker 4>It does seem like the oil market and we just

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<v Speaker 4>heard from Jeff Mason, who said, we have no idea

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<v Speaker 4>what the talks are happening between the US Iran right

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<v Speaker 4>now and this conflict. Oil prices there are down five percent.

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<v Speaker 4>Whether we're talking bread or brand or WTI is the

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<v Speaker 4>oil market getting this right or is it getting it wrong?

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<v Speaker 3>Well, it is quite remarkable that oil price had been

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<v Speaker 3>through this roller coaster of going up and down and

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<v Speaker 3>seem to have a much stronger opinion about whether a

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<v Speaker 3>deal is happening or not, whereas people in raids and

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<v Speaker 3>in the economics and in the region they have a

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<v Speaker 3>much more nuanced view of Hey, if there is no

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<v Speaker 3>sign of a deal, and if we have a deal,

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<v Speaker 3>then there is a bigger risk that we could eventually

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<v Speaker 3>run dry. So that's why the clock is truly ticking

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<v Speaker 3>on oil inventories, and the more that ticks, the higher

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<v Speaker 3>is the risk. Remember there's now two months ago that

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<v Speaker 3>the head of the EIA said that we were six

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<v Speaker 3>weeks away from Europe running out of jet fuel. Now

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<v Speaker 3>we thankfully have not reached that point quite yet, but

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<v Speaker 3>it's very clear that we literally have zero ships. If

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<v Speaker 3>I look at my Bloombery screen e Ken Homers, zero

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<v Speaker 3>ships coming through the strait Up AMusA and Babble MONTEP.

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<v Speaker 3>At the moment, that is still a very significant risk

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<v Speaker 3>in the background. It's difficult to quantify. Who knows if

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<v Speaker 3>this is tomorrow, next week, or next month. But if

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<v Speaker 3>the Iranians continue with this onto the midterm election, I

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<v Speaker 3>feel very confident that then we will have the risk

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<v Speaker 3>that we could see inventory. And remember Nice Airport ran

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<v Speaker 3>out of jet fuel three weeks ago, so this is

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<v Speaker 3>also not just an academic exercise. This is something that's

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<v Speaker 3>really truly happening, not only for jet fuel, also from

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<v Speaker 3>marine fuel, other types of fuel, and of course also

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<v Speaker 3>agricultural products such as fertilized on helium.

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<v Speaker 2>Maybe this is why fed Chaer Kevin Worsh was so

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<v Speaker 2>general broad Macro and I want to play something for

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<v Speaker 2>you because Double one Capital's Jeff Gunlock called out Michael

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<v Speaker 2>McKee on X, noting that Mike's question that last week's

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<v Speaker 2>FOMC press conference, he wrote the greatest financial media moment

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<v Speaker 2>year to date was Michael McKee teeing up and then

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<v Speaker 2>delivering what are you waiting for? To fed Cheer Worsh.

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<v Speaker 2>Listen up, everybody. Here's what Mike had to say at

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<v Speaker 2>the FOMC press conference last week.

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<v Speaker 5>What vetting did you do of the people that you

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<v Speaker 5>appointed to the task forces? In particular, given Mark Andresen's

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<v Speaker 5>substantial political spending twenty five million dollars in just the

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<v Speaker 5>past year to back candidates who oppose stricter IAI regulation,

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<v Speaker 5>the public be confident that a committee he co chairs

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<v Speaker 5>will provide an independent assessment of AI's economic effects rather

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<v Speaker 5>than one aligned with the interests of the AI industry.

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<v Speaker 1>Yeah, so I selected fifteen incredible subject market subject matter

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<v Speaker 1>experts to tackle five of the most important questions that

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<v Speaker 1>if we get the answers right, we're going to do

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<v Speaker 1>a far better job in delivering. And if we get

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<v Speaker 1>the answers wrong, we have a problem. The comfort that

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<v Speaker 1>I can give you and your listeners is all.

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<v Speaker 2>Right, we're going to get out of that. That was

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<v Speaker 2>actually not the SoundBite we wanted to play, but that

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<v Speaker 2>was Kevin Warsh with Michael McKee. But Mike was basically saying,

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<v Speaker 2>what are you waiting for? And Torstan you obviously watched it.

