Today's number, 104,000. That's how many

pounds a sperm whale that washed up on

an Nantucket beach this week weighed. Oh

gosh. This just everybody sit back and

buckle up. Okay, so I've never had an

unplanned pregnancy, uh, Ed, because

when my sperm [music] finally reaches

the egg, the egg swipes left.

My sperm really aren't like swimmers,

Ed. They're more like a slow jogger

being chased by a lame dog.

Um, my sperm are not really swimmers.

They're more like uh an old man browsing

at a Costco who's looking for

gluten-free peanut butter who just had

cataract surgery. Like, it's

well-intentioned, but it's just not

going to reach the goal. [laughter]

>> I could do this all day. I could I By

the way, I made up the last one myself.

Ed. [laughter]

[music]

Ed, do you have a nickname for your for

your sperm?

>> No, I I I'm not quite there yet. I'm not

really going to play ball with you on

this one. [laughter]

>> Also, let me give you a little tip. Just

just while we're barreling towards

cancellation, even Claire looks

horrified. It's important and it's fun

that every time you orgasm, you yell out

the same thing. It's really important.

You have to come up with the same thing.

This is the part where you go, "What do

you yell out, Scott? [laughter]

I told you I'm not playing ball with

you.

>> Ed's got his face in his hands. This is

not CM. Joe Kernan.

>> I'm not I'm not going to do you the

service of asking the question.

>> Surrender, Dory. That's what I yell out

from the Wizard [laughter] of Oz. That's

what I yell out. And my other Wizard of

Oz references, I I yell out, "I'm

melting." [laughter]

[snorts] That's why the fans tune in.

>> That's why they tune in. Next up, JP

Morgan, chief economist for the last

time. [laughter]

>> Uh, how are you, Ed?

>> I'm doing well, Scott. How are you

doing?

>> I'm good. I've been in LA the last few

days and I'm at the Beverly Hills Hotel.

>> Nice.

>> Where they're charging me $1,800 a night

so I can have a construction site above

my room.

>> But they they stopped the construction.

I mean, just off Mike here, you gave the

front desk a call. He asked them to stop

hammering and they did it. Pretty

baller. Good stuff.

>> Yeah. No, I I carry a lot of weight

here. Yeah, it's [laughter] uh they're

very scared of me.

>> Number one client. Um, so what what have

been the highlights from LA just before

we get into this conversation?

>> I had a dinner last night with like a

small dinner with eight people and I'm

totally name dropping. What the

Um, and Larry David. I sat next to Larry

David.

>> Wow. How was that?

>> He is literally the same person in real

life. It's not a show. It's a camera

following around. He showed up. He's

like, "Nice to meet you." He's like,

"Why do they serve odd derves?" He like

goes into a bit. He's like like he's

like why would I like I hate Uber. Do

you hate Uber? Let me talk about Uber

for He's literally I'm like oh my god

it's the show. The guy just shows up and

starts doing these bits. Uh but he's

very funny. He seems pretty nice. His

wife is lovely. I don't know. I enjoyed

>> How did you wind up at a dinner with

Larry David?

>> I'm what you call right now like an

intellectual support animal. And that is

all these rich people think it's

interesting to have me over for dinner

[laughter]

and talk about my book. Like so I think

there's two or three of these people

every year where they're like, "Okay,

let's all get together and and also at

the dinner was my role model Sam Harris

and I always enjoy seeing Sam."

>> So when you get invited as the

intellectual support animal, do you feel

a pressure to provide the intellectual

support?

>> Yeah, that's why you're there.

>> Is that fun? That sounds stressful.

Maybe that's why Larry David was doing

his bit. He was the comedic support

animal.

>> The answer is yes. And I find as I get

older. They called me and they were

going to invite this fairly

famous tech couple and I said, "No, I'm

like, I just don't want to I don't want

to meet them. I don't want to talk about

them. I don't I don't I I find that

stuff is increasingly intimidating me

and I don't want to I mean, you know

what? I'd rather just stay at home and

watch Netflix and have some big Filipino

man reheat my soup six or seven times

and just sort of start peeing in

bottles, grow my nails really long.

[laughter]

Surrender, Dorothy, [laughter]

should we should we get to AI and the

economy? Ed, [laughter]

>> you want to move on now?

>> Somebody gave me mushroom chocolates

over the weekend. Just saying.

[laughter] Just saying.

>> Okay, well that explains a lot. All

right, let's get to the economy.

[laughter]

>> Okay, now that we know what happened in

LA this weekend, here is our

conversation with Michael Semblas, the

chairman of market and investment

strategy for JP Morgan Asset [music] and

Wealth Management. Michael, thanks for

joining us again on Profy Markets. Good

to see you. Morning. So, I'm going to

dive right into the questions that we

have because we've only got you for so

long. Um, just some context. So, last

[music] week we had Professor Asworth

Deodorin on our podcast. He presented

what we think is kind of the most

bearish position we've ever seen from

him. And this is a very level-headed,

calm guy. Um, who basically told us that

he thinks that everything in the stock

market is overvalued. He said there's no

place to hide in stocks. And I'm just

going to play you a short clip uh that

kind of summarizes what he thinks right

now.

>> To the extent that there's going to be a

correction, there's no place to hide in

stocks. I I can't see a way because if

the mag 10 go down by 40%. It's not like

the industrials are going to hold their

value while this happens. The panic that

that's going to create is going to

ripple through stocks. You're an

investor primarily invest in stocks and

bonds. My advice is even though

historically you might never have

invested in non-financial asset

categories, this might be a time where

you think about, you know, kind of at

least moving a portion of your portfolio

know bigger chunk than ever into cash or

something close to cash or maybe even

collectibles, things that I I've never

owned collectibles, but you know, for

the first time in my investing history,

I'm saying maybe I should hold something

that is not going to be affecting

inflation. goes to 10%, there's a mark

in an economic crisis that is cat

potentially catastrophic.

>> So, we were very

u struck by everything he said in that

interview. Um, what do you think,

Michael? Is is he right? Are you

concerned like he is? What are your

reactions?

