Hey, this is Steve Eisman. This is

another episode of The Real Eisman

Playbook. There are just so many issues

going on these days. Crossurrence,

politics, war. But from an economic

perspective, I think the biggest issues

are the impact of AI,

re-industrialization,

short-term, the so-called big beautiful

bill, unemployment,

the deficit, and the overall investing

environment. And these are major issues,

and we've actually never had an

economist on to sort of plow through all

of them. So today I've invited Torstston

Sllock who is the chief economist of

Apollo, an excellent economist and we're

going to go through a ton of issues and

afterwards I'm going to come back and

talk about lessons learned. See you

soon.

Hi, this is Steve Eisman and welcome to

another episode of the real Eisman

playbook. So there's so much going on

these days. AI,

K-shaped economy, oil prices,

the deficit. I mean, it it's just hard

to keep up.

>> So, today we have as our guest chief

economist at Apollo, Torson Slack, who's

going to help us, I hope.

>> I certainly hope my best to go through

what must be like every day, you can't

believe how much information is coming.

So, Torson, welcome first of all.

>> Thank you, Steve. Thanks for having me.

So let's start with

a simple topic. Give us your very broad

overview about the health of the US

economy. A simple question.

>> Well,

>> and then we'll then we'll dig deep.

>> Well, thanks all again first for having

me. But it's really quite simple

initially. What is the headwinds and

tailwinds to the economy at the moment?

Because there are three very important

tailwinds that are driving growth. First

of all, we have an AI spending boom

because of the data centers and the

energy associated with the data centers.

We calculate that that contributes at

the moment about 1%ish point to GDP

growth. Normally GDP growth at two and

now 1% is coming from the AI spending

boom alone.

>> So in other words, GDP growth this year.

>> You estimate up about two and 50% of it

is purely from AI spending.

>> Absolutely. So that's both the boom

coming from the data center and energy

buildout, but also the associated wealth

effects from the stock market being high

and the increase in consumption,

especially for high-end consumers. So

this is a very important source of

growth. That's very unusual. We have not

seen this source of growth for literally

decades before where we've seen one

sector in such a significant way

contributing even with housing. We

didn't see a contribution that was as

high as 1 percentage point because this

sector is just really really

significant. The second source of growth

is the industrial renaissance.

Industrial renaissance means politicians

that want to do home shoring or

production of semiconductors. This was

the chips act under Biden home shoring

of pharmaceuticals prescription drugs

and of course importantly also home

shoring and production of defense. You

know, I've had industrial economists on

and when I would ask them, is there

evidence

that of of this? In other words, people

building factories in the United States,

their response generally be that was

that literally. So you're saying it's

stronger than eh. It is a bit stronger

than a it only adds 0.3% GDP. So not a

full percentage point like the AI

spending boom, but we are seeing

especially after the chips act, we saw

significant increase in manufacturing

capacity for semiconductors and we've

also seen significant increase in

capacity for manufacturing generally. So

that means the ISM in the last five six

months has started to go up. So the

manufacturing sector is doing a little

bit better than a but it's not as big a

source of growth compared to the AI

spending boom.

>> So 1% from AI

>> 0.3

>> 0.3 from re-industrialization.

>> Exactly. From the globalization

reversing.

>> That's out of two.

>> That that's out of two. And then the

last thing we have is 0.9 coming from

the one big beautiful bill. Remember the

one big beautiful bill which was signed

last year. It lowered taxes

retroactively for consumers so that

taxes were lowered starting January 1,

2025. The consequence of that is when

people are filing their taxes this year,

both those who did in April and those

who had extension, last year the average

tax refund was around $3,000 and this

year the average tax refund for

households is about $4,000. That means

over the next 6 months we will continue

to see consumption do really well.

That's a very strong tailwind coming to

consumers because of the one big

beautiful bill that was implemented last

year.

>> So let me pause you on that one. Okay,

I'll grant you that. But that that's one

time.

>> That is indeed one time.

So 2027

90 basis points of growth. If what

you're saying is 90 basis points of

growth this year is from the one big

beautiful bill next year it's not going

to be there.

>> That's absolutely correct. So it will be

smaller and that's why if you add those

things up AI about 1% the industrial

renaissance about 0.3 and 0.9 from the

one big bill you get to a little bit

more than 2% this year right

>> but what's most important about these

three different sources of growth is

that they are not sensitive to interest

rates. Right? In other words, this is

not your traditional economic situation

where interest rates go up and the

economy slows down. We are seeing the

sectors that are sensitive to interest

rates, namely housing and autos are not

doing well because they are very

sensitive to interest rates that have

gone up in the front end and in the long

end of the yield curve. But at the

moment, because these sources are not

sensitive to interest rates, that's why

Kevin W is dealing with a strong

economy, high inflation, that's why long

rates continue to be high because the

economy is just not slowing down. So

that's why you're right when we come to

2027 that's a different discussion but

for the next 69 months we still have

strong tailwinds coming from the AI boom

strong tailwinds from the industrial

renaissance and strong tailwinds coming

from one big beautiful bill

>> okay so since you brought up wash let me

press wash a little bit given all what

you've just said would you agree that

the probability of the Fed cutting rates

this is zero is zero

>> yes

>> zero

>> zero it's not going to happen

>> not going to happen economy is too

strong inflation is high for a number of

different reasons partly because the

economy is also because of tariffs, also

because of of course oil prices that

have gone up and we're also seeing now a

contribution to inflation of 0.3 coming

from the AI and data center buildout

because semiconductors are more

expensive, labor to build data centers

is more expensive and you also have

equipment is also more expensive and

energy also being more expensive is also

adding to inflation. So there is

literally zero chance that he will cut

interest rates this year.

>> How about raise them? Well, the market

as we speak today are pricing that the

Fed will be hiking rates in September

and in December. So that's two hikes.

Wow. So that's pretty a shift. It is

very dramatic shift. As you and I know

very well, in the beginning of the year,

the dot plot was clearly saying that the

Fed is going to cut cut cut and rates

are going down. And now suddenly we have

a situation where the market is pricing

that well maybe especially after his

latest press conference where he said

I'm not going to give any forward

guidance. And when you don't give

forward guidance, the market has to

start guessing. And that's why you and I

are now guessing and the best guess that

the market has at the moment is that we

will see hikes coming because the

economy is really strong and we have

some upward lift. Inflation at the

moment is 3 and a half%. That means we

have some strong tailwinds not only to

GDP growth also to inflation and that

just makes it impossible for wars to cut

rates over the next 6 months.

