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Speaker 2: Our next guest out with some research. Always a must read.
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Speaker 2: Torsten Slock is with US, chief economist and partner to
Speaker 2: Apollo Global Management here in studio. Good to have you
Speaker 2: here with us. So many different places to start, and
Speaker 2: I do want to talk about the sixty to forty portfolio.
Speaker 2: President Trump, we watch and what he's doing with policies.
Speaker 2: We talk about AI a lot. We're going to get
Speaker 2: into that. You know, the FED. Do you just look
Speaker 2: at it all or like first thing in the morning,
Speaker 2: what do you want? Do you want to check what's
Speaker 2: going on in Asia? Like is it everything that is
Speaker 2: a priority right now?
Speaker 3: Yeah? No, absolutely, I mean the agenda is certainly first
Speaker 3: of you, Ryan, is very important. Shift's going to sail
Speaker 3: through the straight up a mussa. Not how much all
Speaker 3: of this is going to get to live. But that
Speaker 3: continues to be a very important risk because if we
Speaker 3: do run dry in tanks, especially in Europe, then we
Speaker 3: may run out of marine fuel, of jet fuel, fertilizer
Speaker 3: of helium and Obviously this creates a jump risk in prices,
Speaker 3: especially for energy, and that's still a.
Speaker 2: Risk even though that like back and forth, I know
Speaker 2: it's a market to look through it.
Speaker 3: You're right, Carol, because this hasn't been an issue for
Speaker 3: a while because we've been so busy with the FIT
Speaker 3: and with AI. But in the background this continues unfolding.
Speaker 3: It still be very, very important because it literally is
Speaker 3: the case that we could have some tanks get your
Speaker 3: critical levels. Yes, there's still, of course fuel running in
Speaker 3: the pipes and the systems have to function, but we
Speaker 3: don't know what that level of critical level of inventory is.
Speaker 3: And the risk is when we don't have twenty percent
Speaker 3: of oil that's supposed to be delivered every day coming
Speaker 3: through the strait up a moose or babel Monte. The
Speaker 3: consequence is that we still have this in the background
Speaker 3: as again jump risk and oil prices in particular and
Speaker 3: also for agricultural prices. So yes, this just adds to
Speaker 3: the other things about WASH's press conference and AI and
Speaker 3: all the other things we can talk about, but one.
Speaker 4: More on one of oil any Ron before we get there.
Speaker 4: It does seem like the oil market and we just
Speaker 4: heard from Jeff Mason, who said, we have no idea
Speaker 4: what the talks are happening between the US Iran right
Speaker 4: now and this conflict. Oil prices there are down five percent.
Speaker 4: Whether we're talking bread or brand or WTI is the
Speaker 4: oil market getting this right or is it getting it wrong?
Speaker 3: Well, it is quite remarkable that oil price had been
Speaker 3: through this roller coaster of going up and down and
Speaker 3: seem to have a much stronger opinion about whether a
Speaker 3: deal is happening or not, whereas people in raids and
Speaker 3: in the economics and in the region they have a
Speaker 3: much more nuanced view of Hey, if there is no
Speaker 3: sign of a deal, and if we have a deal,
Speaker 3: then there is a bigger risk that we could eventually
Speaker 3: run dry. So that's why the clock is truly ticking
Speaker 3: on oil inventories, and the more that ticks, the higher
Speaker 3: is the risk. Remember there's now two months ago that
Speaker 3: the head of the EIA said that we were six
Speaker 3: weeks away from Europe running out of jet fuel. Now
Speaker 3: we thankfully have not reached that point quite yet, but
Speaker 3: it's very clear that we literally have zero ships. If
Speaker 3: I look at my Bloombery screen e Ken Homers, zero
Speaker 3: ships coming through the strait Up AMusA and Babble MONTEP.