>> It's hard to react to somebody that

doesn't have a long-term track record of

this is when I bought, this is when I

sold, this is what I bought, this is

what I sold. You know, professors are

basically running fantasy baseball teams

by coming out inter intermittently and

telling you what who what their trades

are. It's not real money. It's not real

life. And so, you know, the purpose of

Morning Star and Liipper and a lot of

other entities out there is to kind of

track the people that actually manage

money. How do they do over the long run?

Um, and things like that. So, it's it's

a little abstract. I a better example

might be the cash stockpile that's

that's accumulating at Berkshire Hathway

is probably a an a much better indicator

of of people that are having trouble

putting money to work because they can't

find any value and certainly it's

challenging right now. There's a ton of

dry powder in the in private equity and

venture that still has to be put to work

and so it's a challenging time. um his

his premise of I think I heard him say

10% inflation like I'm I'm I'm not

prepared to quite buy into a 10%

inflation forecast nor am I prepared to

buy into the the certainty of a 10%

sorry a 40% correction in the MAG 10 or

MAG 7. Those stocks have gone up a ton

and a passing wind could cause profit

taking right um similar to what took

place earlier this year with the dollar.

Dollar went down 10%. It was at its post

financial crisis high. As soon as any

asset falls by 10%, Nuriel Rubini and

the rest of the people come out of the

woodwork and say, "Okay, this is it.

This is the big one. Everything's going

to go down from here." And then, of

course, the dollar's been flat since

then. The dollar has been actually flat

since our podcast in May. So, the last

time I was on this show, you know, I

think people have to have some kind of

discipline to recognize that when assets

are trading at 20 to 25 year highs, they

can correct by 10 or 15%. it it doesn't

necessarily unfold and unravel into the

big 40% corrections that we had in 2009

and then he had in 2001. So it's it

sounds I mean we're positioning more

defensively than we have but it you know

what he's describing there is is a

bridge too far. Plus, our normal

balanced and conservative portfolios

already have 30 to 40% in cash, cash

equivalents, gold, very diversified

hedge funds, municiples,

um, some short duration preferred and

things like that. Just to play defense

for Asaf, you know, we that clip that we

got was the most bearish string of

sentences that he he uttered. um

otherwise I think if you listen to the

full podcast it would sound less

hyperbolic perhaps but you know in some

he's concerned um but also so is

everyone else and right now this this AI

bubble more and more people are talking

about it more and more people are

googling it we're now beginning to see a

little bit of a correction in in tech

stocks as we speak

>> small

>> uh small [snorts]

um the fears of this AI bubble

are quite strong or stronger than they

have been before. Um what do you make of

those fears? Do you think that they are

warranted? Um and how are you at JP

Morgan uh thinking about it?

>> Something like 75% of all of the

revenues, profits, and capital spending

since November 2022 have come from 40 AI

related stocks. So there's there's

there's almost no justification to spend

time on anything but this. And I try to

be an even keel kind of person, but the

meta number threw me. You know, a

company announcing that they're spending

65 to 70% of their revenues on capital

spending and R&D without even knowing

what the destination is that they're

going to. As an investor, that doesn't

fill me with a lot of good feeling about

where we're going to be two years from

now. And it was only two years ago that

they did this. they reached the same

peak of 65% of revenues investing in the

metaverse, which obviously hasn't really

turned out to be anything. So, um,

there's a lot more behind this

particular generative AI boom, but the

numbers I I put together something,

Scott, I think you'd appreciate this

that you like this kind of historical

context. The tech capital spending in

2025

is equal relative to GDP of

the moon landing, the Manhattan project,

the interstate highway system,

electrification of farming, the tribal

bridge, the Minttown tunnel, the Golden

Gate Bridge, and the Hoover Dam

>> combined. Yeah.

>> Wow.

>> Yeah.

>> There's all these futurists hovering

around like bats telling us how all of

this is going to magically make some

fantastic future. And there are surely

bits and pieces of evidence here and

there of real productivity gains coming

from this. But um this is a this is a

scarier version of the ICT revolution of

the early 90s. The only silver lining

that I latch on to

is that whether it's 2001 or the casino

buildout, airlines, fiber optics,

um the the the the Calpine gas turbine

era, all of those capital spending booms

were financed with debt. And this one,

with the exception of Oracle, is being

financed with internally generated cash

flow. But that simply means it can go on

for longer before it gets unplugged by

the debt markets. It doesn't relieve you

of the ultimate need for there to be

substantial profit generation to

remunerate the trillion two of capital

that's been spent since November 2022.

>> I want to recognize I'm I'm feeling

defensive around my colleague. I've been

following ASW for 20 years and he does

the work around valuations and there's

few people in the alternative investment

space or investors that at least in my

observation have been more right more

often than him and it did rattle us cuz

he generally I want to acknowledge your

point uh it's easier to sound smart when

you're a catastrophist you just sound

smarter right and the the best traders

the best historians the best politicians

have aired on the side of asking

themselves what could go fight, you

know, and cuz the markets over the

medium and long term are up and to the

right. So, I want to acknowledge that

the I want I want to put forward a

thesis and have you respond to it. And

that is if you look at every single of

the company one of the companies we're

talking about, they have all had years

where they're down 50 to 70% in that

12-month period. And the thing that's

scary now is if a company like Nvidia,

which hasn't had one of those years, I

don't think, or maybe it did in 2022, if

that happens to a company that's now got

the market cap [snorts] of the GDP of

whatever Germany, that that that might

take the entire market down that

essentially America has become so

fragile because it is now a giant bet on

AI. And if open AI which you know I mean

60% of cap 60% of revenues on capex is

one thing as far as I can tell open AI

is about at you know 30 times 30 times

the revenue going into capex. If open AI

or some big customers here's the thesis

and you you tell me where I got this

wrong. Some standard S&P companies

PepsiCo Caterpillar PNG announced look

AI is great but we are out over our

skis. We're not seeing the return we'd

hope for. We're scaling back the

investment. Open AAI in the secondary

market trades way down and then o and

then Nvidia is is goes down 60% which

would not be unusual. it wouldn't look

cheap. And then we have a $3 trillion

destruction in the capital markets and

we basically overnight have flat

markets, GDP growth of zero and the

whole market, you know, if these

companies sneeze, we're not catching a

cold, we're catching pneumonia. Has the

thing that worries me the most and I

want to get your response is we have

inadvertently turned our markets into

into a very fragile house of cards.

