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The US Economy and Trump Administration Policy with Apollo's Torsten Slok · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio News. This is Masters in
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  Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
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  Speaker 2: This week on the podcast, our returning champion, Torston Slock,
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  Speaker 2: Chief Economists at Apollo. You know, most of the economists
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  Speaker 2: that you're probably familiar with haven't really had a good
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  Speaker 2: handle on the state of the economy over the past
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  Speaker 2: couple of years. They have been expecting recessions, they've expected contractions.
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  Speaker 2: They kind of missed the search and inflation, they missed
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  Speaker 2: the collapse in inflation. There aren't a lot of economists
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  Speaker 2: who got it more right than Torston Slock. Not only
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  Speaker 2: has he been appropriately bullish about what's going on in
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  Speaker 2: the economy, why we weren't really in danger of a
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  Speaker 2: recession anytime over the past couple of years. I disagree
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  Speaker 2: with his forecast for this year, which is zero percent
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  Speaker 2: chance of recession. Hey I never put a zero percent
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  Speaker 2: chance on anything. But still he's communicating how wrong everybody
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  Speaker 2: else is and how right he's been, and why you
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  Speaker 2: should be pretty constructive about the state of both employment
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  Speaker 2: and credit and the stock markets. He has absolutely been
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  Speaker 2: dead on, and I have to point out what a
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  Speaker 2: force of nature he is he's got a really fascinating background.
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  Speaker 2: I m f OECD, Deutsche Bank and now on the
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  Speaker 2: private by side with a big emphasis on private sector companies.
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  Speaker 2: I don't know what else to say. I thought this
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  Speaker 2: conversation was absolutely fascinating. He was just on such a role.
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  Speaker 2: All I had to do is just kind of give
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  Speaker 2: him a little nudge and get it out of the way.
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  Speaker 2: Really an absolutely true to force explanation as to why
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  Speaker 2: the US and global economy is where it is, where
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  Speaker 2: it's likely to continue going, and why there are such
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  Speaker 2: tailwinds for growth in the US and to a lesser
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  Speaker 2: degree Japan, but why the US is so much better
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  Speaker 2: situated than Europe or China and most of Asia. I
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  Speaker 2: found this to be absolutely fascinating, and I think you
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  Speaker 2: will also with no further ado my discussion with Apollo
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  Speaker 2: Global Managements Towardsten Slock.
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  Speaker 3: Thanks so much, Berrian. It's great to be here instead
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  Speaker 3: of sitting in a boat to fishing in Maine. I
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  Speaker 3: say you and I have done together before.
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  Speaker 2: That's right. That's a mouthful of places where you've worked.
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  Speaker 2: Before we get into your career. I want to start
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  Speaker 2: with University of Copenhagen and Princeton University. What was the
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  Speaker 2: career plan? Always economics and finance.
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  Speaker 3: Well, I grew up in a small time called Ruskilde,
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  Speaker 3: which is thirty kilometers to the west of Copenhagen. You
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  Speaker 3: could see I'm so European still that I speak in
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  Speaker 3: kilometers rather than miles. And I studied economics in university,
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  Speaker 3: and then when I started doing my PSD, you have
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  Speaker 3: to go a year abroad, and I spent a year
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  Speaker 3: in Princeton in the economics department in ninety five ninety
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  Speaker 3: six when pen Peneke was the chairman of the economics department,
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  Speaker 3: and then when I finished my degree, I applied for
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  Speaker 3: a job at the IMF in Washington, DC. And economics
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  Speaker 3: has basically been the bread and butter of my life,
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  Speaker 3: at least my adult life, for the last twenty five
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  Speaker 3: thirty years.
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  Speaker 2: So how I'm just I've been to Denmark, beautiful country, beautiful.
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  Speaker 2: Copenhagen is absolutely beautiful. I'm curious how different studying economics
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  Speaker 2: is in Denmark versus the United States.
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  Speaker 3: Well, obviously all the super universities are here, so from
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  Speaker 3: a publishing an academic perspective, it's really good. But it's
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  Speaker 3: just a little bit different in the sense that it's
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  Speaker 3: not of course having the same environment, the same seminars,
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  Speaker 3: and but that matter, the same people of course.
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  Speaker 4: That are in the US.
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  Speaker 3: But that being said, Europe still has some really incredible universities,
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  Speaker 3: including University of Copenhagen. You learn a lot, and as
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  Speaker 3: you know European style, your degree is not an undergraduate
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  Speaker 3: degree in four years. It's a master's degree where you
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  Speaker 3: start out on day one studying economics, theology, humanities, and
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  Speaker 3: you do that for five years in a row. So
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  Speaker 3: you end up doing five years relatively specialized in this
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  Speaker 3: case in economics for me, and I found it just
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  Speaker 3: that the environment, everything that I experienced that went through there,
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  Speaker 3: and still have many good friends at the university and
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  Speaker 3: of course in Copenhagen that I still talk to to
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  Speaker 3: this day about economics and what's going on in financial
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  Speaker 3: markets and.
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  Speaker 2: Make me a little jealous. Do you pay for college
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  Speaker 2: and graduate school or does the state cover that?
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  Speaker 3: So it happens to be the case in Denmark that
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  Speaker 3: tuition is completely free. In fact, you get a stipend
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  Speaker 3: which is three four thousand a month.
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  Speaker 1: Wow.
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  Speaker 3: On top of that, you also so this is as
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  Speaker 3: a PSD student you also get, of course, I need
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  Speaker 3: to say this a free healthcare. And of course all
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  Speaker 3: this is subsidized and ultimately paid for by the Danish
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  Speaker 3: tax payers. That's why marginal tax rates and then mark
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  Speaker 3: are fifty five percent, right and not to thirty seven
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  Speaker 3: percent as it is in the US.
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  Speaker 2: Right, it's better to be middle class or lower class
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  Speaker 2: in Denmark. It's better to be wealthy in the United States,
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  Speaker 2: at least in terms of net dollars in your pocket.
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  Speaker 3: Everyone has access to healthcare, everyone has access to free education,
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  Speaker 3: and then you just have to do your homework, which
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  Speaker 3: is the hard part, and then of course complete your education.
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  Speaker 4: But it is absolutely a major difference, of course too.
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  Speaker 2: But you left before you had to pay those fifty
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  Speaker 2: five percent taxes.
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  Speaker 3: Well, so I just got my free education and then left.
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  Speaker 3: So but I am still both a Danish citizen and
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  Speaker 3: I'm also a US citizen. So I'm trying to get
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  Speaker 3: the best and make the most of the both world.
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  Speaker 2: So let's talk about your career. You start out as
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  Speaker 2: an economist at the IMF right out of school. I know,
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  Speaker 2: at a certain point at the IMF, you're the guy
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  Speaker 2: writing the world's economic outlook and you're covering China and
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  Speaker 2: Hong Kong and other parts of Asia. Do you start
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  Speaker 2: out right out of school doing the global outlook for
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  Speaker 2: the IMF? For you have to work your way up
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  Speaker 2: to that.
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  Speaker 3: Oh, you absolutely have to work your way up. But
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  Speaker 3: the IMF has this great philosophy that the young people
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  Speaker 3: who start in the organization throw them on deep water,
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  Speaker 3: and in this case that means in IMF language, that
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  Speaker 3: you need to go on a program country, and a
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  Speaker 3: program country is a country that only has some IMF
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  Speaker 3: loan or is drawing on some IMF facility. And in
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  Speaker 3: my case, I was pulled into working on Mongolia. So
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  Speaker 3: I went to Ulan Paton in January, where it was
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  Speaker 3: about as cold as it is here in New York
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  Speaker 3: City today. And it is quite an experience to come
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  Speaker 3: to an emerging market when you are just around thirty
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  Speaker 3: years old, and you certainly sit there with the Central
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  Speaker 3: Bank governor, you sit down with the Minister of Finance,
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  Speaker 3: and of course there's whole team. I was the most
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  Speaker 3: junior person, and you try to think about what are
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  Speaker 3: the macroeconomic problems for this country, how can we get
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  Speaker 3: this country back on track? Under what conditions should they
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  Speaker 3: borrow all those things a very critical part of the
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  Speaker 3: education you get at the IMF, namely learning to analyze
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  Speaker 3: and understand an economy from a macroeconomic perspective.
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  Speaker 2: That sounds like it was an amazing experience.
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  Speaker 4: It was incredible.
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  Speaker 3: I had never obviously looked at a thought about Mongolia
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  Speaker 3: too much before. So the fact that you suddenly are involved,
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  Speaker 3: and also the whole process at the IMF, which is
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  Speaker 3: very important. You basically have a country that haves some
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  Speaker 3: macroeconomic problems, then there is a process of them going
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  Speaker 3: to the Board of the IMF, and the Executive Board
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  Speaker 3: of the IMF then has to discuss under what conditions
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  Speaker 3: do we want to give a loan to this country,
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  Speaker 3: and that process of giving a loan. In some cases
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  Speaker 3: the IMF says yes, you can have a loan. In
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  Speaker 3: other cases, the IMF says no, you cannot have a
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  Speaker 3: loan because you're not willing or able to meet the
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  Speaker 3: conditionality that comes.
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  Speaker 4: With borrowing money from the IMF.
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  Speaker 3: And often countries come to the IMA when they're not
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  Speaker 3: not able to borrow in public markets. And that's why
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  Speaker 3: the IMF plays this special role of having conditionality, having
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  Speaker 3: conditions associated with borrowing. That means that you can borrow,
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  Speaker 3: but only if you do these things that the global
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  Speaker 3: community thinks is a good idea and in some cases
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  Speaker 3: might be politically challenging, But we do this to try
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  Speaker 3: to get you out of this problem that you're in
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  Speaker 3: at the moment.
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  Speaker 2: So now let's compare and contrast. You go from there,
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  Speaker 2: the OECD in Paris. What's it like being an economist
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  Speaker 2: in Paris?
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  Speaker 3: So the IMF has money and gives a loan to countries,
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  Speaker 3: whereas the OECD is really just a think tank. It
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  Speaker 3: used to be really mainly more wealthy countries, meaning developed markets,
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  Speaker 3: meaning the G seven plus a few others, but now
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  Speaker 3: it has brought out a bit more to also have Brazil, Chile,
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  Speaker 3: other countries that you will normally categorize as emerging markets.
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  Speaker 3: But the OECD basically is an organization in Paris that
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  Speaker 3: lays out best practice across countries. So as a government,
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  Speaker 3: you think constantly about what is best practice for healthcare policies,
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  Speaker 3: for pension policies, for all kinds of other policies when
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  Speaker 3: it comes to climate change, when it comes to really
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  Speaker 3: all areas of policy making, and the idea is to
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  Speaker 3: get together in Paris for the OCD countries to come
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  Speaker 3: and say, what experiences have you made when you put
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  Speaker 3: together a pension system? What experiences have we made? And
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  Speaker 3: the IMF the Rights and Reporting says, these are the
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  Speaker 3: ways that people have done it that work. And other
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  Speaker 3: sometimes they say other examples are this is word it.
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  Speaker 4: Has not worked very well.
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  Speaker 3: To try for you and me and the US and
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  Speaker 3: Denmark and all other countries in the world to have
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  Speaker 3: an example of how should we design our pension system,
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  Speaker 3: how do we make sure that they're enough retirement savings
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  Speaker 3: for our population? How has it been done in other countries?
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  Speaker 3: So it's really an organization that really is a think tank,
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  Speaker 3: but it really is the best practice think tank where
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  Speaker 3: you get experiences and you get practices from other countries
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  Speaker 3: that then can be used again in the countries that
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  Speaker 3: are participating.
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  Speaker 2: Huh. Really interesting. So the biggest chunk of your career
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  Speaker 2: was that Deutsche Bank. Did you still art in Germany
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  Speaker 2: or did you start here in New York?
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  Speaker 3: So I started here in New York because some of
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  Speaker 3: my former colleagues from the IMF had moved to Deutsche Bank,
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  Speaker 3: David Fogustlanta and Pink E Chata and they called and
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  Speaker 3: asked if I wanted to come to the US and
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  Speaker 3: work here with him, And this was in two thousand
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  Speaker 3: and five. It was not our plan. My wonderful wife
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  Speaker 3: Julie and I had our first son and his name
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  Speaker 3: is Fleming, and it was a two thousand and three
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  Speaker 3: and we lived in Paris.
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  Speaker 4: We all enjoyed it.
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  Speaker 3: We were actually trying to get a bit closer to Copenhagen.
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  Speaker 3: But then out of the blue, Binky called and said, hey,
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  Speaker 3: would you like to come to New York and work
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  Speaker 3: with us? And my experience from the IMF and the OCD,
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  Speaker 3: and then this opportunity to be in Deutsche Bank with
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  Speaker 3: some friends and colleagues that I had known for many
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  Speaker 3: years and who are still my really good friends today
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  Speaker 3: of course meant that I said, well, why don't we
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  Speaker 3: try this? And Julie was up for it. So we
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  Speaker 3: moved on our family from Paris in two thousand and five.
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  Speaker 2: So brief digression. I don't know who Binky is personally.