>> Sounds like that's pretty bad for

housing.

>> Well, because housing is

>> not that housing is so good right now

either. You are the world expert in this

of course but it is absolutely the case

that housing lives and dies on what's

going on with mortgage rates and housing

is already experiencing very little

supply. The home builders have been very

reluctant to produce and create more

housing. And if you're on top of that on

the demand side also have that rates are

very high for a very long period because

we now have a strong economy and upward

pressure on inflation. It is indeed the

case that the most sensitive parts of

the economy, housing and autos are just

not doing very well at the moment. And

we expect that to continue because the

growth is not coming from traditional

sources of growth that are sensitive to

interest rates. It's coming from these

really unique three areas of the AI

boom, the one big beautiful bill, and

the industrial renaissance. All right,

so let's dig down into AI a little bit.

So tell me if you agree with this or

disagree with this. seems to me, I mean,

not a day goes by that something

dramatic doesn't happen with AI. It's

it's kind of it's pretty hard to keep

up. I get the impression

that at least part of the AI story has

really dramatically changed in the last

I would say not even more than a month.

And I would say it's along two vectors.

One, and this is what I'm curious what

you think about. Number one, this is now

a very capital intensive business. You

know, last year, for example, Google

spent 80 billion on AI and basically

funded it from its own cash flow. And

this year, they're spending 190 billion

and they just raised 85 billion in

equity. And so, you're starting to see

more and more companies raise capital

because the the demands on their balance

sheets are just so huge. So, that's new.

And the second thing which maybe is even

more important is I get the impression

that there are no moes in this business

that people flip from Gemini to Claude

to chat GPT. So you're talking about

massive companies spending trillions of

dollars for something that may have no

moes and

that's not a recipe for longevity. So I

I'd be curious what you think about

that.

>> Yeah. So absolutely on the first point

if you look at the free cash flow for

the hyperscalers has absolutely gone

from being very very high and literally

is dropping down over the next 6 12

months towards zero and it might even

begin to go negative because the capex

requirements which is so massive

>> it's very very very substantial and

these are and continue to be very

profitable businesses especially the

magnificent 7 of course which we have

most information about have had

significant cash flows have continued to

do so well and they have now decided to

spend an enormous into the trillions as

you're saying in terms of spending on

data centers and the energy buildout

because they really view this clearly as

existential that they got to have the

capacity the computing power that is

needed in this case of course to deliver

all the demand for compute that's going

to come along and to your second point I

think actually my second point is more

important because if there were moes

let's assume that there were very high

moes as an investor I would say okay so

you're going to spend a lot of money but

you're going to spend a lot of money and

I'll give you

because at the end of the day, you're

going to have a business that's a

duopoly or or or very well protected.

But if you're asking me to give you

money for a business that has no moes, I

don't want to give it to you. I' I'd

rather I' I'd rather buy Cisco that's

going to supply you is the analogy that

that that I've drawn is it's kind of

like comparing airlines to transdime.

Airlines is a terrible business because

it's very capital intensive and you have

and you have no pricing power and

Transdime which supplies parts to

airlines is a great business. So I'm

just curious as an economist if if if

I'm right what does that mean? What's

exactly most important about this

discussion is exactly are there no modes

for everyone or is it just modes for

someone

>> for the hyperscalers?

>> There could be some of the hyperscalers

that will end up being the winners and

others who will end up not being the

winners. In other words, there are

clearly modes in the sense that there

are some including of the private

hyperscalers that have clear pricing

power and clear products that they are

rolling out in a very substantial way.

But the question becomes of all the

capacity that's being rolled out. Is

that all going to have modes or in other

words, are they going to have pricing

power? Are they going to have special

products? Or is there a scenario as

you're saying where you can begin to

worry about that some of them may not be

able to survive in this situation even

though compute demand continues to go up

which is absolutely indisputable that

there will be almost unlimited compute

demand. The question is what is the

price that they're going to generate? In

other words, what's the revenue they're

going to generate on that compute

demand? Because if the price of compute

the price of tokens keeps going down

towards zero, then it may absolutely be

the case that there are some modes that

might be a lot more shallow or be much

smaller. I mean, let's imagine that one

of the companies that has no modes is

chat GPT, Open AI, just hypothetically.

I I've got no skin in that game, but and

that one day Open AI is in huge trouble.

The ramifications of that because so

much of of what's being spent is related

one way or another to open AI and and

and and anthropic are massive. I mean

Oracle, for example, has a a 600 billion

backlog, but half of the backlog is open

AI. I mean, it's a little scary what's

going on. But the added issue here is

also because from a pure competitive

perspective, the competitive landscape

is also dominated not only by the names

we're talking about here in the

hyperscalers. But remember also that a

lot of this also happens to then turn

into more open-source models including

Chinese models, right? So that means

that if you are a business and you say I

need some compute to do some things for

AI, well are you willing to instead say

it may be that the price of tokens say

from a Chinese model is only 1% of what

is the price of a token from a US model?

It still raises some important

questions. Are you still willing to go

after the cheap model because it runs

the risk that you have to upload your

data into say Chinese models and

therefore into something that could

become a much bigger issue rather than

just thinking about the cost. So the

mode is also and should also be in my

view thought of as there is also this

proprietary discussion about you're

right the data is transferable the

models are replaceable and they can

replace each other very easily but it

still ends up being a discussion that

those that have the cheapest tokens at

the moment at least they are certainly

the Chinese models and that becomes

important because a lot of businesses

might be able to say and willing to say

you know what I'm willing to pay for the

mode over here and for the fact that

this is a good service because this is a

US service rather than running the risk

of doing this is an open source model or

in a Chinese model. So from that

perspective, there is some unique um

characteristics by the US hyperscalers

relative to the hyperscalers especially

again from China.

>> Okay, let's switch gears. Let's talk

about the K-shaped economy, the K-shaped

consumer. Why don't you first define it?