There's the S&P 490 and there's the S&P

10 and right now everything is banking

on these 10 companies living up to these

extraordinary expectations. Your

thoughts?

>> I agree with most of that. Um, one of

the data points that was really

disturbing is two years ago someone

talking about GDP growth would not have

mentioned tech capital spending. It

would have been a rounding error. Last

quarter it was a third of GDP growth and

US GDP growth would already be 1% if it

weren't for this tech AI buildout. And

you know how people get upset when the

private sector gets bailed out by the

public sector. I would argue this year

Generative AI has bailed out the public

sector like the you know these the

hyperscalers bailed out the Trump

administration because without them

they'd be staring a 1% GDP growth number

in the face

>> and having to explain it which they're

in really no position to do. And by the

way, I don't think it's a coincidence

that uh we we track all of the country

product tariff matrix combinations. Um

the AI infrastructure about 70 to 90% of

those imports are exempt from tariffs

right now. So the the those sectors and

companies have also done a very good job

navigating however one has to these days

um Washington in order to get their

imports which are critical to their

survival exempt from tariffs. So, yeah,

I'm I'm nervous about it. Um, again, the

the the fact that it's being financed

through cash flow

means that we don't have quite the same

risk of a sudden seize up because, you

know, bonds can't be placed. Um, you

know, you're not going to have a hung

bridge loan that that gets like the

broker dealers in trouble and have to go

to the Fed's primary dealer credit

facility. You're not have something like

that. Um, Oracle is really the only one

that's financing any material amount of

this through debt,

>> my understanding. So, Oracle is is

raising a ton of debt and it's it's, you

know, capital markets are concerned

about this and that and we're seeing

that reflected in the stock price is

essentially underwater since the um

since the the deal with with OpenAI was

announced for my understanding though is

that the other big hyperscalers are

going out and beginning to raise debt.

Um, I mean, we just saw a big

announcement from Amazon. I think we saw

that from Meta a couple weeks ago as

well. I don't know the exact numbers,

but my understanding is they are going

and financing this with a ton of debt.

Perhaps not debt that they necessarily

have to raise. Perhaps they have the

cash surplus to to to finance this, but

they are going and raising debt. And

it's record amounts of debt that they

are raising. Is that wrong? Of the 40

companies I mentioned, there's AI

stocks. 30 are technology what you and I

would agree are technology companies.

Five are capital equipment companies

like GE Vernova that make the turbines.

And then five are utilities. Let's look

at the 30 AI stocks. Something like 25

of them actually have negative net debt

to Ebbitar ratios because they have more

cash and cash equivalents on their

balance sheet than debt. So for the most

part, um the debt's not an issue. The

Oracle is an exception and is in part a

reflection of the fact that or that that

Ellison's been buying back stock for 15

years and you know taking taking money

out that way. At some point Oracle is

going to have to be recapitalized if

it's going to be borrowing like this.

The Meta deal was interesting and when I

explain how I view it, you'll probably

say, "Well, that that's even scarier

than if it was Meta."

>> I hear it. The meta partnership with

Blue Owl that borrowed 27 billion in the

investment grade bond markets was an SPV

with a strange French name and the debts

not consolidated onto Meta's balance

sheet. Initially, I was concerned that

that was some kind of slight of hand.

It's not. It's worse.

They basically have walk away rights

every four years and a declining

residual value guarantee. Blue Owl's

holding the bag. So, Blue Owl is at

risk. If at any point Meta basically

says, you know, this this we're not

getting a return on this particular data

center complex, we're out. And Blue and

the people that have put up the money

for Blue Owl are the ones holding the

bag. So I think S&P was right to kind of

withhold consolidation of that

obligation, but it says it says a lot

about the underwriting discipline that's

taking place in in you know in private

credit and in other places that are

financing these data centers because

they're the ones that are taking the

risk. It's essentially releasing risk

the likes of which you've seen forever

in the commercial real estate markets.

>> So it sounds like someone is on the

hook. In this case, it's Blue Owl and

we're probably seeing equivalence in

these other debt deals. And by the way,

we're seeing this kind of reflect in the

stock right now. Blue Owl is publicly

traded and it's been it's declining this

week. Um, but is the is the conclusion

then? Because it sounds like you agree

with ASW. We are seeing some we're

seeing some form of a bubble. People are

exuberant. There's a lot of hype and a

lot of excitement that isn't fully

tethered to reality right now when it

comes to AI. But it sounds like where

you disagree is the extent and scale of

the damage that we're going to see if

something blows up or at least the

likelihood that there will be some sort

of blowout.

>> Last year was a perfect example. My

forecast for the year was the Trump

people were going to break something.

We'd have a 15% to 20% correction, but

stocks would end the year higher than

where they began. Um it happened within

50 days 50 days of the inauguration.

They broke everything. Um markets went

down. They eventually came back. I I

wouldn't I wouldn't describe any of the

subsequent recovery as as as the

byproduct of administration policy, but

I think I think you and Scott are right,

which is it would be kind of shocking if

you didn't have some kind of profit

taking correction

in 2026 at some point on the order of 10

to 15%. It would be I'd be I'd be really

surprised not to see that. The the big

question is if you told me the draw down

is 12%. I don't really have to make any

substantial portfolio allocation changes

here. We can we can work through that

with the way that we manage money. If

it's 40, that's different. And so that's

the that's essentially the big call that

asset allocators and Orisa plans and

endowments and foundations have to make.

Are we looking at a 12 to 15% correction

or are we looking at something that's

going to end up at 40 right now? uh with

with a little bit of Fed easing and and

some steady momentum, I I'm I'm I'm more

inclined to think of the 12 to 15 and

the 40.

We'll be right back after the break. And

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>> We're back with property markets.

>> I just want to unpack something you said

about the Trump administration would not

have nearly the cloud cover for some of

the things he was doing. If if these 10

companies were off, the S&P would be

flat or down. GDP I the stuff I've said

is that we'd actually be already be in a

recession.

>> Y

>> So he has a vested interest in this boom

continuing, right? I won't even say this

bubble but this boom continuing doesn't

that I feel like all paths lead to the

same place and that is the government

will back the debt to continue to make

these extraordinary capital purchases

which in my view weakens the strength

and integrity of the US debt markets or

treasuries and is like a further move

into socialism. But I predict he is

going to back uh these companies. Not

the other, not the real economy, not the

main street economy, not the 490

companies in the S&P that got to

actually compete in the capital markets.