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  Speaker 2: I've never met him. I cannot begin to tell you
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  Speaker 2: how many people have referenced him as a man enter,
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  Speaker 2: as an influence, as this is a person who just
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  Speaker 2: had such a big impact in the world of finance.
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  Speaker 2: Will get to the mentor questions later. I'm just curious
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  Speaker 2: how outsized a personality is Binki.
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  Speaker 3: Yeah, so a very important part of your question also
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  Speaker 3: here is that it is absolutely critical to remember that
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  Speaker 3: inside organizations such as the IMF and the OECD, you
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  Speaker 3: establish long term relationships with people that really almost in
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  Speaker 3: a lot of cases basically last for almost your whole
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  Speaker 3: career or your whole life. So that means you build
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  Speaker 3: strong connections with people, you work with them in stressed situations,
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  Speaker 3: in less stress situations, in good and bad times. And
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  Speaker 3: I had worked with Binkie, not directly under him, and
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  Speaker 3: also David Falguslanta, but they were both, of course very
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  Speaker 3: important employees at the IMF, and when they decided to
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  Speaker 3: move to Teutsche Bank, I decided to say, well, I
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  Speaker 3: know these people really will and Binky indeed, even today,
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  Speaker 3: as you know, he is still the chief equity strategy
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  Speaker 3: at the Deutsche Bank. He has some incredible frameworks and
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  Speaker 3: I have learned a lot from him. We'll talk more
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  Speaker 3: about this later in terms of you need to have
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  Speaker 3: a framework when you talk about things, and he was
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  Speaker 3: the first one and still is today. They is telling
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  Speaker 3: me you need.
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  Speaker 4: To have a framework. What is the framework?
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  Speaker 3: Why you are thinking the stock market will go up,
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  Speaker 3: or the dollar will go down, or the federal high rates.
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  Speaker 3: All these things came from a discussion from Pinkie and
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  Speaker 3: David and several others, and who, by the way, also
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  Speaker 3: have a PSD in economics because they were the ones
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  Speaker 3: who got me into Deutsche Bank starting in two thousand
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  Speaker 3: and five.
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  Speaker 2: Really interesting, So you spend fifteen years at Deutsche Bank,
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  Speaker 2: that's the biggest part of your career. On the cell side,
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  Speaker 2: I'm curious, how do you curate a firm view? How
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  Speaker 2: do you develop Hey, this is the perspective of Deutsche
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  Speaker 2: Bank US, which is a giant entity.
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  Speaker 3: Well, as you and I have been talking about for
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  Speaker 3: many years, different banks have different strategies. So some banks
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  Speaker 3: have a house view, other banks have a house of use.
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  Speaker 3: So that means that in this case Doutchr Bank was
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  Speaker 3: run in a way and I think that does make
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  Speaker 3: sense where there was no strong house shoe every day
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  Speaker 3: on everything, because we have to let individuals free in
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  Speaker 3: the sense that the different people have different types of
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  Speaker 3: expertise in different areas. So at dB we would sit
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  Speaker 3: down around the table, think about the Federal Serve or
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  Speaker 3: the ECP or the Bank of Japan, and we would
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  Speaker 3: then say, okay, whoever was the main person responsible for
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  Speaker 3: the central bank, what is your view? Let's discuss do
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  Speaker 3: we all agree with this? What are the arguments why
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  Speaker 3: this is right? One are the arguments why this is wrong.
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  Speaker 4: This gives a healthy debate.
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  Speaker 3: This gives a healthy way of saying, we have now
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  Speaker 3: turned every stone and we end up where we published
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  Speaker 3: the view that Let's say that the FED, for example
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  Speaker 3: today we'll talk about this later, will be keeping interest
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  Speaker 3: rates on hold. But that discussion, of course, is a
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  Speaker 3: very important part of the debate instead of just having well,
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  Speaker 3: I am having someone in the organization who says, oh,
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  Speaker 3: the FED will not do anything. But everyone else can
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  Speaker 3: then sit around and say, oh, I disagree with that view.
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  Speaker 3: I think the view should be different. So there is
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  Speaker 3: no easy solution to this problem. But it is the
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  Speaker 3: case that at Deutsche used to be the situation where
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  Speaker 3: we would sit around the table and fight it out
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  Speaker 3: and end up with a view on what do we
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  Speaker 3: think is the outlook for in this case, the fit
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  Speaker 3: ECB or the Bank of Japan or any other central
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  Speaker 3: bank or any other market we were looking at.
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  Speaker 2: Huh, really really interesting. So you're at a government entity,
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  Speaker 2: then you're at a think tank, then you're at a
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  Speaker 2: sell side brokerage firm. Then you end up at Apollo,
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  Speaker 2: which not only is buyside, but it's more focused on
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  Speaker 2: the private markets than the public markets. I'm curious what
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  Speaker 2: led you to Apollo and what was that transition like?
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  Speaker 3: Yeah, so at Deutsche Bank I spent essentially all my
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  Speaker 3: time on going to clients with sales. So we would
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  Speaker 3: go to Pimco, Blackrock, Brevin Howard, or the hedge funds
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  Speaker 3: or the real money managers and we would sit down
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  Speaker 3: and talk about what is the outlook for rates, equities, commodities,
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  Speaker 3: everything in the macro world that they wanted to discuss.
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  Speaker 3: At Apollo, my job is quite different and it has
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  Speaker 3: some different elements that I didn't have in my job
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  Speaker 3: with Deutsche Bank. So what was the attraction was that
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  Speaker 3: after fifteen years of traveling around the world and talking
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  Speaker 3: about the macro in client meetings, really anywhere you could
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  Speaker 3: go where anyone was interested in the US economic outlook,
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  Speaker 3: at Apollo, I spent roughly half of my time still
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  Speaker 3: doing that on the fundraising side, But the other half
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  Speaker 3: of my time I spent internally talking to deal teams.
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  Speaker 3: So a deal team is looking at buying a company.
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  Speaker 3: At deal team is looking at giving a loan to
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  Speaker 3: a company. This could be in the US, it could
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  Speaker 3: be in Europe, it could be in anywhere in the world, Brazil,
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  Speaker 3: it could be really any type of financing that we
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  Speaker 3: would be studying carefully. And in some of these cases
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  Speaker 3: macroeconomics is less important. In other cases, macroeconomics is really important,
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  Speaker 3: meaning we begin to discuss what is the outlook for rates,
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  Speaker 3: meaning what are their financing costs? What's the outlook for spreads,
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  Speaker 3: what's the outlook for even wages? Was the outlook for
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  Speaker 3: low income wages, middle income wages, high income wages? What
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  Speaker 3: is the outlook for the dollar? And we also have
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  Speaker 3: discussions of what is the outlook for politics? So those
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  Speaker 3: things are not things that we can control, but then
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  Speaker 3: nevertheless turn out to be really important if you want
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  Speaker 3: to understand the risks associated with the investment that you're doing.
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  Speaker 3: So what attracted me to come to Apollo was I
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  Speaker 3: still am doing to a last degree, many of the things. Again,
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  Speaker 3: half of my job is traveling around the world talking
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  Speaker 3: to people about the macroeconomic outlook, but the internal part
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  Speaker 3: of talking to deal teams for that matter, also talking
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  Speaker 3: to management about what's going on, what are we seeing,
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  Speaker 3: what are we hearing? And we have fifty a liberalist
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  Speaker 3: and fifty portfolio companies talking to the CEOs of these
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  Speaker 3: portfolio companies. It all gives a very corporate finance addition
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  Speaker 3: to my macroeconomic thinking, and that was and continues to
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  Speaker 3: be the main significant attraction that I find so exciting
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  Speaker 3: about my job naming that is combining the macro world
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  Speaker 3: with the corporate finance and the deal team world in
• 16:57
  Speaker 3: private credit and private equity, and then trying to come
• 16:59
  Speaker 3: up with a view what do we think will happen
• 17:01
  Speaker 3: going forward now.
• 17:03
  Speaker 2: At Deutsche Bank, you were a fairly traditional economic publisher.
• 17:08
  Speaker 2: When you move to Apollo, you developed several new platforms,
• 17:11
  Speaker 2: new content platforms. I think everybody who's listening is probably
• 17:16
  Speaker 2: familiar with the Daily Spark, which is sort of your
• 17:19
  Speaker 2: chart of the day, which is always fascinating and niche
• 17:22
  Speaker 2: and chock full of information. But you also put out
• 17:26
  Speaker 2: full research decks and full the traditional economic data series.
• 17:32
  Speaker 2: But then on top of that, is the Apollo Academy
• 17:35
  Speaker 2: tell us a little bit about that.
• 17:36
  Speaker 3: Yeah, So the idea with the Apollo Academy is there
• 17:40
  Speaker 3: are really several different purposes. So first of all, Apollo
• 17:44
  Speaker 3: Academy is really the prime place to go if you
• 17:47
  Speaker 3: want to understand alternatives, because it is often, of course
• 17:51
  Speaker 3: the case that people in financial markets, everyone spends so
• 17:54
  Speaker 3: much time on this and p. Five hundred because this
• 17:56
  Speaker 3: in p. Five hundred is what we all discuss all
• 17:58
  Speaker 3: day long. But if you look at businesses with employment
• 18:02
  Speaker 3: in the US, there are six million firms in the
• 18:05
  Speaker 3: US that have employment.
• 18:06
  Speaker 4: So the fact that we spend time.
• 18:08
  Speaker 3: On five hundred companies out of six million businesses, it
• 18:11
  Speaker 3: just doesn't make too much sense. So that's why private
• 18:13
  Speaker 3: markets and what's going on in private markets, both in
• 18:16
  Speaker 3: private equity and also of course in private credit is
• 18:19
  Speaker 3: a very important part of the US and the global economy.
• 18:23
  Speaker 3: So that's what we try to do in Apollo Academy, namely,
• 18:26
  Speaker 3: have various educational materials, white papers about private credit, white
• 18:31
  Speaker 3: papers about private equity, white papers about AZEPAC finance, white
• 18:34
  Speaker 3: papers about all kinds of aspects of what our private
• 18:38
  Speaker 3: markets today and what we also do on the Apolloacademy
• 18:42
  Speaker 3: dot com home pages. Of course, that we also produce
• 18:44
  Speaker 3: as you just mentioned at Daily spag Email, which is
• 18:46
  Speaker 3: a chart that we produce every day, which is some
• 18:49
  Speaker 3: interesting topic that we're thinking about, and we also try
• 18:51
  Speaker 3: to have by the way, we also have podcasts and
• 18:53
  Speaker 3: we also have videos, but we try to generally have
• 18:56
  Speaker 3: material so that people and the public out there can
• 19:00
  Speaker 3: be informed about what's going on in alternatives and in
• 19:02
  Speaker 3: private markets.
• 19:03
  Speaker 2: At the moment, I just want to talk briefly about
• 19:06
  Speaker 2: the Daily Spark because I'm fascinated both on the subjects
• 19:11
  Speaker 2: that you focus on and the process you use in
• 19:14
  Speaker 2: creating it. Something recently that showed up New York hotel costs.
• 19:19
  Speaker 2: Now that seems so specific. What do new York hotel
• 19:23
  Speaker 2: costs tell us about the broader economy?
• 19:26
  Speaker 3: This is a really good question, and you're not the
• 19:27
  Speaker 3: only one to probably think about that among the listeners.
• 19:30
  Speaker 3: Men for those who do subscribe to the Daily Spark
• 19:32
  Speaker 3: are probably scratching their hits sometimes and saying why are
• 19:34
  Speaker 3: we even talking about this? We also have data sometimes
• 19:37
  Speaker 3: that we look at for how many people are visiting
• 19:39
  Speaker 3: the Statue of Liberty. We also look at how many
• 19:41
  Speaker 3: people go to Broadway shows.
• 19:43
  Speaker 2: I remember seeing that, and you may.
• 19:45
  Speaker 3: And you and I laugh at it sometimes, and you
• 19:46
  Speaker 3: should also laugh at it sometimes and say why.
• 19:49
  Speaker 4: Are we're looking at this?
• 19:50
  Speaker 3: But in fact it is still the case that, if
• 19:52
  Speaker 3: you think about it well, hotel cost important for a
• 19:55
  Speaker 3: number of different reasons, not only from a commercial real
• 19:58
  Speaker 3: estate investing perspective. It's also important to get some understanding
• 20:01
  Speaker 3: of how expensive is it now. The average price for
• 20:04
  Speaker 3: staying at a hotel at the moment in New York
• 20:06
  Speaker 3: City is more than four hundred dollars. That is really expensive.
• 20:10
  Speaker 3: Think about also how much that has gone up, how
• 20:12
  Speaker 3: much of that has gone up after COVID. That has
• 20:14
  Speaker 3: implications for how you think about what is occupancy rates
• 20:17
  Speaker 3: for hotels not only in New York but nationwide. That
• 20:19
  Speaker 3: has implications for how well is the consumer doing. That
• 20:21
  Speaker 3: has implications for tourism. It has just so many ramifications.
• 20:25
  Speaker 3: A lot of these things. Even how many people go
• 20:27
  Speaker 3: to Broadway shows also tells you something about is there
• 20:30
  Speaker 3: a willingness among consumers to spend on discretionary spending something
• 20:34
  Speaker 3: that's a little bit expensive. The average Broadway show ticket
• 20:36
  Speaker 3: cost round one hundred and fifty dollars.