I mean, people throw this term out all

the time, and half the time I I think

that when they when they throw the term

out, they don't even know what they're

talking about. So I say to you person

K-shaped economy K-shaped consumer

define this for me like what is this all

about?

>> This is all about three things. Number

one is about a K-shaped situation in

wealth that high income households today

relative to 2019 have literally savings

that are trillions of dollars higher

than where they were in 2019. Lowillions

trillions about one and a half trillion

dollar higher than where it was in 2019.

That's why the airlines have been saying

quite simply basically that they have no

problem selling business class tickets

to high-income households, but they're

having some challenges selling business

class tickets, sorry, economy class

tickets to low-inccome households. Okay?

Because low-income households, the

bottom 20% of the population, people who

make less than $25,000 a year, their

savings cumulatively as a group today is

literally in dollar terms exactly the

same as where it was in 2019.

>> So what you're saying is people 25,000

below have no more savings they had in

2019. in nominal terms.

>> And people at the upper end have a

trillion and a half more savings. That's

an enormous disparity.

>> And that's because people at the upper

end have been benefiting from three

things. Benefiting from stock prices

going up, home prices going up, and

people at the other end also own fixed

income. So when the Fed still has

interest rates high and still talk about

raising interest rates, that means that

the cash flow you get as a high-income

household is at the highest level in

fixed income that has been in decades.

That means that high- income households

are not only making money on their

stocks and on their home prices, but

they're actually also making money on

the cash flow that they get because some

Apollo funds pay like 8 n 10%. And those

returns you can get in private credit,

public credit, and fixed income is

basically at the highest level we have

seen literally in 20 25 years. So for

that reason, high income households

continue to benefit both from asset

price inflation and also from cash flows

being very very strong. So this is the

first answer to your question namely

when it comes to wealth there is a

K-shaped situation and that continues to

the legs are just getting longer in the

K if you will because the stock market

obviously continues to do well and the

cash flows continues to also do well

there is now also a K-shaped situation

secondly in wage growth the Atlanta Fed

has wage growth measures across income

distribution and people at the bottom

are seeing lower wage growth relative to

people that are in the middle and higher

think income distribution so that means

that the Kship situation is not only in

wealth it's also in income growth and

finally There's also a case shift

situation when it comes to inflation.

The New York Fed has measures for

inflation across income distribution and

people at the bottom of income

distribution then spade a bigger share

of their consumption on food, energy and

housing and these have seen a much

bigger increase in inflation. So people

at the bottom are also facing a higher

inflation rate related to people at the

top and in the middle. So from that

perspective the answer is there's a

K-shaped situation for wealth, there's a

cave-shaped situation for income growth

and there's a K-shaped situation for

inflation. And lastly, if you look at

stock prices for baskets of luxury names

in consumer spending have outperformed

over the last several years a basket of

retailers that of course cater to

discount or value names. So that's why

this discrepancy you can look up on your

screen every single day. What is the

difference? And it just continues to be

the case that high-income names and

those who cater to high- income names

continue to outperform discount

retailers. So that's why the K-shap

situation continues to be a major theme

in the outlook at the moment.

>> Okay. So grant that what are the

implications for the economy?

>> So the long term for this because this

is not a trend that's going to flippity

flip in one day. This is long term.

>> Absolutely. The net effect of the K is

that in aggregate the top 20% of

consumers they account for 40% of

consumer spending. The bottom 20% only

account for 8% of consumer spending. So

in aggregate total consumption is

actually still okay. If you look at the

weekly data from Redbook for same store

retail sales. So that mean red book goes

out a week once a week and ask retailers

what were your sales this week relative

to the same week a year ago and that's

still holding up very nicely. So that

means that in aggregate despite the K

getting wider and wider you're still

seeing in aggregate because the bigger

part of part of the case still has such

a big weight that in aggregate the

consumer is actually still doing well.

So that's why the answer to your

question is if the K continues it almost

instead becomes a political discussion

what does it mean when you have a bigger

and bigger share of the lower leg of the

K that continue to face headwinds not

only because of the three dimensions I

mentioned with wealth and income and

inflation but there's also the added

issue that when you look at the language

rates on auto loans have been going up

the language rates on credit cards have

been going up and the linguist rates on

student loans have also been going up

because there are a lot of households in

the bottom and the middle of income

distribution that also are facing higher

interest rates because they have this

problem that they have now also not only

a K-shaped situation for wealth and

income and inflation but also because of

this issue that delinquency rates are

going up especially for people in the

middle and the bottom of the K.

>> Sounds pretty grim.

>> So that means to your question before

that it means that the share of

households that are getting impacted on

the lower leg of the K is unfortunately

just growing and getting bigger and

bigger and that's of course why this

becomes a political discussion. Well,

what do they do?

>> Well, the worse it gets, the bigger the

political discussion

>> because then they become a bigger part

of the population and you can then ask

who do they vote for and what are they

doing and this is becomes ultimately the

risk namely meaning risk from a upside

down side. But what is exactly the

outcome when you have that decap

situation is unfortunately continuing.

>> Let's switch to private credit.

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Talk to me about from an economist

perspective, what does the growth in

private credit mean or not mean? And

what do you think of the the

overindexing of private credit to

software?

>> So let's back up and think about exactly

why private credit and why the financial

system has changed so much since 200

because dod frank as you know better

than anyone was implemented and that

meant that the banks were essentially

asked to do less and the market was

asked to do more. So let's just agree

that this was the rules changes that

came after the

>> there's no question that's what

happened.

>> This is what happened. This is where we

are today. Right?

>> What are the consequence of this? Well,

where we sit right now, if I just back

up and you ask me as a macroeconomist,

what's the situation in credit? Well, if

you look at default rates in loans and

in high yield, they have actually been

going down for the last 12 months. If

you look at distressed exchanges,

meaning that I borrow $100 from you, I

come back two years later and say,

"Sorry, I can't pay you back." You can

then decide to say, "It looks like

you're in distress. Why don't you

instead give me some equity in your

business? Why don't we instead extend

the maturity of the loan? Why don't we

lower the interest rate of the loan?

let's make a deal and we will change

your capital structure because you were

not able to survive higher interest

rates. Let's try to find a solution out

of this. But distress exchanges have

also been going down. So not only are

default rates going down, distress

exchanges are going down and finally

liability management exercises are also

going down. So let's agree at the

highest level credit is actually getting

better because default rates are going

down, distress exchanges are going down,

LME are going down. So what is the

problem in credit? And this gets exactly

to your question. The problem is in

credit that there are some sectors in

credit that have much higher leverage

and much lower coverage ratio. And one

sector that absolutely stands out is

>> just for for viewers because not

everybody knows what is coverage ratio

mean.