But he has such a vested interest in the

in the music continuing here that the

government will step in and offer in

some way to back the exceptional capital

expenditures such so they can continue

to make them and that is only inflating

the bubble to very dangerous territory.

your thoughts on that thesis?

>> That would worry me if I saw it. Um I

would they've done a couple things so

far that I would in fairness put in

different bucket. I like I you know

Jamie is a very inspirational CEO and

one of the things I admire most about

him is he calls it like he sees it,

right? So um

they've done a couple of deals with MP

Materials and Intel. Both of those deals

fall under traditional industrial policy

of of trying to rescue supply chains

that are rapidly diminishing in the

United States with respect to domestic

semiconductor production and critical

minerals.

>> I think you're being generous when they

pick one company and take a stake and

they take a golden share in one steel

company. I would argue that is not

structural or there's not a systemic

strategy there. That's the blood sugar

of a man who thinks he can run these

businesses better than the private

sector. I'm going to disagree with you

on that one and NP materials in

particular. Um I mean they they have

provided a price floor on on neodymium

and praise demium which is needed by the

US military. It's the last man standing

in that sector. Um I if you told me that

that an adi a presidential

administration had to administer an

industrial policy to pick winners and

losers,

this might be the last administration I

would want to see do that. That said,

you know, you don't get to pick your

time and place. And as things stand

right now, China has a chokeold on those

critical minerals. And whatever

administration is is in power is

responsible for making sure uh

particularly with China flexing its

muscles on export controls that we start

the process of trying to rebuild both

mining and processing of critical

minerals. If you can't do that, you've

got a wide range of both renewable

energy and military applications that

will soon become untenable. That has to

be done. I I I would have preferred for

Eisenhower to do it. Okay. But, you

know, I'm 63. So, uh I probably would

have preferred for George Bush Senior to

do it. Um right. I'm not sure I would

have wanted Obama to do it. Those I'm

not sure I would have wanted Jennifer

Granholm to do it. Um so, but you don't

get to pick your time and place. Intel

was different. There's there's no

guarantee of demand. There's no price

floors. It's basically just a cash

infusion. And based on everything I

understand about Intel, their problem

isn't money. So, the worst thing about

that one is I don't even think whatever

it is they did is going to be very

impactful.

But I I and I but I do expect to see

more

intervention by the administration

in in companies that represent the the

tail end of surviving supply chains,

whether it's ship building or anything

else. And and I'm actually I'm actually

I'm I'm not a I'm not a heritage KO guy.

So I'm in support of that. you oversee

and kind of set the strategy and the

narrative and the theme for one of the

deepest pools of capital in the world.

What other than just moving to cash and

maybe that's the only thing you can do.

How do you I don't want to say become

defensive but just recognize that

traditionally when stocks are this fully

valued the markets tend to have a pretty

serious correction or go flat for 10

years like how is your recommended asset

reallocation

what has it been what are you

recommending to those deep pools of

capital uh other than just going into

cash

>> so the answer to that question I think

you'll find interesting because it's

less about changing the asset allocation

of of the different portfolios it's more

about explaining to clients that they

they may be better off switching from

balanced to conservative or from growth

to balanced. When we define the risk

contours of a balanced portfolio, there

are certain parameters that we can go

outside of but usually tend not to want

to do. And so if if if we're really

feeling that the risk return of a growth

portfolio is changing, we would rather

have the student body, you know, change

from being premed to pre-law and migrate

down to the balanced portfolio risk

rather than have to turn the balanced

portfolio or the growth portfolio into

something it isn't. because there's

always going to be people with

generational money or or or quite

frankly

this the city of Chicago, Cook County,

Illinois, New Jersey, plans that are

kind of on paper in extreme distress.

[clears throat]

They their inclination is to take a lot

of risk. And so I don't want to change

what a growth portfolio does because

there are people that are going to

allocate to that and have have every

right to expect a growth portfolio to be

positioned the way a growth portfolio

looks. So part of our job is to explain

to whoever wants to listen that that the

risk return is skewing because of where

the valuations are. So you might want to

kind of move down the portfolio chain.

What does a balanced or more defensive

portfolio look like for those I mean

just at a very high high level general

level like what is that portfolio look

like bonds versus stocks

>> you're talking about 30 to 40% of the

portfolio being in some combination

of cash

short-term A1 P1 commercial paper um m

municiples for taxable clients um super

diversified

um hedge funds like 30 to 40 of them

where where like the V turns out to be

something like five or 6%.

Um and uh some preferred stock things

like that. So you you're kind of taking

a lot of the directional beta risk out

of it. Um you you would

>> you know you're obviously positioning

much more defensively. Healthcare is

trading at like the cheapest valuation

on record relative to itself and

relative to the market. So if you're

going to take a position someplace,

go someplace where you can be paid for

the risk a little bit better, you know?

So stuff like that.

>> How is tech uh valued at large right now

in terms of paying you for the risk? The

first thing people tend to do is say I'm

going to look at the PE of tech and then

I'm going to look at the PE of something

else whether it's industrials or basic

materials consumer discretionary or

staples. But for a hundred years people

have been adjusting PE ratios for growth

like for earnings growth and ROE and ROA

and capital efficiency. So if and one of

the things we do and we share this in

all our publications is we plot both

stocks and sectors and industries with

return on equity on the x- axis and

either PE or price to book on the y-

axis. And so

there's a lot more consistency to the

way the market's valued once you adjust

for earnings growth. Now you may think

the slope of the curve is too steep and

I wouldn't disagree with you but to just

kind of look at PE differentials is

really missing the point that even

before this generative AI boom and we

roll back the clock to 2019 the tech

sector had double the margins of the

rest of the market. They had become the

things that the tech investors of 2000

would eventually dream they would be

which is highly capital efficient

lowemployment businesses with huge

operating margins. So that's what they

were even before this whole AI boom

started.

>> Yeah. Something that I was thinking

about after we spoke with Assworth. I

mean his his core valuation tool is the

equity risk premium which basically you

know he's taking the the rate of return

on stocks minus the risk-free rate and

that and he sort of plots that out.