• 20:39
  Speaker 2: But that's a bargain right there.
• 20:40
  Speaker 3: But it could be a lot more expensive than that.
• 20:42
  Speaker 3: And all that to your question is you say, well,
• 20:45
  Speaker 3: why are we looking at this? So without writing a long, long,
• 20:48
  Speaker 3: thirty page paper with thirty footnotes, just a simple chant
• 20:52
  Speaker 3: saying hey, check this out, this is something we're thinking about,
• 20:55
  Speaker 3: you can say, oh, I don't really care about this.
• 20:57
  Speaker 3: Why should I worry about how many people again go
• 21:00
  Speaker 3: to Broadway shows or how many people who go to
• 21:03
  Speaker 3: the Statue of Liberty? Or what is the cost of
• 21:05
  Speaker 3: saying oh, and I at the hotel? But it still
• 21:07
  Speaker 3: is something that at least is one dimension to thinking
• 21:09
  Speaker 3: about a lot of the different things that are going on.
• 21:11
  Speaker 3: And that is the benefit And that's what I'm enjoying
• 21:13
  Speaker 3: so much of producing one every day, because then I
• 21:16
  Speaker 3: I write about something today and tomorrow I can write
• 21:18
  Speaker 3: about something else.
• 21:19
  Speaker 2: And the fact that you do something completely different every day.
• 21:23
  Speaker 2: Someone may say, who cares how many people go to
• 21:25
  Speaker 2: the Statue of Liberty, But when you see ninety different
• 21:30
  Speaker 2: charts over the course of three or four months, it
• 21:33
  Speaker 2: starts to paint a broader picture as to what's going on.
• 21:36
  Speaker 2: All these little niche data points. They add up and
• 21:40
  Speaker 2: it gives you a perspective on the economy that you
• 21:43
  Speaker 2: may not get looking at GDP or unemployment.
• 21:45
  Speaker 3: As when you and I always talk about what is
• 21:47
  Speaker 3: the economic outlook? And then you can start in some kona,
• 21:50
  Speaker 3: but I still need to paint you a picture and
• 21:53
  Speaker 3: mosaic that ultimately has some different pieces, And these charts
• 21:56
  Speaker 3: are exactly meant to be different pieces in what is
• 21:59
  Speaker 3: goinging on in the economy and more broadly, what is
• 22:03
  Speaker 3: it in financial markets that we should be talking about?
• 22:06
  Speaker 4: And that's relevant?
• 22:06
  Speaker 3: And sometimes some of these pieces in the mosaic may
• 22:09
  Speaker 3: look insignificant and not very critical, But in other times
• 22:12
  Speaker 3: a chart could simply also be what's the trend in inflation?
• 22:16
  Speaker 3: Should we expect invasion to go up? Now that Trump
• 22:18
  Speaker 3: has been talking about tariffs, now that we may have
• 22:20
  Speaker 3: restrictions of immigration, now that we may lower corporate tax
• 22:23
  Speaker 3: rates on domestic manufacturers to fifteen percent? Could that be
• 22:26
  Speaker 3: a reason why there might be some lift in some
• 22:28
  Speaker 3: of the more important indicators, other than, of course, some
• 22:31
  Speaker 3: of the more funny indicators that we've been talking about
• 22:34
  Speaker 3: up to this point.
• 22:35
  Speaker 2: We were talking earlier at the mosaic of different data
• 22:39
  Speaker 2: points that create an economic outlook. Let's talk first about
• 22:44
  Speaker 2: the US and then the rest of the world. You've
• 22:47
  Speaker 2: described the US economy as quote, firing on all cylinders discuss.
• 22:54
  Speaker 3: So the backdrop for where we sit today is, of
• 22:57
  Speaker 3: course that GDP growth for the last two and an
• 23:00
  Speaker 3: years since the FED began to raise interest rates, has
• 23:02
  Speaker 3: been remarkably strong. And this has raised a number of
• 23:06
  Speaker 3: important questions in financial markets. Namely, when the Fed raised
• 23:10
  Speaker 3: interest rates, I would have expected, and the textbook would
• 23:13
  Speaker 3: have expected, that home prices should have been going down.
• 23:16
  Speaker 4: That's not what has happened.
• 23:17
  Speaker 3: You would have expected that when interst rates go up,
• 23:19
  Speaker 3: car sales should go down.
• 23:21
  Speaker 4: That is not what has happened.
• 23:22
  Speaker 3: And you would also have expected that when interest rates
• 23:25
  Speaker 3: go up that cap e spending and business spending by
• 23:27
  Speaker 3: businesses should also be slowing down, and that is not
• 23:30
  Speaker 3: what has happened. And why is it that the economy
• 23:33
  Speaker 3: has continued to be so strong? In other words, what
• 23:35
  Speaker 3: happened to long and variable lacks that the Federal Serve
• 23:39
  Speaker 3: FMC members have talked about for so long? Why didn't
• 23:41
  Speaker 3: the economy slow down when interest rates went up? And
• 23:44
  Speaker 3: there are three very important reasons why that didn't happen.
• 23:47
  Speaker 3: First of all, we have had a much less interest
• 23:50
  Speaker 3: rates sensitive economy this time around than we've had before.
• 23:54
  Speaker 3: Most importantly, ninety five percent of mortgages outstanding in the
• 23:57
  Speaker 3: US are thirty of fixed rates. That when interest rates
• 24:00
  Speaker 3: started going up, that meant that mortgage payments did not
• 24:03
  Speaker 3: go up for consumers because consumers had locked in low
• 24:06
  Speaker 3: interest rates during the pandemic. And this was also the
• 24:09
  Speaker 3: case for corporate debt. Net interest payments as a share
• 24:13
  Speaker 3: of operating surplus in the US has been going down
• 24:16
  Speaker 3: despite that the FED has been raising interest rates, so
• 24:18
  Speaker 3: there was also a list interesst rates sensitivity for corporate
• 24:21
  Speaker 3: So taken together, the first argument why is the economy
• 24:25
  Speaker 3: still so strong? Because FED hikes simply did not have
• 24:28
  Speaker 3: a particularly negative impact on consumers and on firms as
• 24:32
  Speaker 3: the textbook would have predicted. Secondly, in the US, we
• 24:35
  Speaker 3: also have a data center boom. We have an AI
• 24:38
  Speaker 3: and data center boom, unlike what we see in any
• 24:40
  Speaker 3: other countries. There's six thousand data centers in the US,
• 24:42
  Speaker 3: more than all other country countries combined in the world.
• 24:46
  Speaker 3: So data center boom has probably been adding around zero
• 24:49
  Speaker 3: point two percent to GDP growth for the last several years.
• 24:52
  Speaker 3: And third, and finally, we also have fiscal policy. Even
• 24:55
  Speaker 3: before we talk about Trump, Chips Act, the Inflation Doarcs Act,
• 24:57
  Speaker 3: the Infrastructure.
• 24:58
  Speaker 4: Act have also been important.
• 24:59
  Speaker 3: Tale So in summary, and sorry for getting a very
• 25:02
  Speaker 3: long answer, but why good ants the economy has been
• 25:04
  Speaker 3: so strong. It has to do with less interest rate sensitivity,
• 25:07
  Speaker 3: a data center and AI boom, and finally.
• 25:09
  Speaker 4: Also fiscal policy.
• 25:10
  Speaker 3: And that's the reason why even where we sit today,
• 25:13
  Speaker 3: the Atlanta FEDGDP now estimate for Q four is still
• 25:16
  Speaker 3: at three percent, well above the CBO's two percent estimate
• 25:19
  Speaker 3: for long run GDP growth. And that is the reason
• 25:22
  Speaker 3: why there is in P five hundreds have done so
• 25:23
  Speaker 3: well the last few years. That's the reason why credit
• 25:25
  Speaker 3: spreads on ig high end loans are so tight, because
• 25:28
  Speaker 3: we never got that slowdown that everyone worried so much about.
• 25:31
  Speaker 3: And now we can then start talking about if we
• 25:33
  Speaker 3: add Trump policies on top of this starting point, then
• 25:36
  Speaker 3: you can begin to worry about that maybe there's a
• 25:39
  Speaker 3: ray acceleration both in inflation and in GDP in twenty
• 25:43
  Speaker 3: twenty five as a result of the starting point being
• 25:46
  Speaker 3: just so strong at the moment.
• 25:47
  Speaker 2: So there's a couple of things you didn't mention in
• 25:50
  Speaker 2: contributing to the strength of the US economy, as well
• 25:54
  Speaker 2: as some price support, and I want to throw those
• 25:57
  Speaker 2: at you. So you didn't mention the mass of fiscal
• 26:01
  Speaker 2: spends during the pandemic of CARES Act one and two
• 26:04
  Speaker 2: under President Trump and KARS Act three under President Biden.
• 26:08
  Speaker 2: Those were enormous. Is that pig through the python and
• 26:11
  Speaker 2: we're still feeling the effect of that.
• 26:12
  Speaker 3: So those were also very important reasons why, specifically the
• 26:16
  Speaker 3: savings rate went up a lot in the household sext
• 26:19
  Speaker 3: or so excess savings you and I have been emailing
• 26:21
  Speaker 3: these charts back and forth. Excess savings were really high
• 26:24
  Speaker 3: exactly because of those fiscal policies giving a lot of
• 26:27
  Speaker 3: money to households, and as households were running down those
• 26:31
  Speaker 3: excess savings, this was also a very important tail wind
• 26:33
  Speaker 3: to the outlook. So I do agree that those things
• 26:36
  Speaker 3: have also played a very critical role in why the
• 26:38
  Speaker 3: economic data has continued to be so strong. Even the
• 26:41
  Speaker 3: last non fum payrolls number we got was of course
• 26:43
  Speaker 3: also very strong. And also again telling you that there
• 26:46
  Speaker 3: are some tailwinds, and that pick through the python has
• 26:49
  Speaker 3: played at a critical role in keeping the economy strong
• 26:52
  Speaker 3: for a much longer period than what your economics textbook
• 26:55
  Speaker 3: would have predicted.
• 26:56
  Speaker 2: So there's there's so many different questions I want to
• 26:58
  Speaker 2: throw at you from that. You mentioned cars, you mentioned labor,
• 27:03
  Speaker 2: and you mentioned houses. All three of those sectors have
• 27:08
  Speaker 2: a short fall of supply. We stop making cars for
• 27:11
  Speaker 2: a couple of years during the pandemic, So now we've
• 27:15
  Speaker 2: ramped up enough new car production still means we have
• 27:18
  Speaker 2: a short fall of pre owned cars. Housing we underbuilt
• 27:22
  Speaker 2: for a decade, there just doesn't and the number of
• 27:25
  Speaker 2: homes for sale close to record lows, and it feels
• 27:29
  Speaker 2: like the labor pool is as tight as it's ever
• 27:32
  Speaker 2: been in our lifetimes. How significant are these supply issues
• 27:37
  Speaker 2: to both growth and pricing?
• 27:41
  Speaker 4: They are very important.
• 27:42
  Speaker 3: And there is this as you and I also have
• 27:44
  Speaker 3: talked about before this academic debate about what's inflation high
• 27:47
  Speaker 3: because of supply or was it high because of demand?
• 27:50
  Speaker 3: But exactly as you are outlining, it's a much more
• 27:52
  Speaker 3: complicated situation where you both have supply constraints for housing
• 27:56
  Speaker 3: for labor across the board. In autos in many other
• 27:59
  Speaker 3: sexes because during the pandemic we were simply not able
• 28:02
  Speaker 3: to produce enough of what was needed for the economy
• 28:06
  Speaker 3: to go at full capacity. So therefore we did have
• 28:08
  Speaker 3: a decline in supply and at the same time we
• 28:10
  Speaker 3: had a significant increase in demand, including from the fiscal
• 28:13
  Speaker 3: policies that you just mentioned, and those things together were
• 28:16
  Speaker 3: a very important reason why inflation went up. So now
• 28:19
  Speaker 3: you're asking, looking into twenty twenty five, are these things
• 28:22
  Speaker 3: still here? I would say they are still here to
• 28:24
  Speaker 3: a very significant degree. And even before we've talked about
• 28:27
  Speaker 3: Trump policies and tariffs and restrictions in immigration and lower
• 28:30
  Speaker 3: corporate taxes, all these things are still pointing in my view,
• 28:34
  Speaker 3: to a situation where we are not out of the
• 28:36
  Speaker 3: woods on inflation. The risk is that inflation could begin
• 28:39
  Speaker 3: to see some lift simply because the fate is now
• 28:41
  Speaker 3: cutting and we still have tailwinds from fiscal policy AI
• 28:44
  Speaker 3: data under spending. We also have tailwinds from energy transition,
• 28:47
  Speaker 3: and by the way, what we haven't talked about either,
• 28:49
  Speaker 3: we also have tailwinds from defense spending, and we also,
• 28:52
  Speaker 3: of course have tailwinds from fiscal policy. The chipsacked the
• 28:55
  Speaker 3: Inflation Douction Act, the Infrastructure Act, and taken together, all
• 28:58
  Speaker 3: these things do point to your question, namely that there
• 29:01
  Speaker 3: is still a chance that we might see infasion go up,
• 29:04
  Speaker 3: and therefore we might see the Fed potentially race interest
• 29:07
  Speaker 3: rates in twenty twenty five.