>> The leverage means of course how much

debt you have in your business. And

coverage ratio means what are my

earnings divided by my debt servicing

cost. In other words, what is my the

coverage ratio?

>> What's my ability to pay my interest?

>> Exactly. Bottom line, am I able to pay

my debt? Am I not able to pay my debt?

And if you do a simple scatter diagram

of all the sectors in credit or really

all sectors in the economy and ask which

sectors have a lot of debt, which

sectors have little debt. So that's a

very important exercise in equities and

in credit to understand are these

sectors highly levered, are they able to

pay their debts, where are their rate

mean where is their ability to pay their

debts relative to other sectors and

software stands out in a very

significant way by having significant

amounts of debt and at the same time

having actually very little ability to

service that debt. So even before

>> and it has very little ability to

service that debt because

>> because interest rates are now higher

for longer because Kevin Walsh is about

to raise interest rates later.

>> So the coverage ratio is deteriorating.

>> So the coverage ratio is deteriorating

because these companies are

unfortunately not being helped by the

Fed hiking rates. Got it.

>> So that's why if you now even before you

and I begin to talk about AI disruption,

we can talk about AI disruption. Some

software companies in cyber security may

be better. Some software of companies in

education may be worse. So from that

perspective, there are some nuances. But

the big picture is all software

companies across the spectrum they have

very high levels of debt and very little

ability to service that debt especially

now that Kevin Walsh is about to raise

interest rates. So therefore it becomes

important to look at the maturity wall.

A lot of these vintages in software were

originated in 2021 and 22 and a lot of

these vintages have a 7-year maturity on

their debt. That means that exactly in

2028 and 29 we are running into the

maturity wall for software. That means

that

>> so there's some in two 20 2027

>> a

>> little bit but most of it is 2 and 29 28

and 29. So that means if Kevin wars is

not lowering interest rates before we

get to 2028 these companies will have

significant problems rolling over their

debt. So even before we debate whether

AI disruption is going to create a

terminal value of software companies

that's very low. We already have the

macroeconomic problem that when interest

rates are higher for longer because

inflation is higher for longer, the

sectors that have a lot of debt and the

sectors that have little ability to

service that debt will continue to

struggle and software unfortunately

stands out as the number one sector

that's vulnerable in that environment.

So that's why yields on loans and

software continue to trade higher and

higher. At the moment, you and I can

take $100 and put into software loans

and get 12%. I

>> mean, if we buy it in the open market,

we're selling it less than par.

>> Absolutely. So if we buy in the open

market, you and I could basically say we

get 12% return in software loans. I mean

12% that's pretty juicy in any

investment. But the reason why the

market still trades that wider and wider

is moving up towards 12 a.5% is that if

these companies have a terminal value

that's zero and at the same time they

also are not able to roll over their

debt then they will be facing

significant headwinds. It's a double

whammy to software coming from the

terminal value being questioned and at

the same time rates higher for longer

meaning that they're not able to service

their debt. So the bottom line is there

is one sector and in particular that

sector alone there's also some parts of

healthcare small parts of consumer

services but the software sector really

stands out as the number one problem in

credit and this gets back to what you

asked about namely that in direct

lending or in private credit which is a

$2 trillion market $500 billion of

private credit is software that was

originated in the last six seven years.

So for that reason, software is a

significant part of private credit and

is a significant part of public credit

and it is those parts of the credit

market that are wrestling with these

problems of rates higher for longer and

the terminal value whereas the rest of

the credit market very broadly speaking

is actually in good shape exactly

exemplified by the fact that default

rates are going down, distress exchanges

are going down and LME are going down.

You know, 500 billion sounds like a big

number, but would you agree that in the

context of the US economy, which is a $

31 trillion economy?

Eh, it's not. In other words, for the

people who made these loans, God help

you.

>> Exactly.

>> But would you agree that for the the

implications for the US economy overall

are not so bad?

>> Yeah. Because what's also important back

to this upper crisis, and again, you

know, much better than anyone, is of

course that it all becomes a question of

where are these loans located,

>> right? are they on very levered balance

sheets and the generally speaking the

banking sector of course as you know

better than anyone was like levered 20

30 times at the time in the GFC

>> 40 in some cases 40 and of course now

you have the BDC's by law are only lever

twice two to one

>> yeah so that means that of course if it

is even in BDCS and if this is in

pension funds around the world if this

is insurance companies around the world

then of course this is indeed a smaller

number and therefore not a magnifier the

way that we saw during the GFC when

subprime was located in balance sheets

that had to deal very very quickly. So

in other words, and this might be the

way that the Fed is thinking about it,

some people make investments and lose

money. Some people make investments and

make money. And to your point,

>> you're a big boy.

>> Exactly. You have some losses, you have

some gains. And 500 billion, yes, it's

not, of course, it's a huge number in

some dimensions, but from a

macroeconomic perspective, the US

economy is like 33 trillion GDP. Yes,

it's makes some importance, but it's not

anywhere near uh those systemic levels

that we had with subprime in 2006 and 7.

So I actually think the software story

is even worse than what you're saying.

Not not from a macro perspective, but

just from from a micro perspective in

the sense that if you look at any all

the public software companies, you know,

like Salesforce, Service Now, they're

down 50 60% from from their peaks. So,

if you're the lender

and it's 2028

and the loan is now due, the discussion

is not just, well, you're a riskier

company. I want to charge you more

interest. You're you're going to the

private equity owner of the company and

you're saying, dude, the value of your

equity is is basically gone. you got to

pony up more money. Otherwise, we ain't

going to make we not we're not going to

we're not even going to have a

discussion about lending you, you know,

rolling over your loan until you pony up

more equity. And then the question is if

the private equity has to decide whether

they want to do that or not.