Speaker 3: At the moment, that is still a very significant risk
Speaker 3: in the background. It's difficult to quantify. Who knows if
Speaker 3: this is tomorrow, next week, or next month. But if
Speaker 3: the Iranians continue with this onto the midterm election, I
Speaker 3: feel very confident that then we will have the risk
Speaker 3: that we could see inventory. And remember Nice Airport ran
Speaker 3: out of jet fuel three weeks ago, so this is
Speaker 3: also not just an academic exercise. This is something that's
Speaker 3: really truly happening, not only for jet fuel, also from
Speaker 3: marine fuel, other types of fuel, and of course also
Speaker 3: agricultural products such as fertilized on helium.
Speaker 2: Maybe this is why fed Chaer Kevin Worsh was so
Speaker 2: general broad Macro and I want to play something for
Speaker 2: you because Double one Capital's Jeff Gunlock called out Michael
Speaker 2: McKee on X, noting that Mike's question that last week's
Speaker 2: FOMC press conference, he wrote the greatest financial media moment
Speaker 2: year to date was Michael McKee teeing up and then
Speaker 2: delivering what are you waiting for? To fed Cheer Worsh.
Speaker 2: Listen up, everybody. Here's what Mike had to say at
Speaker 2: the FOMC press conference last week.
Speaker 5: What vetting did you do of the people that you
Speaker 5: appointed to the task forces? In particular, given Mark Andresen's
Speaker 5: substantial political spending twenty five million dollars in just the
Speaker 5: past year to back candidates who oppose stricter IAI regulation,
Speaker 5: the public be confident that a committee he co chairs
Speaker 5: will provide an independent assessment of AI's economic effects rather
Speaker 5: than one aligned with the interests of the AI industry.
Speaker 1: Yeah, so I selected fifteen incredible subject market subject matter
Speaker 1: experts to tackle five of the most important questions that
Speaker 1: if we get the answers right, we're going to do
Speaker 1: a far better job in delivering. And if we get
Speaker 1: the answers wrong, we have a problem. The comfort that
Speaker 1: I can give you and your listeners is all.
Speaker 2: Right, we're going to get out of that. That was
Speaker 2: actually not the SoundBite we wanted to play, but that
Speaker 2: was Kevin Warsh with Michael McKee. But Mike was basically saying,
Speaker 2: what are you waiting for? And Torstan you obviously watched it.
Speaker 2: He just was so general. Macro, what did you take
Speaker 2: away from Kevin Walsh last week?
Speaker 3: I think the market reaction speaks to Mike's question naming
Speaker 3: what are we waiting for? Why didn't you just high rates?
Speaker 3: The fact that they didn't do that, Yeah, and the
Speaker 3: margat reaction with a very very steep curve. Of course
Speaker 3: you should have high rates at least. Now we're beginning
Speaker 3: to ask questions in markets about, well, do you have
Speaker 3: the commitment to raise rates? Do you really think inflation
Speaker 3: will be two percent? And if you think so, what
Speaker 3: is the road to getting to two percent? Are you
Speaker 3: going to use the balance sheet? Are you going to
Speaker 3: use the fit fund rate? Are you going to use
Speaker 3: tider financial conditions?
Speaker 2: He should be able to answer, shouldn't.
Speaker 3: He did talk about tider financial conditions, which may have
Speaker 3: added a bit to the confusion, because it becomes really
Speaker 3: really important for the yeal curve whether you pick to
Speaker 3: do this through stronger balance sheet meaning lower balance sheet,
Speaker 3: whether you do this through higher rates, or whether you
Speaker 3: do this through tide of financial conditions, because if you
Speaker 3: trade rates, you of course will have a strong view
Speaker 3: on how is it that the fate is going to
Speaker 3: achieve the two percent goal? And you could say in
Speaker 3: theory that we want to do this through a smaller
Speaker 3: balance sheet, but we didn't even get an answer to that.
Speaker 3: So that's why people are not beginning to wonder, Okay,
Speaker 3: there's more volatility in markets. We have a steeper curve,
Speaker 3: more questions being asked. So therefore, if they don't hike
Speaker 3: in September, of course, then the market will just ask
Speaker 3: given more questions about what is now the plan?
Speaker 4: Can you do it through a fewer meetings a year?