>> Yeah.

>> And you don't you you're not a fan.

[laughter]

>> It doesn't have any nuance to it. It

doesn't look at earnings growth and it

doesn't differentiate between sectors

and you know and it's I understand why

people want to look at it over the

really long run. It can be obviously a

helpful tool.

>> Yeah. I Well, I think it's it's helpful.

It's helpful when you're trying to take

a bird's eye view and understand where

we are in terms of sentiment. And the

thing that kind of surprised me is, you

know, we're at around 3.7% by that

measure. And, you know, to be fair to

him, he says, you know, anything below

4% is a little bit dangerous. But we're

also nowhere near where we were in 99

when it was around 2%. And you know, you

you're someone I mean, you were a

managing director during the the the.com

boom and bust. you were you were the

chief investment officer of JP Morgan

during the 2008 financial crisis. So

you've seen these cycles before and I

think what we're describing here is like

how do we put this in the context of not

just tech versus industrials versus

consumer but how do we put it in the

context of all of history and what does

this look like compared to previous

crises and previous cycles.

>> I couldn't sleep

in March of 2008. like I couldn't sleep.

Um the things that we were seeing on a

daily basis were so bad.

Um and and we knew that it was infecting

the entire like network of the financial

system and we went underweight both

stocks and high yield. The only mistake

we made is we didn't do more of it. Just

to show you how hidden those risks were,

JP Morgan, which is an exceptionally run

bank, bought a couple of billion dollars

worth of Fanny and Freddy preferreds

that summer for its own balance sheet

three months before they went to

conservatorship. Right? So that's how

hidden the the depth of the problems

were. Um 2001 was easier because the

companies weren't making any money. And

so as long as you had some degree of

discipline and support from your

investment committee to to to go through

a period of temporary underperformance

as the market was rocking, you did fine,

right? And so that in a way that was the

easiest one. Um uh I I remember

um we had this annual MD meeting and um

the chairman at the time invited a

company to come speak to us in 1999. He

invited a CEO to come on stage and

address all the MDs and he was the CEO

of a company called the globe.com. So I

pulled up the globe.com on Bloomberg and

I hit dees and it said this company has

no business model at the time. [snorts]

So we're sitting there like the chairman

has invited a guy who runs a company

with no business model to address us. I

think we're underweight now. Right. I

mean so that that was [laughter] pretty

easy. Th this this is this is a harder

one.

because you know in many ways Google's

one of the most successful companies in

the history of the markets. Um I I

personally think their AI related

language model products are better than

everybody else and I think they're the

long-term winners in this race. And so I

I have a lot of respect for what that

company's accomplished. Um you know I I

I have similar feelings about what

Amazon and and Microsoft are doing. Um,

but like Microsoft signed a deal

recently

with Constellation Energy to turn back

on a nuclear power plant in um,

>> Three-Mile Island.

>> Three Mile Island. They've agreed to pay

something in the neighborhood of $130 a

megawatt hour. Now, most of your

listeners don't know what that means.

That's double wholesale power prices for

for an average 20-year, you know, PPA

agreement. The other risk that we need

to acknowledge is we're getting closer

to a power wall

that will prevent OpenAI from getting

anywhere near like they've announced

partnerships with Broadcom, Oracle, AMD,

and Nvidia that would require 30

gigawatts of power, which is the

equivalent of 16 Hoover Dams. Like,

that's just not going to happen.

>> [snorts]

>> So what what we're trying to figure out

is how much of what's in the price of

this whole AI boom is the expectation

that these announcements are actually

going to come to fruition under some 3

to 5 year time frame because it's

impossible.

>> Yeah, it seems it seems kind of obvious

to almost everyone that the I mean if

you look at the numbers when you see the

the amount of power that it's going to

take to build out AI the way OpenAI

would like it's like oh yeah that's

that's not possible. And you know, one

of the things that we've been talking a

lot about recently is that crazy

interaction between Sam Alman and Brad

Gersonner. I don't know if you saw this,

where Brad Gersonner says, you know,

you're going to spend, you're making $13

billion in revenue. You you plan to

spend $1.5 trillion over the next few

years. How are you going to pay for it?

To which Salman responds, if you want to

sell your stock, you can. Be my guest.

There are plenty of other buyers out

there who would love to buy OpenAI

stock.

>> [laughter]

>> It sounds like what happens when when

there's a syndicated loan

um distribution now on Wall Street,

there's so much demand that if you if

you press the button that says on the

syndicate call, I have a question about

the documents, you get disconnected.

Like if you have a question on the docs,

we you don't need to be part of the

syndicate. So that those I would agree

with you. Those are the signs that are

kind of telling me that we've entered

into a period where where the the

risk-taking isn't there. Um that the

underwriting has gotten sloppy. Um when

we look at like in the inards of the

private credit markets, private credit

five years ago was substantially

different than leverage loans in really

boring ways having to do with

maintenance covenants, IP blockers, and

all sorts of stuff. And over that 5year

period, it's converging rapidly towards

the leverage loan market, which

basically doesn't apply much of an

underwriting

wall at all. You know, so we're we're

we're kind of preparing for a uh um

profit taking spark that comes from

things we might not be able to

anticipate,

a violent, you know, correction in over

bid assets.

um and then some period of kind of

recovery and calm that follows.

>> In a previous life, Michael, I used to

take boards and management teams outside

and do scenario planning as as an

exercise for how they allocate their

capital. And if I were going to do this

for a bank or anyone else, there's a

couple scenarios I want to outline and

you tell me if they're realist

realistic, if you think they might

happen, and if so, how to respond.

The first scenario is all right. Built

into these baked into these valuations

of these AI companies is what I've read

the assumption that they're going to be

able to find or inspire across their

clients 3 to 5 trillion in incremental

revenues or efficiencies. Now I don't

see a lot of AI moisturizer out there.