>> Absolutely. And we've seen some examples

of this more recently, of course, but

you're right. It's absolutely the case.

This is page one in your finance

textbook, right?

>> This is private credit. You are senior

to, of course, private equity. And if

you are the equity in these businesses

and if private credit in software is in

trouble then of course private equity in

software is almost in even more trouble.

>> Let's move on to um just general

employment. How's the what's the

employment situation like in the United

States?

>> What's remarkable about the discussion

we had earlier about AI? There's so many

stories being told about mass

unemployment going up 10 20%. People

freaking all losing our jobs. But there

are two important dimensions of this in

the data at the moment. Number one is

non-farm payrolls continues to be

incredible. Why is that incredible?

Because we have the tailwinds from the

AI spending, the one big bill for bill

and the industrial renaissance. But it's

also the case that it's incredible

because clearly AI is not resulting in

mass unemployment. So the first

conclusion is we are still creating a

lot of jobs in this economy and this is

despite that immigration has been

slowing down. Remember it was the case

in 2022, 23 and 24 that net immigration

legal and illegal into the US was 3

million people came in every single year

to the US. Now

>> 3 million

>> 3 million people every single year.

Today basically net immigration is zero.

>> That has resulted in our friends at the

Federal Reserve putting out working

papers, blog posts saying, "Well, hold

on. If we're not having 3 million coming

in every year, non-farm payrolls has

dropped from when it was 3 million, it

was 200,000 every month. Now they break

even for non-farm payrolls according to

the Dallas Fed is 30,000. In other

words, a dramatic drop in the number of

jobs because we simply have much fewer

people coming into the country. So from

that perspective, 172,000 in job growth,

100,000 job growth is a phenomenal

number, way, way higher than the numbers

that you would be getting if you just

looked at the demographics alone. So

that's why the labor market is actually

in really really good shape which is

likely also again back to the reason why

Kevin Moss and the FOMC is worried about

maybe they have to hike rates is because

it's not only inflation is three three

and a half but it's also the fact that

we have a labor market they're actually

quite strong. Even if you look finally

at another indicator of the labor market

let's look at the unemployment rate for

people that are between 20 and 24. It's

been getting a lot of attention that

young people can't find a job. Young

people

>> it's hopeless.

>> It's hopeless. This is the anecdote in

the urban myth including here in the

streets of Manhattan when you hear this

story at the moment. But if you actually

look at the BLS data for the

unemployment rate for people between 20

and 24 years old, it has actually gone

down in the last 6 months and it's gone

down more than the aggregate

unemployment for everyone else. So maybe

we have many more dorm room

entrepreneurs that are sitting at home

inventing new businesses and they're

much more solo entrepreneurs, individual

people who basically now have access to

tools in AI, access to loops, access to

agents, access to chat GBT to basically

start a new business. And I am of the

strong view that because of that the

labor market is actually benefiting from

if a fraction of all the new businesses

that are creating at the moment which by

the way is at the highest level ever in

US history in the weekly data from the

census we have never seen so many

businesses being created as we're seeing

at the moment if a fraction of them are

successful they will also create

employment. So if I didn't get a job at

a bank or in consulting or legal

services why don't you and I coming out

of college open a new business together

100%. And that's become easier than ever

before. So that's why I think that yes

there is a net displacement effect in

particular in t marketers and others

where people might be losing their jobs

because of AI at current rates about

100,000 people are losing their jobs in

t marketing but at the same time the net

effect of that is relatively small

compared to the hundreds of thousands of

people who are basically out there

inventing new things and coming up with

new businesses. We get a much more

dynamic capitalist economy as a result

of AI and we should all be very excited

about this.

>> So let me go on a little bit of a

tangent off of what you just said. So

what you're you're you're saying is that

the US economy is incredibly dynamic.

>> Exactly.

>> I I I would say the US I mean hopefully

AI lasts lasts forever and we're all

great but I mean we'll be a year from

now you'll be back and we'll have

another discussion about it but as of

now the US economy I I would say is more

dynamic than it's ever been in it maybe

in its history or certainly for a very

very long time.

>> I agree. So I worked at the OECD in

Paris which looks at structural issues

in economies and they sometimes point

out that the health care system has some

challenges in the US. There's some other

challenges with pensions and other

things but broadly speaking the number

one indicator in all OECD work that

looks at what are dynamic economies is

that is it easy to fire and hire workers

in France and Germany it's incredibly

complex to fire and hire workers and the

US has the most dynamic labor market.

That's good. Of course, if you're an

employer and if you are a good worker in

your job, it's actually also good for

you and me. So, in that sense, a very

dynamic labor market is a critical part.

A very competitive product market is a

very critical part. And perhaps most

importantly, a financial system that's

willing to finance risk is also not what

we have in Europe. Unfortunately, we

don't have in Japan.

>> That's actually my my my my tangent,

which is you're starting to answer. So

let me my get my question in which is

>> why is Europe so incredibly sclerotic in

terms of its I mean it's it's almost an

embarrassment. I mean I was looking at

statist I I had a um a guest on um last

year who who wrote I would recommend

this book to you. It's called Kaput the

end of the German economic miracle by

Wolf Gang Munch. He's an excellent book

and and we're going to have him back on

soon again. But I was looking at um so

because of I I interviewed him and I

read the book. I always try and keep up

like what's going on in Germany.

>> Yeah.

>> German GDP hasn't grown a dollar in like

the last three years. This like what is

going on in Europe?

>> Six months are going unfortunately

further down. Negative.

>> So the answer to that question is

exactly the things we just talked about

namely the three areas where Germany

unfortunately still needs to do a lot of

homework. Number one it is still very

difficult to hire and fire workers in

Germany. It's hard to hire.

>> Also difficult to hire.

>> Why? Explain that to me. How just

mechanically why would it be hard hard

to hire someone?