• 29:08
  Speaker 2: So you've been very constructive on the economy for the
• 29:11
  Speaker 2: past two years. A lot of economists were expecting a
• 29:16
  Speaker 2: recession in twenty two, twenty three, twenty four. They haven't
• 29:21
  Speaker 2: gotten the recession they've been expecting. Why do you think
• 29:25
  Speaker 2: the consensus was so wrong? Is it just that's what
• 29:28
  Speaker 2: the textbook said exactly.
• 29:30
  Speaker 3: I think we've been waiting for Godou for a long
• 29:32
  Speaker 3: time and Godau basically has not arrived, and I don't
• 29:34
  Speaker 3: think he will arrive, at least not in twenty twenty five,
• 29:37
  Speaker 3: because I think everyone took that textbook out exactly as
• 29:41
  Speaker 3: you just said, Barry, and said, wow, when the Fed
• 29:44
  Speaker 3: racist interest rates, then the probabidias of recession goes up.
• 29:47
  Speaker 4: You actually see that on.
• 29:48
  Speaker 3: Your Bloomberg screen if you type ECFC go and look
• 29:51
  Speaker 3: in the opper right hand corner, you can see that
• 29:53
  Speaker 3: the probabidias of recession immediately when the Fed began to
• 29:56
  Speaker 3: race interest rates in March of twenty twenty two, the
• 29:58
  Speaker 3: contentus began to lift high, yeah, significantly the probability of recession.
• 30:02
  Speaker 3: And it was telling you that all the economies on
• 30:06
  Speaker 3: the street who were looking at what is the implication
• 30:09
  Speaker 3: if the Fed racist interest rates, they were saying, it
• 30:11
  Speaker 3: will absolutely be a recession. And what in my view
• 30:15
  Speaker 3: was at least it's clear today and was the reason
• 30:18
  Speaker 3: why we didn't get it was because we all underestimated
• 30:20
  Speaker 3: fiscal policy. We're underestimated the excess savings, meaning the money
• 30:24
  Speaker 3: that you just mentioned came into people's bank accounts, and
• 30:27
  Speaker 3: we also under estimated the interest rate insensitivity of the
• 30:31
  Speaker 3: Data center boom, and also the interest rate insensitivity of
• 30:34
  Speaker 3: energy transition, and also the interest rate insensitivity of the
• 30:38
  Speaker 3: fiscal policy from the CHIPSAC and the inflation arcid Act,
• 30:41
  Speaker 3: and those tailwinds have just kept the economy a lot stronger.
• 30:44
  Speaker 3: So people under estimated that it was not just about
• 30:47
  Speaker 3: interest rates going up. That were tailwinds that kept the
• 30:50
  Speaker 3: economy afloat and a lot stronger than what really almost
• 30:53
  Speaker 3: everyone expected.
• 30:54
  Speaker 2: So in twenty twenty four, the Fed finally talking about
• 30:58
  Speaker 2: waiting for GOODO finally began cutting interest rates. You're one
• 31:03
  Speaker 2: of the few economists who came out and said, Hey,
• 31:05
  Speaker 2: the US economy is strong enough, we really don't need
• 31:08
  Speaker 2: rake cuts. Explain your thinking.
• 31:10
  Speaker 3: Yeah, so we said, and we were wrong in the
• 31:12
  Speaker 3: beginning of last year that the Fed would not cut rates.
• 31:14
  Speaker 3: In twenty twenty four, they did cut rates now one
• 31:16
  Speaker 3: hundred basis points.
• 31:18
  Speaker 4: It is still being debated.
• 31:19
  Speaker 3: I know this sounds very academic, whether that was actually
• 31:22
  Speaker 3: a good idea or not, but it is clear that
• 31:24
  Speaker 3: the Fed did end up cutting interest rates, with the
• 31:26
  Speaker 3: main argument that inflation in June of twenty twenty two
• 31:30
  Speaker 3: was nine percent, and it had come down to around
• 31:32
  Speaker 3: three percent, So the Fed concluded three year is closer
• 31:36
  Speaker 3: to our target of two So this allows us to
• 31:39
  Speaker 3: begin to cut interest rates. The problem is where we
• 31:42
  Speaker 3: sit right now here. Of course, at the beginning of
• 31:44
  Speaker 3: twenty twenty five, that will. In the last few months,
• 31:47
  Speaker 3: inflation has proven more sticky, the median CPI measure from
• 31:51
  Speaker 3: the Cleveland Fed, the TRIMP Mean, the various measures of
• 31:55
  Speaker 3: acyclical inflation, and of course also various measures from the
• 31:59
  Speaker 3: inflation from the New York Fed that also looks at
• 32:01
  Speaker 3: trends in underlying the uIP measure us saying that inflation
• 32:05
  Speaker 3: is beginning to move more sideways and some indicators begin
• 32:07
  Speaker 3: to move up.
• 32:08
  Speaker 4: So again, even.
• 32:09
  Speaker 3: Before we have spoken about Trump policy is potentially giving
• 32:12
  Speaker 3: a lift to even as if it's modest lift to inflation,
• 32:15
  Speaker 3: the problem is that inflation today is three and three
• 32:18
  Speaker 3: is not two. And if I started three and I
• 32:20
  Speaker 3: begin to add a risk of a strong economy, and
• 32:22
  Speaker 3: I add a risk of both terriffs and restrictions and immigration,
• 32:25
  Speaker 3: the risk is not that inflation goes down to two,
• 32:27
  Speaker 3: but the risk is that three begins to become higher.
• 32:30
  Speaker 3: So that's why we still are in the camp of
• 32:32
  Speaker 3: thinking that, well, maybe we are still a little bit
• 32:36
  Speaker 3: early in declaring victory over this issue. On hey, inflation
• 32:40
  Speaker 3: is no longer a problem, because maybe inflation could come
• 32:43
  Speaker 3: back in twenty twenty five and we just don't quite
• 32:45
  Speaker 3: yet have it completely under control. And that's what AFMC
• 32:48
  Speaker 3: members have been saying in speeches, namely that well, maybe
• 32:51
  Speaker 3: we need to go a little bit more slowly, and
• 32:52
  Speaker 3: maybe we should even just take a pause and take
• 32:55
  Speaker 3: a break and see, well how long time it will
• 32:57
  Speaker 3: it take before inflation begins to show more signs of
• 33:00
  Speaker 3: it actually continuously moving low.
• 33:02
  Speaker 2: One. Well, in the last presser, it's pretty clear Jerome
• 33:05
  Speaker 2: Powell wants to take a break. But it raises the
• 33:08
  Speaker 2: question if all this is true about the strength of
• 33:10
  Speaker 2: the US economy. And I completely agree with you. I've
• 33:14
  Speaker 2: been trying to figure out what is their thinking why
• 33:19
  Speaker 2: would they cut? And I kind of came up with
• 33:21
  Speaker 2: two theories, and I want to bounce them off you.
• 33:24
  Speaker 2: One is, the bottom half of the economy really is
• 33:28
  Speaker 2: feeling the effects of higher credit, whether it's credit cards,
• 33:32
  Speaker 2: automobile loans, to say nothing of new mortgage rates. And
• 33:36
  Speaker 2: then second, related to mortgage rates, so many people have
• 33:40
  Speaker 2: locked in low rates. It's almost a set of golden
• 33:44
  Speaker 2: handcuffs and they're stuck to that house that they can't
• 33:48
  Speaker 2: move out of because the financing costs of a newer house,
• 33:53
  Speaker 2: a larger house, or wherever they want to move is
• 33:56
  Speaker 2: just so much greater than where they are. All the
• 33:58
  Speaker 2: supply is frozen place remotely close or what do you think?
• 34:03
  Speaker 3: So the argument that the Fed or their firmc laid
• 34:06
  Speaker 3: out for why they were cutting interest rates was simply
• 34:09
  Speaker 3: that inflation had come down and their goal at their
• 34:12
  Speaker 3: federal reserve is the dual meant they're given by Congress, namely,
• 34:16
  Speaker 3: they need to have inflation at two percent and they
• 34:18
  Speaker 3: need to have full employment. And given inflation was closer
• 34:20
  Speaker 3: to two percent, three percent is closer to two than
• 34:24
  Speaker 3: nine is to two. They were saying, we can begin.
• 34:26
  Speaker 4: To cut interest rates.
• 34:27
  Speaker 3: But it's absolutely clear what you're saying that It was
• 34:30
  Speaker 3: definitely the case and continue to be the case that
• 34:33
  Speaker 3: who is it that is impacted when interest rates are high?
• 34:37
  Speaker 3: It is people and balanteed with a lot of debt.
• 34:40
  Speaker 4: That is both the case.
• 34:41
  Speaker 3: In credit, meaning for firms, but that is also the
• 34:44
  Speaker 3: case for households. Households that have a lot of debt
• 34:47
  Speaker 3: are more vulnerable when interest rates are high. And who
• 34:50
  Speaker 3: are the households, as you were just saying, who have
• 34:52
  Speaker 3: more debt? That is by definition young households, because when
• 34:55
  Speaker 3: you're young, you have more debt on your credit card,
• 34:58
  Speaker 3: on your auto loan, on your student, on your mortgage.
• 35:01
  Speaker 3: So if interest rates are higher for longer, it by
• 35:03
  Speaker 3: definition has a more negative impact on lower income and
• 35:08
  Speaker 3: younger households because when you're young, you're generally also lower income.
• 35:12
  Speaker 3: So it is the reality, it's not very comfortable for
• 35:15
  Speaker 3: the FED to talk about it this way, but it
• 35:17
  Speaker 3: is real reality that FED policy has distributional consequences. It
• 35:22
  Speaker 3: hurts those who have debt and it helps those who
• 35:25
  Speaker 3: have assets. And that's exactly the distribution across the income distribution,
• 35:29
  Speaker 3: across h across fight coss course, namely that if you
• 35:32
  Speaker 3: are a low income, low fight call and younger household
• 35:36
  Speaker 3: you have been hit harder by interest rates being higher.
• 35:39
  Speaker 4: So that's why when interest rates started to go.
• 35:41
  Speaker 3: Down, that would likely not that this was the goal,
• 35:44
  Speaker 3: but that would likely then be helping these households that
• 35:48
  Speaker 3: have been harder hit and more negatively impacted by high
• 35:51
  Speaker 3: interest rates.
• 35:52
  Speaker 2: So we look at the inflation rate in the United
• 35:54
  Speaker 2: States hanging around two and a half percent, little under three. Well,
• 35:59
  Speaker 2: it depends on what you're looking at CPI or CORE
• 36:01
  Speaker 2: or PCE or whatever. But you look around the rest
• 36:04
  Speaker 2: of the world x US, it's like four and a
• 36:07
  Speaker 2: half percent. Why does the rest of the world have
• 36:11
  Speaker 2: so much higher of an inflation rate than we do
• 36:14
  Speaker 2: here in the United States.
• 36:15
  Speaker 3: Yeah, So one important answer to that is that Europe
• 36:18
  Speaker 3: is unfortunately not in a particularly good situation relative to
• 36:21
  Speaker 3: the US. Europe is having the challenge that China is
• 36:25
  Speaker 3: slowing down. Remember, China is slowing down for three reasons.
• 36:27
  Speaker 3: Slowing down because of demographic problems. Remember, the workforce in
• 36:31
  Speaker 3: China is about a billion people, and the United Nations
• 36:33
  Speaker 3: is forecasting that over the next ten years that will
• 36:35
  Speaker 3: shrink from a billion to nine hundred million. That means
• 36:38
  Speaker 3: that we are removing one hundred million people in the
• 36:40
  Speaker 3: Chinese workforce over the next decade, meaning one hundred million people.
• 36:44
  Speaker 3: Few are working in the service sector, in the manufacturing sector,
• 36:48
  Speaker 3: one hundred million people. Few are paying taxes, one hundred
• 36:50
  Speaker 3: million people. Few are demanding housing and at different housing needs.
• 36:54
  Speaker 3: All those things a Japanese style hit wind to Chinese growth. Overall,
• 36:58
  Speaker 3: China is also having at deflating housing bubble. Existing home
• 37:02
  Speaker 3: prices are falling nine percent, new home prices are falling
• 37:04
  Speaker 3: six percent. And finally, China is also engaged in a
• 37:06
  Speaker 3: trade war not only with US, but also with Europe.
• 37:09
  Speaker 3: So because of the headwinds to China, we also have
• 37:12
  Speaker 3: some headwinds therefore to Germany in particular, but Europe, because
• 37:15
  Speaker 3: Europe produces a lot of theirs simply line in China
• 37:18
  Speaker 3: and if we don't have that demand from China for
• 37:21
  Speaker 3: assembly lines and for manufacturing goods and for capital in
• 37:24
  Speaker 3: sensitive goods.
• 37:25
  Speaker 4: That means that Europe is also in trouble.
• 37:26
  Speaker 3: So the problem which you asked about is Germany, and
• 37:29
  Speaker 3: therefore the European economy is not in a good place either.