What I do see is companies saying okay

we're cutting our legal expenses. We're

cutting compliance. There's real savings

and efficiencies. which is sort of Latin

for layoffs. And if you think that 160

million people in the nation work, if

half of them are in industries immune to

AI, chiropractors, you know, welders, 80

million are quote unquote vulnerable. If

you were to not inspire, which I have

not seen, a ton of incremental revenue

growth from AI products, but but all

efficiencies, say a trillion a year,

$100,000 average load per job, you're

talking about a destruction in the labor

market of 10 million jobs a year across

the 80 million jobs that are vulnerable

or a 12 a.5%

labor destruction per year in certain

industries, which may not sound like a

lot, but that's chaos. or or these

companies valuations get cut in half. I

I see this as a pretty definitive fork

in the road. Either pretty much chaos in

the labor markets for the next 3 years

or these companies adjust down their

expectations and valuations.

What are your thoughts on that scenario?

>> Those are some important questions. Um

[laughter] that says it all.

The first kind of thought piece that

OpenAI published after GPT was released

was a piece that kind of jumped out and

said Generative AI is going to be

complimentary to workers and not

destructive. And I remember thinking,

uhoh, it's going to be bad [laughter]

because they they they they they were

ready to go out of the gate with a paper

to defend the labor market of this stuff

like right away to try to get out in

front of it, which which which

demonstrates that they kind of knew what

this would would be able to do to

certain industries. You know, the other

thing that happened uh and I wrote about

this a couple months ago, there was a

couple of papers that came out. There

was there's this chart showing that the

um unemployment rate for reaching

college graduates for the first time in

about 60 years is higher now than the

overall unemployment rate rather than

lower. So the first two pieces that come

out say it has nothing to do with

generative AI. So you know you go to the

back and you like who wrote this piece

and as you unravel the threads they're

Silicon Valley think tanks. And so then

I kind of went to David Our and Darren

Osamoglu at Harvard at MIT and and um um

John Bjolson at Stanford. You get a

different answer which is yes, it's kind

of looking like generative AI is

beginning to affect um uh those young

college graduates. So so we're starting

to see that. We made this pyramid of

things about AI and the bottom of the

pyramid is the most ubiquitous thing you

can find which is like futurist

forecasts and all sorts of stuff and

then as you go a little narrower it's

um study lab studies of AI doing non-b

businessiness related things. They're

great, right? It's it plays chess. It

plays go. It plays It can do all sorts

of non-b businessiness related things

extremely well. It can play your Wordle

for you, right? Then now let's see how

does it do in actual business related

tasks. Pyramid's getting narrower, but

there are some studies out there showing

this in a lab setting. Then you want

like surveys of adoption, but then you

get those kind of bland, you know, cream

of chicken soup pieces from McKenzie

where all they do is call companies and

say, "Hey, do are you using it?" Right?

And you [snorts] don't really learn

anything from that. And then you keep

going up the pyramid to hardcore stuff

where what are the revenue and profit

and productivity consequences of doing

this stuff? There's only a handful of

those. And what you can't find at all is

the top of them pyramid which are

pathways

explicit pathways to profitability for

generative AI adoption for the

hyperscalers. [music]

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>> I think China's pissed off. I I think

they're sick of trying to figure out the

US China relationship, plan their

economy, and they're diversifying away

from us. 24% of their exports used to

come to the US, now 17. But they really

feel as if they have, I believe they

feel we have declared economic war on

them. and that they are going to punch

back. And one way they might punch back

or what I would do if I were she, we run

companies for profit. They sort of run

companies for control and geopolitical

advantage. And if I were them, I would

begin a government sponsored drive of

capital and strategy to essentially

engage in

what in the 80s they did with steel, but

with AI and engage in massive AI

dumping. and that is create a ton of

LLMs that have near par technically to

US LLMs and then dump them into mark the

market you know uh kind of these openw

weight open-source LLMs that basically

do what China does and that is offer 95

97% of the premium high-end US product

for 5% of the price and then essentially

cut go for the jugular just flood the

market with openweight LLMs and AI

products for nearfree that takes down

massively erodess the margin power of

these companies takes them down and

thereby takes the US economy down. Your

thoughts?

>> So the the outlook for this year has

four major risks. Number one is the

power constraint wall. Number two is the

thing you just said which is that China

basically scales the moat on its own. As

as recently as three years ago that

scenario you just described would have

been impossible. Um, China is the

world's leader in a lot of things. You

know, fish, they've made more fusion

advances. They're ahead in genetic

testing of certain new drugs. They have

there's a really cool thing that looks

at the complexity of exports. Um, it's I

think the it's one of the Harvard labs

that does it. They've converged now with

the United States. So, the complexity in

the industrial complexity and

sophistication of their exports has

matched that of the United States. But

as recently as 5 years ago, they

couldn't figure out the semiconductor

thing. And the through a combination of

ingenuity and theft, they have now

acquired um a lot of things. There's a

long list of people that used to work

for for you know either TSMC or ASML

that are now working for Huawei. And

Huawei has announced that next year they

expect to sell to your points got a chip

cluster

that matches or exceeds the performance

of what you can get from Nvidia.

Um now it's got more it it matches the

power the chip on a per chip basis. It's

only let's say a third as powerful but

they say fine we'll just use three times

as many chips. And so that's they're

they're trying to use a combination of

brain and brawn to do that. I I that

feel that kind of still feels twina's

on a really long-term journey and I

would agree that that is very much

explicitly their goal. I want to talk

more about the your 2026 outlook. Um so

you mentioned that the number one risks

or the number one risk is power

constraints. We don't have enough power

to build all the things that we want to

build particularly AI. You said number

two is China. Uh what else should we

know in terms of risks?

>> Well, the two other ones is the the the

more that China is able to

[sighs and gasps]

rely on its own chip ecosystem, the that

means that number three risk has to be

Taiwan because um you know the the

Taiwan essentially was always

protected by the fact that China relied

90% for its advanced chips on Taiwanese

output. you know, the the day we wake up

and that number is below 50%. I think

you have to start to re-evaluate some of

the geopolitical contingencies around

this whole thing. Um, there's great

work. CSIS is the best think tank in the

world on this kind of stuff. And they

showed us some data. Something like 85%

of Chinese military assets are in the

Taiwanese Strait. They have been

partnering with Russia to do drills on

how to drop heavy equipment out of

specially designed parachutes from

helicopters. Um, you know that this is

this is moving in another direction in

another clear direction here. Uh, and

again, you don't know when and you don't

know how and you don't know why. And

maybe it's a quarantine, maybe it's a

blockade, maybe it's not a full-out

invasion. But there are going to be some

challenging times for the west

within the next 5 years as it relates to

its almost exclusive reliance on this

you know Nvidia ASML TSMC partnership.