>> Because if you once you hire someone, if

you turn out that you hired me for a job

and you send well this guy is not really

working, it's really difficult for you

to get rid of me again

>> because then you need to go through e

metal, the trade unions, their organized

systems. And France is the extreme of

this case. Namely, you can't even get on

permanent contracts. You have to be on

temporary contracts. That creates all

these dual labor markets. Unfortunately,

Europe and Germany and France are at the

peak of this on meaning in a bad way

that it's just become still very

difficult despite that we're sitting

here in 2026 to hire and fire workers.

That means that if you and I have a good

idea and we want to open a business and

we say let's go out and hire some people

to help us open this business.

>> We don't want to do it in Germany.

>> Reluctant to do that because you say if

I hire this person, I can't get rid of

them again. If we do see a slowdown in

demand, right? That's very different

from the US. If we go out and hire

someone here in New York City, well, if

our business does great, we can go and

hire a lot more people. We may have to

pay for them. But if we have some

problems of course then we have to fire

these people quite quickly and we can do

that in the US. So the labor market is

just very rigid and the product market

is also very rigid in Europe including

in Germany. There are issues of course

also when it comes to product market

competition there we see as indicators

comparing competition in the US relative

to Germany and Europe and it's also the

case that it's not very competitive

there all kinds of monopolies there all

kinds of problems with pricing there's

also all kinds of problems with tariffs.

So a lot of things are also making

product markets less competitive. And

finally financial markets. Unfortunately

to your point if you think about the

sclerotic situation in the US sorry

European financial system there are

basically traditionally people talk

about the European financial system as

bank-based and the US system is market

based. Correct.

>> And we want the European system to also

be market based because think about it

you and I a company in Germany. We would

like to borrow some money. We can go to

a bank in Germany or in France and we

would like to borrow some money. And if

they say yes, it's great. If they say

no, we really have other places to go.

But if you and I go to a bank here in

Manhattan and say we like to borrow some

money and they say no, you and I will

say great. We have some good friends in

venture capital. We have some good

friends in private equity. We may have

some good friends in private credit. We

could also do IPO. We could also do

various things when it comes to

borrowing in even secondary markets. So

the financial system is just not very

diverse in Europe, unfortunately. And

that's a problem for Europe that they're

still working on the capital market

union on the financial system generally

being able to provide more riskwing

capital the way that we have. Go to

Silicon Valley and you can get money for

just a piece of paper on a a very and

simple idea. So that means that in the

European situation, we just have

unfortunately much more red tape, much

more regulatory complex environments and

the financial system is just not very

good at allocating money to a lot of

good ideas. And that's why unfortunately

for the Europeans, a lot of Europeans go

to Silicon Valley, come to New York City

to basically say I would like to borrow

some money here rather than borrow and

do my little business in the Euro area.

And then fortunately the consequence is

that a lot of growth is literally all

good ideas are coming to the US and

that's what is the main problem there.

some ideas and some corners of Europe is

moving a little bit in the right

direction. But the big answer to your

question is that it's difficult to hire

and fire. The product markets are not as

competitive as in the US and the

financial system unfortunately is not as

diversified. It doesn't provide the same

type of resources available to people

who have a good idea like we have in the

US.

>> Do you think there's a growing

recognition in Europe that this is a

problem or not really?

>> So the drugy recommendations

>> Okay. So I I'm going to challenge you on

that. Okay. So, so before I I found Wolf

Gang last year,

>> I when I was starting my podcast, I took

out a piece of paper and I and I wrote

down

all the topics I want wanted to do on my

podcast. And one of them was why is

Europe so bad? Yeah.

>> And so then I started looking around for

for something to read and um friend of

mine put me on to Mario Draggy's white

paper. So I it's 100 pages long.

>> Yeah.

and I started to read it and by the time

I got to page 10 I was asleep because he

his his paper basically said we have a

problem but I don't want to upset

anybody about and talking about the

problem and and so I said this is

ridiculous and eventually I found Wolf

Gang's book which which I much more

helpful so if if that's what everybody

points to is the draggy white paper it's

hopeless

>> I know he did so he was commissioned to

write a white paper or a report and say

what do we need to see can you come with

some specific policy proposals and he

came with basically 200 different things

that he wanted to see changed so that's

why there are now institutions including

bugal in Brussels which is a think tank

basically similar to Brook kings in DC

and they basically tried to track of all

the things that he suggested now they're

almost two years ago how many of these

things have been implemented and the

answer is this is now two years ago and

of all his proposals only 10% in round

numbers have been implemented so yes it

is it's not quite falling asleep, but it

really the speed with which the

Europeans are moving. So, I both have a

European and US passport to be clear,

but the speed with which the Europeans

are moving is just not very impressive

and it's not helping themselves.

>> They're not panicked.

>> They're not helping themselves that

they're not doing their own homework and

it's very unfortunate because they

absolutely need especially with this new

situation that China is also leading on

AI and that's beginning to become an

issue also of course for the sector.

Absolutely. And that's why if you now

have that anyone who has an AI and D

idea in Europe actually goes to the US

then again they're not helping

themselves. I think they are waking up a

little bit. Of course they woke up a lot

on defense for a number of different

reasons but I think they're also

beginning to wake up more on AI. But

that's why from an Apollo perspective,

we need financing, a lot of strategic

financing for the industrial

renaissance, not only the US, but also

in the European case for defense, for

infrastructure. Exactly. For data

centers, for things that require

financing to make sure that Europeans

also can catch up and continue to be

competitive in the global economy.

>> Let's switch gears one more time. Let's

talk about the US deficit. So I have my

own views about this but I'd be curious

as to yours which and let me just intro

in introduce the concept in this

wonderful deck you point out that uh

federal US debt to GDP is around like

100% or so when it's going to 175%.

You know when you watch CNBC not a week

goes by that somebody doesn't come on

and and does what I like to call virtue

signaling when it comes to the deficit.

Meaning I am so against the deficit.

your guest last week, he said he was

against the deficit, but I'm much more

against the deficit than him. And and

and each each guest strings out this um

disaster scenario, which by the way,

Pete Peterson strung out 40 years ago.

>> Yeah.

>> So,

>> what's fact, what's fiction? What do you

think? What's really interesting about

that discussion is absolutely we have an

enormous budget deficit and of course we

have significant deficits every year.