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<v Speaker 2>He just was so general. Macro, what did you take

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<v Speaker 2>away from Kevin Walsh last week?

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<v Speaker 3>I think the market reaction speaks to Mike's question naming

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<v Speaker 3>what are we waiting for? Why didn't you just high rates?

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<v Speaker 3>The fact that they didn't do that, Yeah, and the

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<v Speaker 3>margat reaction with a very very steep curve. Of course

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<v Speaker 3>you should have high rates at least. Now we're beginning

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<v Speaker 3>to ask questions in markets about, well, do you have

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<v Speaker 3>the commitment to raise rates? Do you really think inflation

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<v Speaker 3>will be two percent? And if you think so, what

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<v Speaker 3>is the road to getting to two percent? Are you

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<v Speaker 3>going to use the balance sheet? Are you going to

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<v Speaker 3>use the fit fund rate? Are you going to use

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<v Speaker 3>tider financial conditions?

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<v Speaker 2>He should be able to answer, shouldn't.

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<v Speaker 3>He did talk about tider financial conditions, which may have

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<v Speaker 3>added a bit to the confusion, because it becomes really

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<v Speaker 3>really important for the yeal curve whether you pick to

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<v Speaker 3>do this through stronger balance sheet meaning lower balance sheet,

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<v Speaker 3>whether you do this through higher rates, or whether you

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<v Speaker 3>do this through tide of financial conditions, because if you

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<v Speaker 3>trade rates, you of course will have a strong view

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<v Speaker 3>on how is it that the fate is going to

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<v Speaker 3>achieve the two percent goal? And you could say in

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<v Speaker 3>theory that we want to do this through a smaller

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<v Speaker 3>balance sheet, but we didn't even get an answer to that.

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<v Speaker 3>So that's why people are not beginning to wonder, Okay,

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<v Speaker 3>there's more volatility in markets. We have a steeper curve,

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<v Speaker 3>more questions being asked. So therefore, if they don't hike

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<v Speaker 3>in September, of course, then the market will just ask

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<v Speaker 3>given more questions about what is now the plan?

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<v Speaker 4>Can you do it through a fewer meetings a year?

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<v Speaker 3>Well, that's one way, of course of doing it, but

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<v Speaker 3>that doesn't change the facts that the.

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<v Speaker 4>Market frame does. The New York Times reporting on Friday

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<v Speaker 4>night that I saw that that the FED could have

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<v Speaker 4>fewer meetings.

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<v Speaker 3>Yeah, absolutely, and I think that that, of course would

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<v Speaker 3>change the game quite significantly if they were to go

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<v Speaker 3>to the legally manded only fall meetings a year. But

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<v Speaker 3>it's very clear still that even that debate, the market

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<v Speaker 3>will still try to price the FED at every single

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<v Speaker 3>moment in time. And that basically means that we have

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<v Speaker 3>a situation where the market constantly needs to think about

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<v Speaker 3>how might the FIT interpret the incoming data? Right?

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<v Speaker 4>Got, well, I guess what it does? It mean that

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<v Speaker 4>we hear more from the FED speakers and they're sort

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<v Speaker 4>of job owning between meetings. I'm just trying to understand

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<v Speaker 4>a world we live in with less communication. If you

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<v Speaker 4>want the market to serve as sort of the benchmark

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<v Speaker 4>for the FED, I don't know.

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<v Speaker 3>I think the toothpaste will come out one way or

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<v Speaker 3>the other other. If i'm C members will begin to

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<v Speaker 3>have speeches where they say here's what I think. And

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<v Speaker 3>normally some of these if i'm C members they don't

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<v Speaker 3>get a lot of weight as such from financial markets,

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<v Speaker 3>but today they are given a lot of weight because

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<v Speaker 3>if the chair has decided to say I'm not giving

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<v Speaker 3>not even forward guidance but also not framework guidance, then

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<v Speaker 3>of course others who are willing to talk about not

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<v Speaker 3>even framework guidance and forward guidance, but just give a

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<v Speaker 3>description of the data and talk about how do they

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<v Speaker 3>think the data could be evolving. I think that is

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<v Speaker 3>going to get a lot more weight. Which is why

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<v Speaker 3>when Beth Hammer puts something on LinkedIn on a Sunday afternoon,

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<v Speaker 3>this suddenly gets people sent this to me all Sunday

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<v Speaker 3>evening and say what do you think? How should we

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<v Speaker 3>think about this? And this suddenly becomes really really important

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<v Speaker 3>because the market is constantly trying to figure out what

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<v Speaker 3>is the trajectory of where rates are going.