• 37:32
  Speaker 3: And the channels now is that the service sector inflation
• 37:35
  Speaker 3: in Europe is driven a lot by wage inflation because
• 37:39
  Speaker 3: a lot of wages are basically directly spilling over the
• 37:42
  Speaker 3: service sector and therefore that's how it's measured when you
• 37:44
  Speaker 3: measure inflation in services. And the concusion is because of
• 37:47
  Speaker 3: trade unions and while wage negotiations and bargaining is being delayed,
• 37:52
  Speaker 3: we still to this day have wage negotiations that i
• 37:54
  Speaker 3: function of what we're in what inflation numbers for the
• 37:57
  Speaker 3: last several years, and looking back, inflation was high. So
• 38:01
  Speaker 3: that's why with the delay, wage inflation is also high.
• 38:03
  Speaker 3: And therefore with the delay, service x inflation.
• 38:06
  Speaker 4: Is also high.
• 38:06
  Speaker 3: So it's just because of some institutional reasons. Europe just
• 38:10
  Speaker 3: has a different wage and price dynamic because of this
• 38:14
  Speaker 3: delay in wate negotiations, and that is keeping inflation rates
• 38:17
  Speaker 3: more elevated, especially in services. Inflation in Europe right to
• 38:21
  Speaker 3: what we're having in the US now.
• 38:23
  Speaker 2: I know, the thirty year fixed MORTGAGEES is, you know,
• 38:26
  Speaker 2: beloved here in the US most of Europe, it's it's
• 38:29
  Speaker 2: a variable inflation. It's a variable rate. How does that
• 38:33
  Speaker 2: variable rate impact inflation in Europe? And how significant is
• 38:36
  Speaker 2: that to their overall equivalent of CPI.
• 38:40
  Speaker 4: Yeah, and this is really really important.
• 38:42
  Speaker 3: I mean, as we spoke about earlier, I started my
• 38:44
  Speaker 3: lovely career at the IMF and there s a D.
• 38:46
  Speaker 3: And at the IMF and there was a D. Your
• 38:47
  Speaker 3: job is actually quite simple. If the US is good,
• 38:50
  Speaker 3: Europe is good. If the US is bad, Europe is bad.
• 38:53
  Speaker 3: But this is not the case today. And exactly what
• 38:55
  Speaker 3: you're saying is a very important reason, namely that the
• 38:58
  Speaker 3: interest rates sensitivity of the US economy is a lot
• 39:02
  Speaker 3: lower simply because people have locked in interest rates. Whereas
• 39:05
  Speaker 3: think about literally, as you mentioned all other OECD countries
• 39:08
  Speaker 3: in the UK, in France, Australia, Canada, take the Bank
• 39:11
  Speaker 3: of England. When interest rates go up, mortgage payments for
• 39:15
  Speaker 3: households go up immediately. So that means that monetary policy
• 39:19
  Speaker 3: has a much more immediate negative impact on the European
• 39:23
  Speaker 3: and in this case the UK economy than it does
• 39:25
  Speaker 3: in the US, simply because exactly the mortgage market is
• 39:28
  Speaker 3: much more a function of short term interistrates than long
• 39:31
  Speaker 3: term insterstrates.
• 39:32
  Speaker 4: And why is that the case.
• 39:33
  Speaker 3: That's the case because in the US, and you wrote
• 39:35
  Speaker 3: a book about this many years ago, we have decided
• 39:38
  Speaker 3: that for Fanny and Freddy, for you to get a
• 39:40
  Speaker 3: conventional mortgage, you must show up at their doorstep with
• 39:43
  Speaker 3: a thirty year fixed rate mortgage. You cannot show up
• 39:46
  Speaker 3: with any other mortgage. Then the government will not guarantee it.
• 39:48
  Speaker 3: If you show up with that, they will guarantee it.
• 39:50
  Speaker 3: So that means that the mortgage market is ninety five
• 39:53
  Speaker 3: percent of mortgage are standing at thirty year fixed and
• 39:55
  Speaker 3: that is simply not the case basically in any other
• 39:58
  Speaker 3: OECD country. And that means the US this unique feature
• 40:01
  Speaker 3: that Central Bank of fit policy simply has less of
• 40:05
  Speaker 3: an impact. It's simply less potent relative to what you see,
• 40:08
  Speaker 3: especially in Europe, but also again UK, Australia, Canada and
• 40:11
  Speaker 3: the rest of their West countries.
• 40:13
  Speaker 2: You also drop the data point that I have to
• 40:16
  Speaker 2: follow up the billion to nine hundred million shift in
• 40:21
  Speaker 2: workers over the next decade. Essentially you're saying China is
• 40:27
  Speaker 2: losing a million workers a month for the next decade.
• 40:31
  Speaker 2: Imagine if nine non farm payroll came out each month
• 40:35
  Speaker 2: and it was negative eight hundred and fifty thousand people.
• 40:38
  Speaker 2: That's just an astonishing data point.
• 40:41
  Speaker 3: And that is exactly because of the one child policy
• 40:43
  Speaker 3: that of course is beginning to catch up with the
• 40:45
  Speaker 3: Chinese economy. So if you think about the consequences of
• 40:49
  Speaker 3: the one child policy, is of course that if you
• 40:51
  Speaker 3: have a small a population, the population will begin to shrink,
• 40:54
  Speaker 3: and the consequence, of course is that that you will
• 40:56
  Speaker 3: get really what I would describe as Japanese style hit
• 40:59
  Speaker 3: wins from a demographic perspective, similar to what we have
• 41:02
  Speaker 3: seen in Japan now for many decades.
• 41:04
  Speaker 2: So we have a soft China, although Japan seems to
• 41:09
  Speaker 2: be getting out of its own way and doing pretty well. Yes,
• 41:13
  Speaker 2: Europe is kind of struggling. The rest of the emerging
• 41:17
  Speaker 2: market world seems to be doing okay outside of hotspots
• 41:22
  Speaker 2: where there are problems. How do you get to a
• 41:25
  Speaker 2: two point three percent GDP in the US given all
• 41:29
  Speaker 2: that challenging data points around the rest of the world.
• 41:33
  Speaker 3: Yes, so there are some very important aspects of this
• 41:35
  Speaker 3: name in the US is actually, and I know this
• 41:37
  Speaker 3: sounds a little bit academic, but the US is actually
• 41:40
  Speaker 3: the only economy in the world that's a close economy.
• 41:43
  Speaker 3: And what I mean by that is that that's an
• 41:45
  Speaker 3: economy that does not depend too much on the rest
• 41:47
  Speaker 3: of the world. You always talk about in the literature
• 41:51
  Speaker 3: in economics about the small open economy. So Denmark is
• 41:54
  Speaker 3: a small open economy, Australia is a small open economy.
• 41:57
  Speaker 3: Canada is actually also a small open economy because they
• 42:00
  Speaker 3: depend on others. But the US really doesn't depend to
• 42:02
  Speaker 3: the same degree on others the West the way that
• 42:04
  Speaker 3: others depend on the US. And why is that important here?
• 42:07
  Speaker 3: That's very important because if we take the three reasons
• 42:09
  Speaker 3: we talked about earlier why the US is doing so well,
• 42:12
  Speaker 3: less interest rates sensitivity, we have an AI and data
• 42:14
  Speaker 3: center boom, we have strong fiscal policies. These are all
• 42:17
  Speaker 3: things that we simply don't have in other countries. Instead,
• 42:21
  Speaker 3: we have some significant headwinds to growth in other countries.
• 42:24
  Speaker 3: So that means that at the aggregate level, the US
• 42:27
  Speaker 3: continues to do well for some very idiosyncratic tailwinds and Europe,
• 42:31
  Speaker 3: and the rest of the world is not doing well
• 42:33
  Speaker 3: from actually some different idiosyncratic headwinds. And now finally for markets.
• 42:37
  Speaker 3: Why is this important Because if you think about it,
• 42:39
  Speaker 3: for this in p. Five hundred, suddenly this becomes relevant
• 42:42
  Speaker 3: what's going on in the rest of the world because
• 42:44
  Speaker 3: this inp. Five one hundred is not the USGDP forty
• 42:47
  Speaker 3: percent of revenue and the SNP five hundred comes from abroad.
• 42:49
  Speaker 3: So if Apple sells fewer iPhones in Canada, in Europe,
• 42:53
  Speaker 3: in Australia, that will have vacations for Apple's earnings. Likewise,
• 42:57
  Speaker 3: SMP five hundred companies that sell things up broad if
• 43:00
  Speaker 3: the rest of the world is bad, that could be
• 43:02
  Speaker 3: one way that this could begin to have negative consequences
• 43:05
  Speaker 3: for this and P.
• 43:06
  Speaker 4: Five hundred.
• 43:07
  Speaker 3: That's not my baseline forecast, but I am getting more
• 43:10
  Speaker 3: and more word about this divergence with the US doing
• 43:12
  Speaker 3: good and everyone else doing poorly. The consequence of that
• 43:15
  Speaker 3: could be that that could ultimately show up in earnings
• 43:18
  Speaker 3: because this in p. Five hundred is to a very
• 43:20
  Speaker 3: significant degree. Again, forty percent of revenue in this INP.
• 43:24
  Speaker 3: Five hundred comes from abroad, and abroad is not doing well.
• 43:27
  Speaker 3: Then the revenues from abroad will also begin to have
• 43:30
  Speaker 3: a negative impact on earnings for SMP.
• 43:32
  Speaker 2: Last international question before we jump to the new Trump administration.
• 43:38
  Speaker 2: It's kind of fascinating Japan couldn't get out of its
• 43:41
  Speaker 2: own way for decades. Their market had peaked in nineteen
• 43:45
  Speaker 2: eighty nine, took almost thirty years to set new highs,
• 43:49
  Speaker 2: more than thirty years. Why did Japan suddenly start performing
• 43:56
  Speaker 2: not just the stock market but their economy. Suddenly it
• 43:59
  Speaker 2: looks like Japan is number two to the US and
• 44:03
  Speaker 2: everybody else's distant third.
• 44:04
  Speaker 3: Yeah, there are three reasons why Japan is doing so
• 44:07
  Speaker 3: well at the moment. Number one is that the exchange
• 44:09
  Speaker 3: rate has depreciated a lot, and Japan is an exporting economy.
• 44:13
  Speaker 3: It is again a small, open economy that is definitely
• 44:17
  Speaker 3: experiencing a tailwind to economic growth from exports moving higher
• 44:21
  Speaker 3: simply because of the depreciation in the exchange rate. The
• 44:24
  Speaker 3: second reason is also that in Japan there's actually been
• 44:27
  Speaker 3: some quite fundamental changes in governance. There have been some
• 44:31
  Speaker 3: quite fundamental changes in the policies set up in terms
• 44:35
  Speaker 3: of how at least the government talks about corporates and
• 44:38
  Speaker 3: how they talk about finance. There is an increased willingness
• 44:42
  Speaker 3: in Japan to give more support to basically people coming
• 44:48
  Speaker 3: and buying companies, lending to companies. So that's why private equity,
• 44:52
  Speaker 3: private credit has been busy in Japan, simply because it's
• 44:55
  Speaker 3: been getting a lot of policy support from politicians that
• 44:58
  Speaker 3: want to change the governance in Japanese companies. And third
• 45:01
  Speaker 3: and finally, Japan is actually also and this might sound
• 45:05
  Speaker 3: a little bit peculiar, but they're actually benefiting from some
• 45:07
  Speaker 3: of the problems in China now that suddenly Japan is becoming,
• 45:12
  Speaker 3: of course still a big manufacturing nation, but also now
• 45:15
  Speaker 3: a place where more investment is taking place now that
• 45:18
  Speaker 3: there have been these renewed worries about the outlook for China.
• 45:21
  Speaker 3: So the short answer to your question is the exchange
• 45:23
  Speaker 3: rate is supporting the Japanese economic outlook, changes in governance
• 45:26
  Speaker 3: and changes in corporate finance, and the political support for
• 45:30
  Speaker 3: activist investors has also been supportive for the Japanese outlook
• 45:34
  Speaker 3: and for Japanese financial markets. And finally, Japan has also
• 45:37
  Speaker 3: been benefiting for geopolitical reasons for the tailwinds coming because
• 45:41
  Speaker 3: of some of the challenges that we're seeing in China
• 45:44
  Speaker 3: at the moment.
• 45:44
  Speaker 2: Huh, really really fascinating. So we were talking about the
• 45:48
  Speaker 2: state of the global economy. Now we have a brand
• 45:53
  Speaker 2: new president. Let's start out just discussing how lucky this
• 45:58
  Speaker 2: guy is to inherit for the second time. An economy that,
• 46:04
  Speaker 2: to use your words, is firing on all cylinders.
• 46:07
  Speaker 3: Yeah, the economy is actually in great shape today. We
• 46:10
  Speaker 3: have an U employment rate of four point one percent.
• 46:12
  Speaker 3: GDP growth has for the last several quarters been around
• 46:15
  Speaker 3: three percent, and that's also what their linefit GDPs the
• 46:18
  Speaker 3: mid now is for the fourth quarter. So the starting
• 46:21
  Speaker 3: point is a fairly strong economy. The only little macroeconomic
• 46:25
  Speaker 3: thing you can worry about is what we have talked about.