The government deficit at the moment is

about 5%. And we have debt levels that

of course continue to just go up

literally since 1776. We are entering a

period where we'll have the highest

level of debt for the government ever. I

mean in US history. So let's just start

out by concluding that the trend in this

is not our friend. This is a major

challenge. So now this becomes important

because the question is of course well

why are interest rates then still so

relatively low?

>> Yes.

>> And the answer is that the rest of the

world is still buying a lot of US

assets. Importantly, they're still

buying a lot of US treasuries. The rest

of the world, by the way, is also still

buying a lot of US credit. And the rest

of the world is also still buying a lot

of US equities. And why is that? That's

because, back to what we spoke about

before, if you are a pension fund in

Europe, you have to be invested in AI,

you must be invested in the US. So,

pension funds in Europe have significant

allocations in dollars to US AI. If you

are pension fund in Europe, you see your

own interest rates at relatively low

level. You see higher returns in the US.

you again say I got to also allocate

more to the US that also helps finance

US deficits because the level of

interest rates is simply higher in the

US than it is in all European countries.

So the reason why this is still able the

government is still able to finance the

deficit is that there is an incredible

willingness especially among foreigners

to still buy US government debt and buy

US credit and also buy US AI meaning

stocks and other products of course that

gives you AI exposure. The first answer

to your question is there's a remarkable

willingness especially among foreign

investors are buying US government debt

because the low interest interest rates

is higher and that's of course helping

when you want to cut coupons and you are

a pension fund or insurance company in

Japan in Europe in Taiwan and of course

also in Canada. So now here's the other

side of the problem. If you look at the

domestic investors

>> I haven't heard a problem yet. I've I've

only heard that it's not a problem.

>> So far we have the foreigners are happy

to come to the US with money. But the

problem now is in the US that there are

two problems. Both when it comes to

institutional demand for treasuries and

also when it comes to retail, meaning

household demand for treasuries.

Remember, normally if you are a pension

fund and insurance company in the US,

you would have some 30-year liabilities.

You need a 30-year asset. Historically,

you would say, "I'm buying US treasuries

because that matches my 30-year

liabilities in my insurance company."

But today, insurance companies and

pension funds are not buying US

treasuries. They are buying privately

issued longduration assets. They're

buying privately issued longduration as

in data centers, infrastructure,

climate, energy transition, you name it,

longduration assets that have a better

risk return profile. That means that

from an asset allocation perspective,

pension insurance in the US has been

moving towards privately issued

longduration assets instead of buying

longduration US treasuries. That's a

challenge. That's a headwind. That's why

the of course market is worried about

that the Treasury and the Tback, the

Treasury Bing Advisory Committee is at

risk that if they issue more

longduration assets, then there will not

be enough demand. So that's the

institutional side has been switching

towards privately issued longduration

assets and the retail the household side

has been also switching in the last

several years away from instead of

buying longduration US treasuries in

ETFs their flows have continued to go

down instead households are now buying

money market funds and short duration

government bonds so that's another way

of saying why do you think that is

>> because the yield curve is a lot flatter

now and you suddenly get a very high

return when the Fed keeps rates higher

for longer

>> in other words you're getting enough and

the short end of the curve if you're a

household. Why do I need to buy

something 30 years out?

>> And and in response, the Treasury both

under Janet Jillen and under Scott

Besson have been issuing much more T

bills because hey, now there's all this

demand from households to buy short

duration assets. So that's why now

households are willing to cut coupons in

the very front end. So there's a

different way of saying in summary that

for a number of different reasons,

there's less appetite for the long end

from institutions because they're now

buying other privately issued

longduration assets. And there's also

less demand from households because I

get less out of buying long duration US

treasuries. If I can cut coupons in T

bills, that basically gives me a return

that's also quite decent. So that's why

the challenge at the moment is that when

the debt level continues to move higher

and higher and higher, we run into the

risk of course that at some point then

the Treasury needs to think about where

on the curve are we issuing and there's

just less and less institutional demand

in the long end, less demand from

households in the front end. It's only

really the foreigners that have been

holding up demand in a very substantial

way. Especially private investors,

foreigners have been kick cutting

coupons and putting money into the front

end. So that's why if you segment who

the different players are in the

treasury market, it used to be that it

was China which was not interest rate

sensitive but all these entities namely

foreigners and institutions and

households they are very interest rate

sensitive. So we have a situation where

you could worry about a spring coil

effect where everyone is saying great

rates are high, rates are high, so now

I'm plowing money into treasuries. But

if the Fed succeeds with cutting rates a

lot, then foreigners might not be buying

so much, households might not be buying

so much. And suddenly the interest rate

sensitivity will become a very important

part of why there is a risk that the US

government deficit cannot continue and

the US government debt level can

continue to be at these very very high

levels.

>> How worried are you about this

>> at this point? Because the AI boom

continues and at this point because

rates are higher for longer and the Fed

is about to hike rates. I'm not worried

about this. Definitely not this year.

But I am worried about the dynamics that

we have shifted from Chinese being not

an interest rate sensitive buyer to now

having these different groups of much

much more interest rate sensitive

buyers. And by the way, the basis trade

and hedge funds have also been

benefiting a lot of course from some of

these developments. That also means that

if these new entities or buyers suddenly

are much more interest rate sensitive.

If we do get a situation where the Fed

will have to cut rates dramatically down

to zero, then suddenly there might be

much more risk involved with treasuries

because now we suddenly have a much

bigger group of investors who are much

more interested in what is actually the

yield that I get on this investment that

I that I'm doing relative to when it was

China where it was purely done for FX

reasons to protect the exports and not

so much with consideration to what the

level of interest rates were at. So the

answer is I'm not worried about that

over that the next several years I still

think we'll be okay but it's very clear

that the trajectory that we are on as J

Palway always was saying and Jenna and

Benanken that is an unsustainable

trajectory and at some point this will

come home to roast and be something

that's important for financial markets

but we're just not quite there yet.

Let's just quickly about China and then

about big risks. Um is there any risk

that China ever dumps treasuries?

>> Well the issue of course is that this

has been getting a lot of attention.