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<v Speaker 2>Right exactly, I want to get to the sixty forty

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<v Speaker 2>portfolio that we've talked about forever right being broken? Why so,

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<v Speaker 2>and you have an AI aspect to this.

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<v Speaker 3>Yeah, So the really important aspect of this discussion is

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<v Speaker 3>the following. The sixty to forty portfolio was really truly

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<v Speaker 3>a stroke of genius when it was invented, because remember,

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<v Speaker 3>if my stocks go up normally my bond prices go down.

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<v Speaker 3>That means insust rates go down, and that means I

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<v Speaker 3>make money on stocks and I may lose something on

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<v Speaker 3>my bonds vice versa. When the stock market goes down,

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<v Speaker 3>then bunt prices go up. In other yields go down,

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<v Speaker 3>and that means, of course that I make money either

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<v Speaker 3>on bunds or made money and equities somewhat somewhat randomly.

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<v Speaker 3>Then pick sixty forty. This was the weights, and it

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<v Speaker 3>made sense in an environment where the business cycle goes

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<v Speaker 3>up and down. Sometimes I should have in stocks sometimes

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<v Speaker 3>we're having a rate. So if that's the case, this

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<v Speaker 3>was a very good way to balance your portfolio. The

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<v Speaker 3>problem today is the following, Namely, today's stocks are really

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<v Speaker 3>is drawn by AI is not driven so much by

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<v Speaker 3>the business cycle, and it's highly concentrated, with the ten

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<v Speaker 3>biggest stocks making up forty percent of the basket. So

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<v Speaker 3>that means that the AI story has become absolutely critical

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<v Speaker 3>as a driver of the stock market, and the fiscal

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<v Speaker 3>situation has become a very important driver of the bond

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<v Speaker 3>market because now we have significant physical problems, We have

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<v Speaker 3>the fact that rates have been going up, the term

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<v Speaker 3>premium has been going up, and therefore that's also not

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<v Speaker 3>necessarily a function of what the business cycle is doing.

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<v Speaker 3>So suddenly you have two new factors that have been

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<v Speaker 3>a key driver of equity, name the AI, and a

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<v Speaker 3>key driver of BoNT markets, namely fiscal which are not

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<v Speaker 3>a function of whether the economy goes up and down.

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<v Speaker 3>And therefore we may no longer have the property that

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<v Speaker 3>you make money on one side and lose on the other,

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<v Speaker 3>but you may actually lose on both.

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<v Speaker 2>We've often said, and we've said that when you see

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<v Speaker 2>the markets like both stocks and bonds going up in tandem,

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<v Speaker 2>which is just unusual, right to see that in any

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<v Speaker 2>given trade. Having said that, big Tac Torsten has been

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<v Speaker 2>disproportionately moving the market even before we started talking a

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<v Speaker 2>lot about AI. Is there something different as AI though

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<v Speaker 2>that trade on steroids and even further disconnecting us from

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<v Speaker 2>the business sid cale.

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<v Speaker 3>Yeah, let's think about that exactly at this moment in

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<v Speaker 3>the sixty forty context, because AI, of course is highly

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<v Speaker 3>concentrated equity, so AI better work out otherwise equities will

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<v Speaker 3>not go up. So if at the same time AI

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<v Speaker 3>companies are also issuing a lot of debt, that takes

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<v Speaker 3>money out of treasury markets into buy a hyperscale a debt,

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<v Speaker 3>so in that sense, even the bond side of my

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<v Speaker 3>portfolio is also being impacted. And by the way, is

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<v Speaker 3>also now AI. So certainly I had AI everyone in equities.