• 46:27
  Speaker 3: Name the inflation is still a little bit too high
• 46:30
  Speaker 3: around three percent on CPI when it comes to both
• 46:33
  Speaker 3: core and headline. And that's of course the challenge here
• 46:35
  Speaker 3: name me and already strong economy and a little bit
• 46:38
  Speaker 3: too elevated inflation. That's the starting point for where we
• 46:41
  Speaker 3: sit today.
• 46:42
  Speaker 2: So I want to talk about taxes and regulation and tariffs.
• 46:45
  Speaker 2: But before we get there, I know President Trump focuses
• 46:50
  Speaker 2: on the stock market to a lesser degree, the bond
• 46:53
  Speaker 2: market how do you think about valuations for both equities
• 46:57
  Speaker 2: and fixed income here in the beginning of twenty five.
• 47:00
  Speaker 3: Well, if you there are various ways of looking at that,
• 47:03
  Speaker 3: but one simple way of looking at that is to
• 47:05
  Speaker 3: go back and look at the Shiller cyclically adjusted PE ratio.
• 47:09
  Speaker 3: And this Shiller cyclically adjusted PE ratio is basically, as
• 47:13
  Speaker 3: you know too well, a complicated way of saying, let's
• 47:15
  Speaker 3: try to take the business cycle out of earnings by
• 47:18
  Speaker 3: taking a ten year average of earnings for the last
• 47:21
  Speaker 3: ten years and ask the question, where is the stock
• 47:24
  Speaker 3: market whereas there in p. Five hundred relative to a
• 47:27
  Speaker 3: ten year moving average of earnings, And the answer to
• 47:30
  Speaker 3: that is that the Schiller cyclically adjusted PE ratio, which
• 47:33
  Speaker 3: is an attempt to try to correct the stock market
• 47:36
  Speaker 3: valuations for the business cycle, is currently at a very
• 47:39
  Speaker 3: elevated thirty seven.
• 47:41
  Speaker 4: That means rember in the long run. The PE ratio
• 47:43
  Speaker 4: for this in P.
• 47:44
  Speaker 3: Five hundred is sixteen over the last fifty years. So
• 47:47
  Speaker 3: Schiller cyclically adjusted so called CAPE ratio at thirty seven
• 47:52
  Speaker 3: is and thirty eight and approaching forty is indeed a
• 47:55
  Speaker 3: very very elevated level of valuation.
• 47:58
  Speaker 2: So so let me ask you two questions about that. First,
• 48:01
  Speaker 2: we're not that far apart in age. For most of
• 48:04
  Speaker 2: our careers, CAPE has been elevated almost the entire time.
• 48:09
  Speaker 2: If you were not inequities because of an elevated CAPE,
• 48:12
  Speaker 2: well you missed the hell of a move.
• 48:15
  Speaker 3: It just happens to be the case that with the
• 48:16
  Speaker 3: Trump presidency, this is the highest level of CAPE at
• 48:19
  Speaker 3: the start of any presidency going back in the last
• 48:23
  Speaker 3: fifty years.
• 48:23
  Speaker 4: Huh So that means.
• 48:24
  Speaker 3: That we are starting at an extremely elevated level of valuations,
• 48:28
  Speaker 3: at least on the Shillos syclically adjusted level. So let's
• 48:31
  Speaker 3: now turn to other things that are going on in
• 48:32
  Speaker 3: the stock market. As you know much better than me,
• 48:35
  Speaker 3: forty percent of this and P. Five hundred is the
• 48:37
  Speaker 3: top ten stocks. You also know that most of the
• 48:39
  Speaker 3: returns have been coming from really the Nvidia having great performance.
• 48:43
  Speaker 3: And we also know very well that, of course, if
• 48:47
  Speaker 3: you have such a high concentration of the Magnificent seven
• 48:50
  Speaker 3: and the top ten biggest stocks in your index, this
• 48:52
  Speaker 3: goes completely against Page one in my finance textbook. Page
• 48:56
  Speaker 3: one in my finance textbook says you must diversify, and
• 48:59
  Speaker 3: if you take a hundred fresh dollars and put into
• 49:01
  Speaker 3: this in p.
• 49:01
  Speaker 4: Five hundred.
• 49:02
  Speaker 3: Today, you're not diversified. You are basically betting on in
• 49:05
  Speaker 3: Vidia still having good earnings. And I love sitting there
• 49:08
  Speaker 3: on a Wednesday afternoon looking at whether in video earnings
• 49:11
  Speaker 3: where good or we're bad, and I love the adrenaline
• 49:13
  Speaker 3: russ that comes with investing in Nvidia and a lot
• 49:15
  Speaker 3: of other Magnificent seven stocks.
• 49:17
  Speaker 4: But the conclusion still is the.
• 49:18
  Speaker 3: Same that, well, if I'm saving money for the long
• 49:22
  Speaker 3: run and I'm trying to do capital preservations, do you
• 49:25
  Speaker 3: want to expose myself to the risk that I will
• 49:27
  Speaker 3: basically be putting all my money on red, namely on
• 49:30
  Speaker 3: in Vidia and for that matter, Tesla and the other
• 49:32
  Speaker 3: names that I am in the Magnificent seven still doing well.
• 49:35
  Speaker 3: That could be that they will do well. There are
• 49:37
  Speaker 3: also some arguments why they will not do well. But
• 49:38
  Speaker 3: they're certainly very expensive, and that's an argument in my
• 49:41
  Speaker 3: view for definitely being more diversified rather than just having
• 49:45
  Speaker 3: exposure in this and p. Five one hundred mainly to
• 49:48
  Speaker 3: those major names that have gotten so much attention.
• 49:50
  Speaker 2: So could we make that same argument? For a long time,
• 49:54
  Speaker 2: it was Intel, and then it was Cisco, and it
• 49:57
  Speaker 2: seems like every decade you have this Concer tradtion at
• 50:00
  Speaker 2: the top. But since the SMB five hundred is market
• 50:04
  Speaker 2: cap way it did when and at one point in
• 50:06
  Speaker 2: time twenty five years ago, Cisco was the biggest stock
• 50:10
  Speaker 2: in the SMB five hundred and the Nasdaq one hundred,
• 50:13
  Speaker 2: doesn't it sort of automatically adjust as the company shrinks,
• 50:17
  Speaker 2: you own less of it in the index, and it
• 50:20
  Speaker 2: I don't know if self correcting is the right word,
• 50:23
  Speaker 2: but it seems that you buy the whole basket, you'll
• 50:26
  Speaker 2: have the NVIDIAs along with a whole lot of other dogs.
• 50:28
  Speaker 3: One hundred percent. I do think that's absolutely correct. But
• 50:31
  Speaker 3: that's why where we're sitting today. If we agree, and
• 50:34
  Speaker 3: listeners don't have to agree with this, but let's say
• 50:36
  Speaker 3: that at least some people think that the Magnificent seven
• 50:39
  Speaker 3: are very, very expensive. The trailing PE ratio for Tesla
• 50:42
  Speaker 3: is one hundred and eighty. The trailing PE ratio for
• 50:45
  Speaker 3: Nvidia is like sixty. The trailing PE ratio for Amazon
• 50:48
  Speaker 3: is like forty five. Remember again, the PE ratio has historically,
• 50:51
  Speaker 3: on average in the last fifty years been sixteen. So
• 50:54
  Speaker 3: if it is the case that these companies are expensive,
• 50:56
  Speaker 3: I think that a more intelligent approach, in my opinion,
• 50:59
  Speaker 3: would be to say, we're probably going to see some
• 51:01
  Speaker 3: of these companies actually begin to fade and other companies
• 51:04
  Speaker 3: begin to come in. It's a hard issue to pick
• 51:06
  Speaker 3: which ones it is. But maybe at least in this situation,
• 51:09
  Speaker 3: let's agree that maybe it may be a better strategy
• 51:12
  Speaker 3: at least to buy the s and P. Four hundred
• 51:13
  Speaker 3: and ninety three, because that at least I'm not exposed
• 51:16
  Speaker 3: to those seven stocks are so expensive.
• 51:18
  Speaker 2: But by the equal way, and by the equal way way.
• 51:22
  Speaker 4: You're not alternative.
• 51:23
  Speaker 3: Yeah, So in that sense, I of course here and
• 51:25
  Speaker 3: I understand what you're saying, and I do know that
• 51:27
  Speaker 3: the returns in the last two years have been coming
• 51:29
  Speaker 3: to a very last degree from those specific stocks. But
• 51:32
  Speaker 3: all I'm saying is that if we all agree that
• 51:34
  Speaker 3: this is the case, why not take the consequence and
• 51:36
  Speaker 3: then alternatives you can if you have to be in
• 51:38
  Speaker 3: public equities, you could buy this in p. Four hundred,
• 51:40
  Speaker 3: which is a way to have exposure, not to the
• 51:42
  Speaker 3: small cap companies. Remember, in the rust of two thousand,
• 51:45
  Speaker 3: forty percent of companies have no earnings. So if interest
• 51:47
  Speaker 3: rates are higher for longer and you have no earnings,
• 51:49
  Speaker 3: that means that your coverage ratios are low. That means,
• 51:52
  Speaker 3: of course that therefore you're going to struck more if
• 51:54
  Speaker 3: interest rates are indeed higher for longer. So I don't
• 51:56
  Speaker 3: like large cap because I think that's so expensive. I
• 51:58
  Speaker 3: don't like small cap because I think they have no earnings.
• 52:01
  Speaker 3: That's why I think value stocks of companies in the middle,
• 52:04
  Speaker 3: both in properting and private space. But in this case,
• 52:07
  Speaker 3: if you have to be in public SMP four hundred
• 52:09
  Speaker 3: will be probably doing at least my reading a better
• 52:13
  Speaker 3: job relative to the other parts of the spectrum.
• 52:15
  Speaker 2: So we hear during an inauguration week, let's talk a
• 52:18
  Speaker 2: little bit about the new administration, probably the we can't
• 52:24
  Speaker 2: go anywhere without starting with tariffs. How do you feel
• 52:28
  Speaker 2: our trading partners are going to respond to Trump's tariffs?
• 52:33
  Speaker 2: Is he serious about this? Is this a negotiating tactic?
• 52:37
  Speaker 2: How do you put this into your intellectual framework?
• 52:40
  Speaker 3: So the Tax Foundation has quantified that if Trump does
• 52:43
  Speaker 3: through sixty percent on China, twenty five percent on Canada,
• 52:47
  Speaker 3: twenty five percent of Mexico, and ten percent on Europe,
• 52:50
  Speaker 3: we will get an overall level of tariffs that will
• 52:52
  Speaker 3: go up to eighteen percent, which is the same level
• 52:55
  Speaker 3: that we had in the nineteen thirties when we had
• 52:57
  Speaker 3: trade walls and the economy was not doing very well.
• 52:59
  Speaker 4: So if you do have a complete all.
• 53:02
  Speaker 3: In on all fronts when it comes to tariffs, then
• 53:05
  Speaker 3: of course we should begin to worry about that. If
• 53:07
  Speaker 3: everything we buy you and me in stores goes up
• 53:10
  Speaker 3: quote unquote buy sixty percent because now there's sixty percent
• 53:13
  Speaker 3: tariffs on China, then a good guess is that that
• 53:16
  Speaker 3: means that sales by stores in US is going to
• 53:18
  Speaker 3: go down. And if sales start to go down, that
• 53:20
  Speaker 3: means that GDP will also be at risk of going down.
• 53:23
  Speaker 3: So that's why tariffs of course comes by definition with
• 53:26
  Speaker 3: a stackflationary risk that you raise prices and your lower sales.
• 53:30
  Speaker 3: So with that in mind, that doesn't mean that we
• 53:33
  Speaker 3: will not get tariffs. It doesn't mean that we will
• 53:35
  Speaker 3: get all in tariffs. No one really knows exactly how
• 53:37
  Speaker 3: much we will get, but we do know that A
• 53:40
  Speaker 3: very important aspect of this is that we also don't
• 53:42
  Speaker 3: know how the retaliation will be exactly as you're highlighting
• 53:45
  Speaker 3: from other countries.
• 53:46
  Speaker 4: So that's why tariffs overall and remains. We didn't get.
• 53:50
  Speaker 3: Any executive orders on tariffs other than saying that we
• 53:53
  Speaker 3: will investigate it here. But we didn't get any executive
• 53:56
  Speaker 3: orders on tariffs on day one. So we'll see how
• 53:58
  Speaker 3: far we go and what will happen. But at this point,
• 54:01
  Speaker 3: it's very clear that if tariff's I imposed, it is
• 54:04
  Speaker 3: something that the textbook would tell you that we would
• 54:06
  Speaker 3: involve high invasion and at the same time downward pressure
• 54:09
  Speaker 3: on GDP.
• 54:10
  Speaker 2: And just to clarify that plus sixty percent, that's not
• 54:13
  Speaker 2: your forecast as to what's going to happen. That's hey,
• 54:17
  Speaker 2: if what we're discussing gets put into place, exactly, this
• 54:20
  Speaker 2: is the worst case.