And then the fourth one is the stuff

we've been talking about which is this

kind of collective

metaverse moment where investors in

aggregate say like okay it's not a waste

of money but the we don't we can't see

the ROI we're going to take profits

until we have a clearer vision of of

where this is going. I I'm still digging

through it. There was a for every good

paper there's a negative paper right so

that for every good paper on AI adoption

there was one that you should read it it

came from this group called MIT Nanda

NDA

>> yeah the 95% one yeah

>> yeah like you know I read through the

details on that one that uh those are a

lot of companies that that kind of tried

it played around with it and said you

know what we're just going to keep doing

things the way we're doing them

>> the other um thing that the outlook

mentions there are three forces that

will define next years market. Um they

are according to your report AI. We've

discussed that. I think everyone

understands that global fragmentation

and inflation. Describe global

fragmentation and inflation for us.

>> Let me just summarize by saying like the

the Fed is is facing a peculiar fork in

the road here. It's not a violent

differential, but there's a meaningful

differential right now between we look

at the PMI surveys, right? The ISM and

PMI surveys of prices paid. those are

going up. Uh the PMI survey is on labor,

they're going down, right? So what's a

Federal Reserve to do when you have a

dual mandate that are going in opposite

directions? Um historically, the Fed has

almost never cut rates when prices paid

surveys are going up. Why would they,

right? I mean, you'd be easing into an

inflationary environment. Um it looks

like they're going to do that and it's a

it's a huge gamble. Um the gamble is

that the inflationary increase is tariff

related and once it makes its way

through the system it will not ignite

some kind of wage price spiral and

inflation will be coming down by the

spring and the Fed will be vindicated.

But that's that's a big bet and that's

the bet that's you know that we're

looking at as we're heading into you

know the end of the year and early next

year and the markets are pricing in a

couple of cuts here uh because of that.

Um, I'm I'm less worried about tariffs

than immigration policy as it relates to

this stuff we're talking about. I I

think the president is less committed to

some of these things than he appears to

be. Um, they're they're already adding

massive numbers of products to the

exemption list of tariffs. So, I think

the tariff stuff will turn out to be

less damaging.

But the um the latest data from the Fed

is that 50,000 payroll growth is is is

inflationary. Like the nu of inflation

for wages is 50,000, right? So they

Yeah, they shut the border. We all

understand what political forces they

were reacting to. But the United States

needs people to grow. And if if if you

get wage inflation at 50,000 payroll

growth, you have a labor supply problem.

And so they're they're gonna have to

they're gonna have to make a change

soon on that one or else they're going

to have bigger problems.

>> Yeah. The report also says it says um

tariffs are here to stay no matter what

the Supreme Court rules. What are you

thinking about in terms of the Supreme

Court ruling on tariffs right now?

>> You know Gorsuch has been kind of

tilting his showing I don't know the

poker analogy because I don't play I

don't gamble. Um but what what is is it

the thing where you hold your cards and

people can see what you have or

something? I mean, he's he's been

showing his cards a little um during

during the hearing and um I think he and

Barrett will side with the Liberals and

um that would reduce the effective

tariff rate from like 15 to 7 and then

they would try to replace 2 or 3% of

them with some other clauses, but a

bunch of them get defanged and are not

so easy to replace. Do you think there

might be a ruling where they have to pay

back the tariffs to the companies the

tariffs were imposed on?

>> I do over some period of time and you

know they would make that as difficult

as possible and you know that it would

be extremely messy um you know it would

be you know think think about the

messiness of the PPP loans as people

started to kind of clean up after them.

I mean the it's it's it's a messy thing

to do. And of course the the Doge people

cut a lot of the staffing as it relates

to the enforcement and tracking of this

stuff. So one of the reasons the tariffs

haven't been quite as much of an impact

on the economy is a lot of companies are

recategorizing goods so that they fall

under different tariff buckets that they

may not necessarily supposed to apply

to. But if you've gutted the enforcement

of the people that look at that then

that's what companies are going to do.

So, um, you know, earlier in the year, a

lot of people were trying to convince me

that there was this holistic vision that

they had about what they were trying to

accomplish. And I'm I'm I've struggled

with that because I see too many

policies that conflict with each other.

Like, if you're really trying to attract

foreign direct investment, why would you

expel all of those South Korean factory

workers? There's just too many policies

that don't seem to be aligned with what

the administration says its goals are.

So, which has given me less confidence

that that they that there's a kind of a

a playlist here that is all adding up to

some big coherent grand vision. You've

got to work over time to justify how it

all makes sense and how it all plays

into a specific strategy and then which

leads you to believe okay that's not

what's happening. This is this is policy

by tweets.

>> If you have time on the weekend and you

really want to, you know, read something

interesting, the Washington Post had an

editorial recently from every single

living prior surgeon general about what

they thought about the leadership at

HHS. And uh I'm not going to go into any

more detail. [laughter]

Okay, we'll check it out on our own

time. Um just start Final question from

me. Scott might have one as well. Um,

we've talked about some kind of

concerning stuff on this podcast and you

said that you thought it was, and

correct me if I'm wrong, you thought it

would be unlikely to see some sort of

profit taking event to the tune of 10 to

12 to 15%.

>> No, that's the one I thought was likely.

>> I I misspoke. That's what I meant. That

is a likely scenario. You That's almost

your base case for next year. and

perhaps there is a a more shocking event

like 40%. But you're thinking, you know,

you're going to see 10, 12, 15%

correction. Um, for for someone who has

kind of a regular portfolio, a regular

investor who is, you know, dollar cost

averaging into the market, into the S&P,

they've been doing that for a few years,

maybe they haven't looked at bonds too

closely in the past. What is your

general advice for those people going

into 2026? How should they think about

their portfolio and how should they

invest right now?

>> Well, you know, based on what we've just

discussed, it would make sense to start

accumulating some

dry powder to take advantage of whatever

opportunities may exist. A lot of times

when you get selloffs like that, a bunch

of things sell off. All of a sudden, you

start seeing industrial and utility

preferred stock sell off two to three

points, which is can be the equivalent

of 50, 60, 80 basis points. So, you

know, um having having some spare cash

and and and credit to be able to draw on

when these things happen can be helpful.