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<v Speaker 3>I also have AI in investment, great credit, and by

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<v Speaker 3>the way, venture capitusal eighty seven percent is also AI.

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<v Speaker 3>So now my whole pie shot it's actually all AI.

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<v Speaker 3>So suddenly there's one factor driving everything I'm doing. And

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<v Speaker 3>if there's one thing we'll learned in finance is facta

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<v Speaker 3>investing and one factor is driving all returns at the moment, namely,

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<v Speaker 3>AI is inequities. AI is in everywhere in public credit,

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<v Speaker 3>and AI is also in ventor capsule. So the best

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<v Speaker 3>recommendation today is to be not in AI, because that

0:10:17.200 --> 0:10:19.560
<v Speaker 3>gets you away from this one factor that is driving

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<v Speaker 3>markets at the moment.

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<v Speaker 2>You did say in your note, the real risk emerges

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<v Speaker 2>that the AI trade reverses or markets become more worried

0:10:24.520 --> 0:10:27.040
<v Speaker 2>about government deficits. In either scenario, both stocks and bonds

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<v Speaker 2>with face pressure, simultaneously leaving investors with no hedge, which

0:10:30.280 --> 0:10:34.520
<v Speaker 2>is what you basically said, what happened with situational awareness

0:10:34.760 --> 0:10:37.520
<v Speaker 2>the hedge find is that a sign to you of

0:10:37.559 --> 0:10:40.560
<v Speaker 2>the AI trade reversing, Like, what's your read on that?

0:10:40.600 --> 0:10:42.560
<v Speaker 2>And I have no idea if Apollo was interested in

0:10:42.559 --> 0:10:43.640
<v Speaker 2>the assets.

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<v Speaker 1>Of the share what you'd like?

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<v Speaker 2>Yeah, but is that the beginning of a little Canarian

0:10:48.440 --> 0:10:48.800
<v Speaker 2>the Colma.

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<v Speaker 3>Well, what was of course very unusual about this is

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<v Speaker 3>that it didn't take much decline in the AI trade

0:10:53.720 --> 0:10:55.760
<v Speaker 3>and suddenly that was a blow up. It was a

0:10:55.760 --> 0:10:58.200
<v Speaker 3>bit of a coincidence that this was the specific fund

0:10:58.240 --> 0:11:01.480
<v Speaker 3>you mentioned, But it's very clear that the AI trade reversing.

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<v Speaker 3>There's a lot of leveled ETFs at the moment. There's

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<v Speaker 3>a lot of people that are having leveled bets on AI.

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<v Speaker 3>Can only go one way. Name you up, and we're

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<v Speaker 3>now finding out where the underperformings of growth for the

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<v Speaker 3>last four months is very very substantial. Value has been outperforming.

0:11:15.160 --> 0:11:18.000
<v Speaker 3>That's exactly telling you that in a sixty to forty framework,

0:11:18.240 --> 0:11:21.840
<v Speaker 3>growth is just becoming more risky, simply because the AI

0:11:22.240 --> 0:11:25.600
<v Speaker 3>story is beginning to also become more vulnerable, especially with

0:11:25.640 --> 0:11:28.640
<v Speaker 3>this debate about open source models relatives the closed source models.

0:11:28.679 --> 0:11:30.920
<v Speaker 3>If the Chinese models come and dominate, that will then

0:11:30.960 --> 0:11:33.520
<v Speaker 3>of course take market share from the closed source models.

0:11:33.520 --> 0:11:35.760
<v Speaker 3>And the question is how big is that eating into

0:11:35.760 --> 0:11:36.800
<v Speaker 3>the market share going to be?

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<v Speaker 2>The narrative has changed a lot from where we were

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<v Speaker 2>three years ago. Tourist and Slot, thank you so much

0:11:41.600 --> 0:11:43.520
<v Speaker 2>and thanks for hanging around. We really wanted to talk

0:11:43.559 --> 0:11:46.560
<v Speaker 2>with you. His chief economist at Apollo Global Management, joining

0:11:46.600 --> 0:11:47.520
<v Speaker 2>us here in studio