• 54:21
  Speaker 3: Scenario exactly because the thing is these are the I mean,
• 54:24
  Speaker 3: Trump on the campaign trail talked about this in many
• 54:26
  Speaker 3: different ways. But if this were to be implemented at
• 54:29
  Speaker 3: sixty percent towards China, think about it. Everything you buy,
• 54:32
  Speaker 3: your iPhone, your T shirt, your clothing, toys for your kids,
• 54:35
  Speaker 3: everything would go up in theory by sixty percent. And
• 54:38
  Speaker 3: that's of course something that would have implications both for
• 54:40
  Speaker 3: prices of those things but also for the sales of
• 54:43
  Speaker 3: those things.
• 54:43
  Speaker 2: What about the restrictions on immigration, both legal and illegal.
• 54:48
  Speaker 3: So Pew estimates that there are about eleven million illegal
• 54:51
  Speaker 3: immigrants in the US, and roughly half of them probably
• 54:54
  Speaker 3: have a job, so that's around six million. Total employment
• 54:57
  Speaker 3: in the US is about one hundred and sixty million.
• 54:59
  Speaker 3: So if there's a hu nred and sixty million people
• 55:00
  Speaker 3: in the US in total that have a job and
• 55:02
  Speaker 3: six million of these are illegal immigrants, that means if
• 55:06
  Speaker 3: you remove millions of people with through deportations, you will
• 55:09
  Speaker 3: remove like two three four percent of the workforce. And
• 55:13
  Speaker 3: Pew and others American Immigration Council, they find that where
• 55:16
  Speaker 3: do illegal immigrants work, They work in three sectors agriculture, construction,
• 55:21
  Speaker 3: and restaurants or services. So the consequence of this is
• 55:24
  Speaker 3: up to fourteen percent of workers in agriculture and construction
• 55:27
  Speaker 3: who are illegal immigrants. And if this is the case,
• 55:30
  Speaker 3: then of course means that you will likely see wage
• 55:32
  Speaker 3: inflation in construction, wage inflation in agriculture, and wage inflation
• 55:36
  Speaker 3: in restaurants. So that also means that if we do
• 55:39
  Speaker 3: get deportations, even if we get restrictions and immigration, that's
• 55:42
  Speaker 3: very meaningful in particular because the starting point is a
• 55:46
  Speaker 3: very strong economy. The consequence is that I will begin
• 55:48
  Speaker 3: to worry again about not only overheating and inflation, but
• 55:52
  Speaker 3: maybe also overheating in the label market. If you remove
• 55:54
  Speaker 3: workers and suddenly there are fewer workers left to compete
• 55:58
  Speaker 3: for their available jobs, and that could exact be why
• 56:00
  Speaker 3: you begin to see in the jolts that job openings
• 56:03
  Speaker 3: actually begin to move higher, because it could be that
• 56:05
  Speaker 3: there's already some issues around what is the labelmar going
• 56:09
  Speaker 3: to look like if we are going down a road
• 56:11
  Speaker 3: where we may see deportations or some very significant restrictions
• 56:14
  Speaker 3: on immigration.
• 56:15
  Speaker 2: All right, so those first two are the negative policies.
• 56:18
  Speaker 2: Let's talk about potentially positive policies like corporate tax cuts
• 56:23
  Speaker 2: and deregulation. How do you see that impacting the economy
• 56:26
  Speaker 2: in the markets?
• 56:27
  Speaker 3: Yes, So if we rewind just for a second and
• 56:29
  Speaker 3: think back to twenty seventeen, where the corporate tax rates
• 56:32
  Speaker 3: were lowered from thirty five to twenty one percent, and
• 56:34
  Speaker 3: remember household taxes were lower from thirty nine point six
• 56:37
  Speaker 3: to thirty seven percent. In twenty seventeen, we saw both
• 56:40
  Speaker 3: household taxes came down and corporate taxes came down. And
• 56:43
  Speaker 3: now Trump has talked about lowering corporate taxes and domestic
• 56:46
  Speaker 3: manufacturers in addition to from twenty one but all the
• 56:49
  Speaker 3: way down to fifteen percent. That means that manufacturers will
• 56:53
  Speaker 3: now see if this happens, of course, a tailwind to production.
• 56:57
  Speaker 3: Just as a footnote, as you and I of course
• 56:59
  Speaker 3: also talk about often, manufacturing is actually only about ten
• 57:01
  Speaker 3: percent of GDP and ten percent of employment, So it's
• 57:04
  Speaker 3: a little bit special that a sexer that's only ten
• 57:06
  Speaker 3: percent of the economy continues to get so much attention.
• 57:09
  Speaker 3: But nevertheless, the definition of make America great again is
• 57:12
  Speaker 3: probably that manufacturing should come back. And if that's the case,
• 57:15
  Speaker 3: even though it only makes up ten percent of GDP,
• 57:18
  Speaker 3: lowering corporate taxes for domestic manufacturers would indeed also be
• 57:22
  Speaker 3: something that's positive, So that policy alone would be a
• 57:25
  Speaker 3: lift to inflation and also a lift to GDP. And
• 57:28
  Speaker 3: on deregulation, of course, we don't know quite exactly what
• 57:32
  Speaker 3: deregulation is going to look like. If it's for financial services,
• 57:36
  Speaker 3: if it's for energy, if it's for transportation, we remain
• 57:39
  Speaker 3: to be seen what area it will be in. But
• 57:41
  Speaker 3: broadly speaking, of course, deregulation would also be releasing animal spirits.
• 57:46
  Speaker 3: It would also be boosting GDP growth, and it would
• 57:48
  Speaker 3: actually also deregulation normally would be putting downward pressure on inflation,
• 57:52
  Speaker 3: at least in the longer run. So those policies exactly
• 57:55
  Speaker 3: as you're saying, Barry, would certainly be tailwinds a particulars
• 57:58
  Speaker 3: GDP growth.
• 58:00
  Speaker 2: We've discussed policy uncertainty as a potential concern because we
• 58:06
  Speaker 2: have no idea what the taraffy going look like, what
• 58:08
  Speaker 2: the deregulations will look like. At least there's some specificity
• 58:13
  Speaker 2: with manufacturing corporate tax rates and exactly where the president
• 58:19
  Speaker 2: wants those to go. How do you deal with the
• 58:22
  Speaker 2: variability of Hey, we have no idea what this looks like.
• 58:26
  Speaker 2: How do you build a model with so many unknowns
• 58:30
  Speaker 2: built into it?
• 58:31
  Speaker 3: This is indeed very complicated from a forecasting perspective. There
• 58:34
  Speaker 3: is no room in my Excel spreadsheet for the US
• 58:37
  Speaker 3: economic outlook to stuff in uncertainty. I can have, and
• 58:40
  Speaker 3: I do have, various small mickey mouse models where vix
• 58:44
  Speaker 3: and the move indicts and volatility measures are included, but
• 58:47
  Speaker 3: they are not a central part of the O world outlook,
• 58:49
  Speaker 3: simply because as you're saying, we just don't know exactly
• 58:52
  Speaker 3: how to quantify that risk. But that being said, it
• 58:55
  Speaker 3: is still the case that if there is uncertainty, that
• 58:59
  Speaker 3: does all obviously have implications for business planning, for household planning.
• 59:03
  Speaker 3: If you don't know what's coming, if you don't know
• 59:05
  Speaker 3: exactly what the nature of policies is going to look like,
• 59:08
  Speaker 3: then of course it does bring some elevated levels of
• 59:11
  Speaker 3: risk that people may be holding back with doing things
• 59:13
  Speaker 3: the otherwise would have done simply because of the uncertainty
• 59:16
  Speaker 3: of everything from immigration policies, tax policies, tariffs, and all
• 59:21
  Speaker 3: the other things that we have talked about. So that's
• 59:24
  Speaker 3: why policy uncertainty is something that is holding back investment
• 59:28
  Speaker 3: and spending decisions by households and by firms.
• 59:31
  Speaker 2: So we talked earlier about CAPEX how significant our administration
• 59:36
  Speaker 2: policies to corporate America spending and investing and building out
• 59:42
  Speaker 2: what is likely to be the next generation of economic drivers.
• 59:45
  Speaker 3: Well, I think that there are two dimensions to that issue. Namely,
• 59:49
  Speaker 3: first of all, we already have in place a number
• 59:51
  Speaker 3: of important tailwinds to CAPEX and business spending, namely AI
• 59:55
  Speaker 3: and data center boom. It doesn't matter what their fitfunds
• 59:57
  Speaker 3: rate is doing, we will have an AI and data
• 1:00:00
  Speaker 3: center boom no matter what interest rates are doing, because
• 1:00:02
  Speaker 3: everyone wants to invest and should be investing in AI. Secondly,
• 1:00:07
  Speaker 3: we probably also have energy transition because energy is needed
• 1:00:10
  Speaker 3: to power the data centers. I also think strongly this
• 1:00:13
  Speaker 3: is getting financing, including from US at Apollo, long term
• 1:00:16
  Speaker 3: investments in energy transition, long term investments in data centers,
• 1:00:19
  Speaker 3: because these long term investments are simply needed and this
• 1:00:22
  Speaker 3: is something that needs to be done. We will also
• 1:00:24
  Speaker 3: have a structural and tale went also from probably defense.
• 1:00:27
  Speaker 3: Defense spending has been going up. The rest of the
• 1:00:29
  Speaker 3: world is also spending more on defense. Again, that is
• 1:00:31
  Speaker 3: also something that is humming in the background supporting growth overall.
• 1:00:35
  Speaker 3: Now specifically to different policies obviously with deregulation, obviously with
• 1:00:40
  Speaker 3: tax cuts, obviously broadly speaking, with policies that are America
• 1:00:44
  Speaker 3: first and make America great again, will probably from a
• 1:00:47
  Speaker 3: cyclical perspective, also be giving a boost to cap expending domestically.
• 1:00:52
  Speaker 3: One way of saying the cyclical part of the outlook
• 1:00:55
  Speaker 3: is really that the animal spirits that have been released
• 1:00:58
  Speaker 3: after Trump was elected, now that companies have at least
• 1:01:02
  Speaker 3: a view seems to be that there's a more business
• 1:01:04
  Speaker 3: friendly environment and for that reason, more business spending will
• 1:01:07
  Speaker 3: be taking place, is from a cyclic perspective, adding to
• 1:01:10
  Speaker 3: the other structural things that I just listed.
• 1:01:12
  Speaker 4: So that's a.
• 1:01:13
  Speaker 3: Reason to be actually quite bullish overall on the KAPIS
• 1:01:16
  Speaker 3: and business spending outlook.
• 1:01:18
  Speaker 2: So you mentioned defense, you mentioned energy, what about technology,
• 1:01:24
  Speaker 2: and what about crypto? Seems to have found a whole
• 1:01:27
  Speaker 2: new tailwind with the most recent election.
• 1:01:31
  Speaker 3: Yeah, so that's of course a lot more complicated and
• 1:01:34
  Speaker 3: more reason we got a coin both from the President
• 1:01:37
  Speaker 3: and of course also from Millennia, and this is raising,
• 1:01:40
  Speaker 3: of course some different questions about the crypto world more generally.
• 1:01:44
  Speaker 3: But I will say that the technology and blockchain and
• 1:01:47
  Speaker 3: investment in AI and investment generally speaking and getting more
• 1:01:52
  Speaker 3: productive and doing things more productively and efficiently is certainly
• 1:01:55
  Speaker 3: something that is here to stay. And I think that that,
• 1:01:57
  Speaker 3: broadly speaking, is also a tail in two the overall outlook.
• 1:02:01
  Speaker 2: Huh, really fascinating. I only have you for a couple
• 1:02:05
  Speaker 2: more minutes. Let's jump to our favorite questions that I
• 1:02:08
  Speaker 2: get to ask all of my guests. It's great having
• 1:02:11
  Speaker 2: that baseline of what everybody else has said, but let's
• 1:02:14
  Speaker 2: just start really simply, what's keeping you entertaining these days?
• 1:02:17
  Speaker 2: What are you watching or listening to?
• 1:02:19
  Speaker 3: So one of my favorite podcasts, of course, is Master's
• 1:02:23
  Speaker 3: in Business. Stop enough, Okay, but that's true. I know
• 1:02:26
  Speaker 3: you ought to more than five hundred episodes. I can't
• 1:02:28
  Speaker 3: believe it's ten years ago since I said with you
• 1:02:30
  Speaker 3: here last time.
• 1:02:31
  Speaker 2: I know when I first began, I had dark hair.
• 1:02:34
  Speaker 3: Yeah, well I actually had hair, so I take that
• 1:02:37
  Speaker 3: I was perhaps one of your first customers here in
• 1:02:39
  Speaker 3: the studio. But I do so listen to we have
• 1:02:43
  Speaker 3: actually our own review from Apollo podcast. But I also watched.
• 1:02:46
  Speaker 3: One series that I've been watching is The Jacal on Peacock,
• 1:02:49
  Speaker 3: which is basically very very James Bond like the series
• 1:02:54
  Speaker 3: about a guy who's going around Europe and doing all
• 1:02:57
  Speaker 3: kinds of things and and what's.
• 1:03:00
  Speaker 2: The name of that Jackal the chaquelle Jackal or Jackal?
• 1:03:05
  Speaker 2: How are you pronouncing life like the spy novel The
• 1:03:09
  Speaker 2: Jackal exactly? Oh really, I'm trying to remember who wrote that.