Speaker 3: Well, that's one way, of course of doing it, but
Speaker 3: that doesn't change the facts that the.
Speaker 4: Market frame does. The New York Times reporting on Friday
Speaker 4: night that I saw that that the FED could have
Speaker 4: fewer meetings.
Speaker 3: Yeah, absolutely, and I think that that, of course would
Speaker 3: change the game quite significantly if they were to go
Speaker 3: to the legally manded only fall meetings a year. But
Speaker 3: it's very clear still that even that debate, the market
Speaker 3: will still try to price the FED at every single
Speaker 3: moment in time. And that basically means that we have
Speaker 3: a situation where the market constantly needs to think about
Speaker 3: how might the FIT interpret the incoming data? Right?
Speaker 4: Got, well, I guess what it does? It mean that
Speaker 4: we hear more from the FED speakers and they're sort
Speaker 4: of job owning between meetings. I'm just trying to understand
Speaker 4: a world we live in with less communication. If you
Speaker 4: want the market to serve as sort of the benchmark
Speaker 4: for the FED, I don't know.
Speaker 3: I think the toothpaste will come out one way or
Speaker 3: the other other. If i'm C members will begin to
Speaker 3: have speeches where they say here's what I think. And
Speaker 3: normally some of these if i'm C members they don't
Speaker 3: get a lot of weight as such from financial markets,
Speaker 3: but today they are given a lot of weight because
Speaker 3: if the chair has decided to say I'm not giving
Speaker 3: not even forward guidance but also not framework guidance, then
Speaker 3: of course others who are willing to talk about not
Speaker 3: even framework guidance and forward guidance, but just give a
Speaker 3: description of the data and talk about how do they
Speaker 3: think the data could be evolving. I think that is
Speaker 3: going to get a lot more weight. Which is why
Speaker 3: when Beth Hammer puts something on LinkedIn on a Sunday afternoon,
Speaker 3: this suddenly gets people sent this to me all Sunday
Speaker 3: evening and say what do you think? How should we
Speaker 3: think about this? And this suddenly becomes really really important
Speaker 3: because the market is constantly trying to figure out what
Speaker 3: is the trajectory of where rates are going.
Speaker 2: Right exactly, I want to get to the sixty forty
Speaker 2: portfolio that we've talked about forever right being broken? Why so,
Speaker 2: and you have an AI aspect to this.
Speaker 3: Yeah, So the really important aspect of this discussion is
Speaker 3: the following. The sixty to forty portfolio was really truly
Speaker 3: a stroke of genius when it was invented, because remember,
Speaker 3: if my stocks go up normally my bond prices go down.
Speaker 3: That means insust rates go down, and that means I
Speaker 3: make money on stocks and I may lose something on
Speaker 3: my bonds vice versa. When the stock market goes down,
Speaker 3: then bunt prices go up. In other yields go down,
Speaker 3: and that means, of course that I make money either
Speaker 3: on bunds or made money and equities somewhat somewhat randomly.
Speaker 3: Then pick sixty forty. This was the weights, and it
Speaker 3: made sense in an environment where the business cycle goes
Speaker 3: up and down. Sometimes I should have in stocks sometimes
Speaker 3: we're having a rate. So if that's the case, this
Speaker 3: was a very good way to balance your portfolio. The
Speaker 3: problem today is the following, Namely, today's stocks are really
Speaker 3: is drawn by AI is not driven so much by
Speaker 3: the business cycle, and it's highly concentrated, with the ten
Speaker 3: biggest stocks making up forty percent of the basket. So
Speaker 3: that means that the AI story has become absolutely critical
Speaker 3: as a driver of the stock market, and the fiscal
Speaker 3: situation has become a very important driver of the bond
Speaker 3: market because now we have significant physical problems, We have
Speaker 3: the fact that rates have been going up, the term
Speaker 3: premium has been going up, and therefore that's also not
Speaker 3: necessarily a function of what the business cycle is doing.
Speaker 3: So suddenly you have two new factors that have been
Speaker 3: a key driver of equity, name the AI, and a
Speaker 3: key driver of BoNT markets, namely fiscal which are not
Speaker 3: a function of whether the economy goes up and down.