Um a lot of these things tend to be very

v-shaped, right? If you look back at

almost every single one of these

corrections, including the one that

happened last year, there's this rapid

violent unwinding of risk. Uh I think a

lot of the hedge fund, the big risk

parity funds are kind of um partially

responsible for that. But then it tends

to snap back where it comes back roughly

at the same speed at which it declined.

In in that regard,

individual investors have an advantage

over some of the large institutional

investors. I mean, the average the

average endowment or foundation meets

quarterly. They're they're not even set

up to respond to some of these things.

>> Yeah.

>> So, um I think it's, you know, in retail

investors have at least the flexibility

to try to act when these things happen.

>> Make the bull case for 2026. you start

seeing more concrete evidence of of AI

adoption

that companies are willing to pay for

and

you you you start seeing

productivity benefits that are based

equally on revenues and not entirely on

the backs of lower rates of hiring. Um,

China starts to cut back on its excess

production policy. They announced this

involution campaign a few months ago

that's designed to make Chinese

companies more profitable by telling

them to stop overproducing. I'll believe

it when I see it. Um, you get fiscal

stimulus in Europe in part because Trump

is basically forcing them to defend

themselves. Uh, another policy that I

think is long overdue, um, Europe agreed

in 2006 to spend 2% of GDP on defense

and it took them until 2021 to finally

get there. And, uh, so you're starting

to see more defense spending in Europe,

which is stimulative. And um and then in

the US the Fed is vindicated

where inflation starts to roll over

aided and emedded by an enormous amount

of multif family and single family real

estate supply uh pushing down housing

related inflation.

and and the administration figures out

through some combination of relaxation

in certain regulations and things like

that

to to ramp up US oil and gas production.

So energy prices come down. So that's

that's kind of your your bull case.

Michael San is the chairman of market

and investment strategy for JP Morgan

Asset and wealth management. a global

leader in investment management and

private banking with $6 trillion dollars

of client assets under management

worldwide. He's responsible for the

development of market and investment

insights across the firm's institutional

funds and private banking businesses.

Michael joined JP Morgan in 1987. His

previously served as chief investment

officer for the firm's global private

bank and head strategist for emerging

markets fixed income. And you can

discover more of his insights by reading

Eye on the Market or listening to his

podcast by the same name, Michael. Uh,

always really insightful. Uh, really

appreciate your time. Thank you.

>> Good to see you, Michael.

>> Thank you very much. Good to see you,

Scott.

>> Ed, what' you think?

>> Uh, I thought that was very I He knows

everything, which is so It's so helpful.

Um I mean he's kind of overseeing one of

the largest

portfolios in terms of

aumumumumumumumumumumumumumumumumumumumum

in the world. So I mean he's got so much

data.

Um I I I'm

I think I agree with him on pretty much

everything he said. I mean our reactions

to interview I thought it was really

striking but I didn't feel quite as

bearish um as as Professor Deodum was

when we interviewed him. I feel like

Michael's sentiment is more where I'm at

right now in terms of valuations. Um,

where I'm kind of expecting some sort of

correction, but not something that is

kind of going to cause a a major major

crisis. So,

yeah, I thought that was informative,

made me feel maybe a little better. I

think he's very measured because he the

last thing he wants to do is spook, you

know, the $2 trillion in value or in

assets they oversee. But he sounded

he sounded measured and a little bit I

don't want to say nervous but and I

might be it might be just confirmation

bias but whether it's Sam Alman or Alex

Kart getting defensive or deodorant

saying

Asworth is the least panicked person

I've ever met and and then Michael sort

of Michael seems really measured not to

a fault but really measured like Okay, I

don't want to I don't want to spook all

the capital I oversee, but I'm having a

tough time defending this market. Um,

and I think part of the reason he's in

the position he is is this guy is just

he's very measured. He just doesn't

scare easily, right? But I don't know.

And again, I I can't figure I can't sus

out [snorts]

like when I hate everyone around me, I

know it's my depression. like when I

literally hate everybody. Um I know it's

my depression speaking and I'm pretty

convinced now we're in for a serious

pretty rocky road in the next 12 months

and I can't I can't sus out my old man

boomer anger from the actual data. But

the data I just think looks I think if

the market goes down 40% if the NASDAQ

goes down 40% in the next 90 days or 100

we're going to be like well of course it

did. I think it's going to be

like the most obvious thing in the

rearview mirror that it happens. So, but

anyways, back to Michael. I I like him

because he's measured and just I like

that he pauses and thinks about

questions. He wants to answer them

answer them correctly.

>> I appreciate that too. Yeah. And and you

know what he saids with what you're

saying. I think he he is anxious and

kind of expressed that. I mean, he said

that his base case is a 10 to 12 to 15%

correction, which is kind of a big deal

in and of itself. I mean, the question

is, do you think it's going to be like

that or do you think it's going to be

40%, which again, he didn't rule out. He

said that it was unlikely. He doesn't

think it's going to happen, but he

didn't fully rule it out. I think the

the the the part that he's gotten right

is that there is crazy amounts of

leverage and debt that's being

accumulated, but only in certain

contained spaces. So, he mentioned

Oracle. I've talked about how Open AI,

they haven't gotten there yet, but

they're going to have to raise huge

amounts of debt in order to support the

amount of um AI that they want to build

and and spend on over the next few

years.

uh he mentioned Blue Owl and the idea

that Meta is raising debt but using

these SPVS to sort of protect

themselves. So I think where he's

probably right is that the debt and the

leverage that we're seeing isn't quite

as systemic as we've seen in previous

crises which is probably going to be a

good thing. It means that whatever

correction we see is going to be at

least more contained than it has been in

previous crises. I think that's quite a

a a sound analysis. The question then

becomes, well, how much more debt are we

going to see in the pipeline? I mean, is

it just Oracle or are we going to start

seeing crazy amounts of debt from Amazon

and Microsoft and Meta? Are they going

to ramp it up? Um, that that that's sort

of the next question. But in terms of

his views on like what the implosion

will look like, um [music] I think he I

think he's pretty spot on.

Thank you for listening to Prof Markets

from Prof Media. If you liked what you

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a fresh take on markets on Monday.

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