• 1:03:13
  Speaker 3: So there was This was originally a movie in France
• 1:03:15
  Speaker 3: in the nineteen seventies. But this is something that's playing
• 1:03:18
  Speaker 3: now on Peacock and I've been watching this is like
• 1:03:21
  Speaker 3: I think it's eight episodes and he's traveling around Europe.
• 1:03:23
  Speaker 3: It's really fascinating. It's actually it's really well done.
• 1:03:26
  Speaker 2: We mentioned Binky earlier. Tell us about your mentors who
• 1:03:30
  Speaker 2: helped shape your career.
• 1:03:31
  Speaker 3: Well, my first mentor was my professor and economics in Copenhagen.
• 1:03:35
  Speaker 3: His name is Neil Tigison. He just turned ninety and
• 1:03:38
  Speaker 3: I celebrated his birthday here in December. But he was
• 1:03:41
  Speaker 3: the one that really put me on track to thinking
• 1:03:43
  Speaker 3: about economics. I did my PSD with him and he
• 1:03:46
  Speaker 3: sent me that year to Princeton and he was the
• 1:03:49
  Speaker 3: one who got me going first. And then when I
• 1:03:51
  Speaker 3: joined the IMF, Binkie was there. There were also several others.
• 1:03:55
  Speaker 3: David Ferguslanda also played a very important role, and there
• 1:03:58
  Speaker 3: was also another actually happened to be Danish guy. His
• 1:04:00
  Speaker 3: name is Fleming Larsen, he's now retired, who was also
• 1:04:02
  Speaker 3: a very important vintor for me. And then when I
• 1:04:05
  Speaker 3: came to the WCD, I worked very closely together with
• 1:04:08
  Speaker 3: the gentleman called Vincent Cohen who's actually still there also,
• 1:04:11
  Speaker 3: and also another colleague elan Is Sayers, who's also still there.
• 1:04:14
  Speaker 3: So they have all been teaching me various ways of
• 1:04:17
  Speaker 3: how do you think about things, the importance of a framework,
• 1:04:20
  Speaker 3: the importance of what are the arguments that we put
• 1:04:24
  Speaker 3: up on the scale for something happening. There are some
• 1:04:26
  Speaker 3: arguments why this stock market may be going up, there's
• 1:04:28
  Speaker 3: some arguments why this stock market may be going down.
• 1:04:30
  Speaker 3: Let's try to have a systematic approach to how it
• 1:04:32
  Speaker 3: is that we talk about things. So that's been very influential,
• 1:04:35
  Speaker 3: and finally on Wall Street, on in Deutsche Bank, and
• 1:04:39
  Speaker 3: of course also had Apollo everyone around me and living
• 1:04:43
  Speaker 3: in the private sector, on the commercial world, and of
• 1:04:45
  Speaker 3: course very importantly also here thinking about investing in private assets,
• 1:04:50
  Speaker 3: not least my current CEO, Mark Rowan, and the inspiration
• 1:04:53
  Speaker 3: in terms of how he is really in my view,
• 1:04:56
  Speaker 3: a genius changing the financial system and moving things in
• 1:05:00
  Speaker 3: in the direction that's the future of finance is playing
• 1:05:03
  Speaker 3: a very important impact. I'm playing a very important roland
• 1:05:05
  Speaker 3: having a important impact on my thinking also.
• 1:05:07
  Speaker 2: Today, Yeah, really really fascinating. Let's talk about books. What
• 1:05:11
  Speaker 2: are some of your favorites? What are you reading right now?
• 1:05:13
  Speaker 4: So I have been reading.
• 1:05:15
  Speaker 3: And I just finished The Two Parent Privileged by Melissa Kearney,
• 1:05:19
  Speaker 3: and that has to do with this, of course, a
• 1:05:22
  Speaker 3: unique discussion around what does it mean to have two parents,
• 1:05:26
  Speaker 3: what does it mean to have one parent? What are
• 1:05:28
  Speaker 3: the differences from a sociological perspective for different types of
• 1:05:34
  Speaker 3: organizing yourself as a family. This has been It's very
• 1:05:38
  Speaker 3: interesting and quite eye opening when you think about a
• 1:05:42
  Speaker 3: lot of different things going on in society today.
• 1:05:44
  Speaker 2: Give us one other, what's one of your all time favorites?
• 1:05:47
  Speaker 3: Well, well, of course there's your book after the dailoud. Okay,
• 1:05:51
  Speaker 3: so now we have just too big sure for that,
• 1:05:53
  Speaker 3: to make sure we have that on the record. But
• 1:05:55
  Speaker 3: I think that broadly speaking, I spend a lot of
• 1:05:58
  Speaker 3: my time as just getting back to square the circle
• 1:06:01
  Speaker 3: here in terms of what we spoke about earlier.
• 1:06:03
  Speaker 4: I do spend a lot.
• 1:06:03
  Speaker 3: Of my time reading the economists, reading newspapers, try to
• 1:06:07
  Speaker 3: come up with ideas for daily sparks. I try to
• 1:06:10
  Speaker 3: think about questions I get from clients, questions I get internally.
• 1:06:14
  Speaker 4: Can we get data with this?
• 1:06:15
  Speaker 3: I ask my team, which several of them are sitting
• 1:06:17
  Speaker 3: in India, hey can you over And I come up
• 1:06:20
  Speaker 3: with a chat on this on that. Can we find
• 1:06:22
  Speaker 3: data for how many people go to Broadway shows? Can
• 1:06:24
  Speaker 3: we find data for all kinds of things that I
• 1:06:27
  Speaker 3: would normally try to say, Well, we can't really find
• 1:06:30
  Speaker 3: any data for this, but let's try to dig a
• 1:06:32
  Speaker 3: little bit deep and see if there is any data
• 1:06:34
  Speaker 3: that can help us. So I do also spend a
• 1:06:36
  Speaker 3: lot of my time on Twitter social media, reading newspapers,
• 1:06:40
  Speaker 3: watching Bloomberg shows, and figuring out what are we talking about?
• 1:06:43
  Speaker 4: What data do we have?
• 1:06:45
  Speaker 3: Is this conversation correct or are there actually ways where
• 1:06:48
  Speaker 3: we should take this conversation in a different direction because
• 1:06:50
  Speaker 3: there are other dimensions that are more important.
• 1:06:52
  Speaker 2: Huh, really really fascinating. Our final two questions, what sort
• 1:06:56
  Speaker 2: of advice would you give to a recent college grad
• 1:06:59
  Speaker 2: interesting career in either economics or finance.
• 1:07:03
  Speaker 3: Well, I think this is of course a very important question,
• 1:07:07
  Speaker 3: but I would say read The Economist, watch Bloomberg, Surveillance,
• 1:07:11
  Speaker 3: listen to podcasts like Masters and Business. Try to do
• 1:07:15
  Speaker 3: the homework that is really really hard, and we have
• 1:07:18
  Speaker 3: all been through this process. You will feel that it's
• 1:07:20
  Speaker 3: quote unquote not rewarded, but you will learn more and more.
• 1:07:24
  Speaker 3: You will get to know and understand more and more,
• 1:07:27
  Speaker 3: and in particular, given how the world is moving with
• 1:07:30
  Speaker 3: private markets becoming more and more important, try to understand
• 1:07:33
  Speaker 3: and get a good understanding on what is private equity,
• 1:07:36
  Speaker 3: what is private credit, what is the evolution in private markets?
• 1:07:39
  Speaker 3: How is that relative to public markets? Try to get
• 1:07:42
  Speaker 3: a broader view on what does finance mean and where
• 1:07:46
  Speaker 3: is finance going? And that can really only be done
• 1:07:48
  Speaker 3: by reading your textbooks, trying to stay up to date
• 1:07:51
  Speaker 3: on recent developments. Textbooks in some cases are a little bit behind,
• 1:07:54
  Speaker 3: but really trying to listen and try to think hard
• 1:07:56
  Speaker 3: about and lean back in your check go for a
• 1:07:58
  Speaker 3: long walk in a green park and think about, Okay,
• 1:08:01
  Speaker 3: what is it that I have just learned, What is
• 1:08:03
  Speaker 3: it that I've just been told?
• 1:08:04
  Speaker 4: And how does that fit.
• 1:08:05
  Speaker 3: In with my view of what is overall the outlook
• 1:08:09
  Speaker 3: for financial markets? And how should I think about how
• 1:08:12
  Speaker 3: the financial system hangs together?
• 1:08:13
  Speaker 2: Huh really really interesting? And our final question, what do
• 1:08:17
  Speaker 2: you know about the world of investing today? You wish
• 1:08:20
  Speaker 2: you knew thirty years ago or so when you were
• 1:08:22
  Speaker 2: first getting started.
• 1:08:23
  Speaker 3: Well, this is something that's very important and close to
• 1:08:26
  Speaker 3: my heart because what I had not appreciated until recently,
• 1:08:30
  Speaker 3: is the very important part that private markets play. So
• 1:08:34
  Speaker 3: there are six million businesses in the US with employment.
• 1:08:38
  Speaker 3: So that's a complicated way of saying there are six
• 1:08:41
  Speaker 3: million businesses that have workers working inside those businesses? And
• 1:08:45
  Speaker 3: why is that important? Because we spend so much time
• 1:08:48
  Speaker 3: on the s and P. Five hundred and we starty
• 1:08:50
  Speaker 3: these companies incredibly in incredible detail, and you then turn
• 1:08:55
  Speaker 3: around and say, Okay, those five hundred companies are really interesting,
• 1:08:57
  Speaker 3: but what about the remaining five point zero nine million
• 1:09:00
  Speaker 3: companies that are not in this?
• 1:09:02
  Speaker 4: In p. Five hundred? How do they get financing? Who
• 1:09:04
  Speaker 4: owns them?
• 1:09:05
  Speaker 3: How do they get financing for expanding if they want
• 1:09:08
  Speaker 3: to build a new factory, how do they get financing
• 1:09:10
  Speaker 3: if they want to hire more workers, how do they
• 1:09:12
  Speaker 3: get financing if they want to expand in another country?
• 1:09:14
  Speaker 3: And private markets and the role of private markets. I
• 1:09:17
  Speaker 3: wish that I, earlier on in my macroeconomic career had
• 1:09:21
  Speaker 3: spent some more time thinking much more deeper around what
• 1:09:25
  Speaker 3: is it that's going on in everything else than in
• 1:09:28
  Speaker 3: the SMP five hundred, Because remember of total employment in
• 1:09:31
  Speaker 3: the US, total employment in this in P. Five hundred,
• 1:09:33
  Speaker 3: companies in very round numbers is about twenty five million people,
• 1:09:36
  Speaker 3: and total employment in the US is one hundred and
• 1:09:38
  Speaker 3: sixty million people, so it is only in round numbers
• 1:09:41
  Speaker 3: around twenty percent of employment in the US economy that
• 1:09:44
  Speaker 3: is in this in p. Five hundred, that's a very
• 1:09:46
  Speaker 3: high estimate because SMP also employs people outside the US,
• 1:09:49
  Speaker 3: so that means that eighty percent of employment in the
• 1:09:51
  Speaker 3: US is outside there.
• 1:09:52
  Speaker 1: In p.
• 1:09:52
  Speaker 3: Five hundred, what do these people do? How do we
• 1:09:54
  Speaker 3: measure them? And what businesses do they work in? And
• 1:09:57
  Speaker 3: do they have the financing? Can they get the financing?
• 1:10:00
  Speaker 3: How do they get growth so that the economy can
• 1:10:02
  Speaker 3: growth also outside this and p.
• 1:10:04
  Speaker 2: Five hundred, Torston, this has been absolutely fascinating. I really
• 1:10:09
  Speaker 2: appreciate how generous you've been with your time. We have
• 1:10:12
  Speaker 2: been speaking with Torston Slock. He is the chief economist
• 1:10:16
  Speaker 2: and partner at Apollo Global Management. If you enjoy this conversation, well,
• 1:10:22
  Speaker 2: be sure and check out any of the previous five
• 1:10:24
  Speaker 2: hundred and thirty we've done over the past ten and
• 1:10:27
  Speaker 2: a half years. You can find those at Bloomberg, iTunes, Spotify, YouTube,
• 1:10:34
  Speaker 2: wherever you find your favorite podcasts, And be sure and
• 1:10:37
  Speaker 2: check out my new book coming March eighteenth, How Not
• 1:10:41
  Speaker 2: to Invest The ideas, numbers, and behavior that destroy wealth.
• 1:10:46
  Speaker 2: How Not to Invest at your favorite bookstores March eighteenth.
• 1:10:50
  Speaker 2: I would be remiss if I did not thank the
• 1:10:52
  Speaker 2: Crack staff that helps us put these conversations together each week.
• 1:10:57
  Speaker 2: Sarah Livesey is my audio engineer. Anna Luke is my producer.
• 1:11:02
  Speaker 2: Jean Russo is my researcher. Sage Bauman is the head
• 1:11:06
  Speaker 2: of podcasts at Bloomberg. I'm Barry Rittoltz. You've been listening
• 1:11:10
  Speaker 2: to Masters in Business on Bloomberg Radio.