China used to have at the peak $1.3

trillion in US treasuries. Now they're

down closer to around 700 billion. So

China has already been offloading

treasuries over the last 5 years. So

there's already a development where

China is more gradually lowering their

holdings of treasuries for a number of

different reasons. Now they have less

trade directly with the US. They trade

more with others which is not in

dollars. So there's a number of

different dimensions to why that's been

happening. But in short, if they were to

do that, the risk of course would be

that the US economy, if you really saw a

significant spike in long-term interest

rates would begin to slow down very very

hard. And if this slowdown would be very

hard in the US economy, that will also

begin to hurt therefore Chinese exports

to the US. So that's why they are

probably having a strategic

consideration. Yeah. Because they don't

want to slow their own economy. They

still depend importantly on exports to

the US. although they have been

diversifying away to Europe and other

emerging markets then they are generally

not interested in slowing and crashing

the US economy because that would also

result in much less demand from you and

me and others in the US buying Chinese

goods. So I take that they're probably

trading very carefully when they think

about how they want to think about that

topic.

>> Okay, let's just finish up with from an

economist perspective what do you think

the biggest risks in the market are?

Well, I think one thing that is very

important in markets at the moment is

that AI has absolutely turned out to be

almost everywhere. If you and I think

about the 6040 portfolio and I think

about 60% equities, 40% fixed income.

Let's talk about what is in my equity

first. Well, the S&P 500, the 10 biggest

stocks now make up 42% of the index. So,

let's just agree that returns for the

last 5 years, basically half of it has

been coming because of AI. So AI plays a

very important role in my returns in

equities have played for the last

several years and at the moment have

such a big weight that it continues to

be a huge bet if I put money into the

S&P 500. So the first conclusion is

let's just agree there's one factor

playing out in AI is the key factor in

equities. But even now in fixed income

in credit because the hyperscalers are

issuing so much debt that means that the

IG index is changing. It used to be that

IG was government bonds. IG is

investment grade

>> investment grade credit and it also used

to be banks. Those were the two main

components. There's also a little bit

industrials but mainly banks and also

government bonds but now there's a new

player in investment grade credit and

that is hyperscalers that are issuing

$700 billion in debt this year. That

means that AI is suddenly also becoming

a very important part. So that means

that in my 40, not only do I have a lot

of AI in my 60 in my 6040 portfolio, but

I also have a lot of AI in my 40. And

finally, if you and I also put money in

venture capital, venture capital used to

be pharma, biotech, prescription drugs,

new medical products, but now 87% of

venture capital is also AI. So now I

wake up in 2026 and I look at my 6040

portfolio or 60

>> 6040.

>> It's it's I mean it looks 60/40,

>> but it's basically all AI in my equity

portfolio. It's a lot of AI in my fixed

income portfolio. It's also AI in my

venture capital portfolio.

>> So AI better work.

>> This AI, I think, better work out. it

better work out

>> because if that doesn't work out then

your portfolio will be in trouble.

That's why ironically the best

investment recommendation today is the

new 6040 is really to do 60 maybe AI and

40 non AI. So in other words, the best

recommendation for investors is to

invest in nonAI things that are not

correlated with this one factor. Because

if there's one thing we have learned in

finance since the financial crisis is

factor investing, you don't want to be

exposed just to one factor. And at the

moment there's one factor staring all of

us right in our eyes and that is AI is

literally everywhere. And that's of

course means that value investing which

you will appreciate more than anyone

else is actually superior because I'm

already exposed to AI everywhere. But

the problem with that thesis, which is

wonderful, is that all the stuff that

you would want to that you like if we

drew up a list like what can I invest in

that's not correlated and then I look at

the chart of those things, the chart

looks terrible of every single one of

those things. It's like hasn't moved in

years like consumer staples for example

>> 100%. But that's exactly why those

things haven't moved for years. But if

you now are going to see back to our

token discussion and demand for comput

and data centers and if you if there

truly is no mode as you were saying of

course then we will have some problems

in the AI world and if that's the case

then of course these things are about to

take off like a rocket because then

investors will be saying I got to buy

something

>> I got to buy something else which is not

this thing that is the one factor that

is now the biggest risk. this I to be

sure large language models I have seven

on my phone they are incredibly helpful

they will change your life my life is

changing all of our lives but that's not

the same thing as saying that the

revenues that are coming in for the AI

firms is going to come at the speed that

is priced in markets today

>> right

>> okay Torson thank you very much

we'll have you back

>> thank you and we're back so I thought

one of the first interesting things that

Torston said is that this year GDP will

grow a little bit more 2% and if you

divide it up 1% of that 2% comes from AI

spending 3/10en of 1% comes from the

re-industrialization and onshoring

and 90 basis points comes from the

consumer getting a lot of money back

from tax refunds from the big beautiful

bill actually raises an interesting

issue in that those tax refunds won't

exist next year so you know the base of

GDP growth um will be sub should be sub

2% in 2027 unless something else

happens. You then we started talking a

lot about AI and the dramatic impact

it's had on the US economy. We then move

to how dynamic the US economy really is

that interestingly enough despite all

the you know news stories that you hear

about people losing their jobs the

unemployment rate is actually still

excellent. Job creation is very very

strong and job creation is actually very

very strong statistically amongst young

people which belies the stories that

that you hear about. So the US economy

is is very dynamic. It's still growing

but it's unbelievably AI dependent and

you know we talked about some of the

bare case stories of AI which are that

it's become more capital intensive.

There are potentially no moes and these

are things that everybody should keep in

mind about future risks. Then we moved

on to Europe where Torson basically

agreed that Europe is sclerotic and

nothing's going to change anytime soon.

And we ended up with an interesting

comment from Torson about investment

risks that people think that they're

diversified because they have 60% of

their money in equities and 40% of their

money in debt. And what they're missing

is that of the 60 because the large

companies now make up 40% of the S&P and

so much is AI related, if you own the

equity markets or own the general

indexes, you are very heavily AI

indexed. And then on the debt side, you

would normally think that would be

diversification, but because of all the

debt being issued by AI data centers,

debt is now becoming overindexed to AI.

So people are incredibly overindexed to

AI. This AI story better work because if

it doesn't work, the losses that people

are going to experience are going to be

mammoth. And I think that was the

concluding message that I wanted to

bring home. Thanks for watching. See you

soon.

This podcast is forformational purposes

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