Speaker 3: And therefore we may no longer have the property that
Speaker 3: you make money on one side and lose on the other,
Speaker 3: but you may actually lose on both.
Speaker 2: We've often said, and we've said that when you see
Speaker 2: the markets like both stocks and bonds going up in tandem,
Speaker 2: which is just unusual, right to see that in any
Speaker 2: given trade. Having said that, big Tac Torsten has been
Speaker 2: disproportionately moving the market even before we started talking a
Speaker 2: lot about AI. Is there something different as AI though
Speaker 2: that trade on steroids and even further disconnecting us from
Speaker 2: the business sid cale.
Speaker 3: Yeah, let's think about that exactly at this moment in
Speaker 3: the sixty forty context, because AI, of course is highly
Speaker 3: concentrated equity, so AI better work out otherwise equities will
Speaker 3: not go up. So if at the same time AI
Speaker 3: companies are also issuing a lot of debt, that takes
Speaker 3: money out of treasury markets into buy a hyperscale a debt,
Speaker 3: so in that sense, even the bond side of my
Speaker 3: portfolio is also being impacted. And by the way, is
Speaker 3: also now AI. So certainly I had AI everyone in equities.
Speaker 3: I also have AI in investment, great credit, and by
Speaker 3: the way, venture capitusal eighty seven percent is also AI.
Speaker 3: So now my whole pie shot it's actually all AI.
Speaker 3: So suddenly there's one factor driving everything I'm doing. And
Speaker 3: if there's one thing we'll learned in finance is facta
Speaker 3: investing and one factor is driving all returns at the moment, namely,
Speaker 3: AI is inequities. AI is in everywhere in public credit,
Speaker 3: and AI is also in ventor capsule. So the best
Speaker 3: recommendation today is to be not in AI, because that
Speaker 3: gets you away from this one factor that is driving
Speaker 3: markets at the moment.
Speaker 2: You did say in your note, the real risk emerges
Speaker 2: that the AI trade reverses or markets become more worried
Speaker 2: about government deficits. In either scenario, both stocks and bonds
Speaker 2: with face pressure, simultaneously leaving investors with no hedge, which
Speaker 2: is what you basically said, what happened with situational awareness
Speaker 2: the hedge find is that a sign to you of
Speaker 2: the AI trade reversing, Like, what's your read on that?
Speaker 2: And I have no idea if Apollo was interested in
Speaker 2: the assets.
Speaker 1: Of the share what you'd like?
Speaker 2: Yeah, but is that the beginning of a little Canarian
Speaker 2: the Colma.
Speaker 3: Well, what was of course very unusual about this is
Speaker 3: that it didn't take much decline in the AI trade
Speaker 3: and suddenly that was a blow up. It was a
Speaker 3: bit of a coincidence that this was the specific fund
Speaker 3: you mentioned, But it's very clear that the AI trade reversing.
Speaker 3: There's a lot of leveled ETFs at the moment. There's
Speaker 3: a lot of people that are having leveled bets on AI.
Speaker 3: Can only go one way. Name you up, and we're
Speaker 3: now finding out where the underperformings of growth for the
Speaker 3: last four months is very very substantial. Value has been outperforming.
Speaker 3: That's exactly telling you that in a sixty to forty framework,
Speaker 3: growth is just becoming more risky, simply because the AI
Speaker 3: story is beginning to also become more vulnerable, especially with
Speaker 3: this debate about open source models relatives the closed source models.
Speaker 3: If the Chinese models come and dominate, that will then
Speaker 3: of course take market share from the closed source models.
Speaker 3: And the question is how big is that eating into
Speaker 3: the market share going to be?
Speaker 2: The narrative has changed a lot from where we were
Speaker 2: three years ago. Tourist and Slot, thank you so much
Speaker 2: and thanks for hanging around. We really wanted to talk
Speaker 2: with you. His chief economist at Apollo Global Management, joining
Speaker 2: us here in studio