The US Economy and Trump Administration Policy with Apollo's Torsten Slok

25:39Most importantly, 95 % of mortgages outstanding in the U.S. are 30 % at fixed rate. And that means that when interest rates started going up, that meant that mortgage payments did not go up for consumers because consumers had locked in low interest rates during the pandemic. And this was also the case for corporate debt. Net interest payments as a share of operating surplus in the U.S. has been going down despite that the Fed has been raising interest rates. So there was also less interest rate sensitivity for corporates. So taken together, the first argument, why is the economy still so strong?

26:11because Fed hikes simply did not have a particularly negative impact on consumers and on firms as the textbook would have predicted. Secondly, in the US, we also have a data center boom. We have an AI and data center boom unlike what we see in any other countries. There's 6 ,000 data centers in the US, more than all other countries combined in the world. So data center boom has probably been adding around 0.2 % to GDP growth for the last several years. And third and finally, we also have fiscal policy. even before we talk about Trump, CHIPS Act, the Inflation Induction Act, the Infrastructure Act have also been important tailwinds.

26:45So in summary, and sorry for giving a very long answer, but why is it the economy has been so strong? It has to do with less interest rate sensitivity, a data center, an AI boom, and finally also fiscal policy. And that's the reason why even where we sit today, the Atlanta Fed GDP now estimate for Q4 is still at 3%, well above the CBO's 2 % estimate for long-run GDP growth. And that is the reason why the S &P 500s have done so well the last few years. That's the reason why credit spreads on IG higher than loans are so tight, because we never got that slowdown that everyone worried so much about.

27:17And now we can then start talking about if we add Trump policies on top of this starting point, then you can begin to worry about that maybe there's a ray acceleration both in inflation and in GDP in 2025 as a result of the starting point being just so strong at the moment. So there's a couple of things you didn't mention in contributing to the strength of the U.S. economy, as well as some price support. And I want to throw those at you. So you didn't mention the massive fiscal spend during the pandemic of CARES Act 1 and 2 under President Trump and CARES Act 3 under President Biden. Those were enormous.

27:54Is that pig through the python? Are we still feeling the effect of that? Yeah, so those were also very important reasons why specifically the savings rate went up a lot in the household sector. So excess savings, you and I have been emailing these charts back and forth. Excess savings were really high exactly because of those fiscal policies giving a lot of money to households. And as households were running down those excess savings, this was also a very important tailwind to the outlook. So I do agree that those things have also played a very critical role in why the economic data has continued to be so strong.

28:26Even the last non-farm payrolls number we got was, of course, also very strong. And also, again, telling you that there are some tailwinds and that pick through the Python has played a critical role in keeping the economy strong for a much longer period than what your economics textbook would have predicted. So there's so many different questions I want to throw at you from that. You mentioned cars, you mentioned labor, and you mentioned houses. All three of those sectors have a shortfall of supply. We stopped making cars for a couple of years during the pandemic. So now we've ramped up enough new car production.

29:02Still means we have a shortfall of pre-owned cars. Housing we underbuilt for a decade. There just doesn't. And the number of homes for sale close to record lows. And it feels like the labor pool is as tight as it's ever been in our lifetimes. How significant are these supply issues to both growth and pricing? They are very important. And there is this, as you and I also have talked about before, this academic debate about was inflation high because of supply or was it high because of demand? But exactly as you are outlining, it's a much more complicated situation where you both have supply constraints for housing, for labor, across the board in autos, in many other sectors.

29:45because during the pandemic, we were simply not able to produce enough of what was needed for the economy to go at full capacity. So therefore, we did have a decline in supply. And at the same time, we had a significant increase in demand, including from the fiscal policies that you just mentioned. And those things together were a very important reason why inflation went up. So now you are asking, looking into 2025, are these things still here? I would say they are still here to a very significant degree. And even before we've talked about Trump policies and tariffs and restrictions on immigration and lower corporate taxes.

30:16All these things are still pointing, in my view, to a situation where we are not out of the woods on inflation. The risk is that inflation could begin to see some lift simply because the Fed is now cutting. And we still have tailwinds from fiscal policy, AI data center spending. We also have tailwinds from energy transition. And by the way, what we haven't talked about either, we also have tailwinds from defense spending. And we also, of course, have tailwinds from fiscal policy, the CHIPS Act, the Inflation Reduction Act, the Infrastructure Act. And taken together, all these things do point to your question, Naomi, that there is still a chance that we might see inflation go up, and therefore we might see the Fed potentially raise interest rates in 2025.

30:53So you've been very constructive on the economy for the past two years. A lot of economists were expecting a recession in 2022, 2023, 2024. They haven't gotten the recession they've been expecting. Why do you think the consensus was so wrong? Is it just that's what the textbook set? Exactly. I think we've been waiting for Godot for a long time, and Godot basically has not arrived, and I don't think he will arrive, at least not in 2025, because I think everyone took that textbook out exactly as you just said, Barry, and said, wow, when the Fed raises interest rates, then the probabilities of recession goes up.

31:32You actually see that on your Bloomberg screen. If you type ECFC Go and look in the upper right-hand corner, you can see that the probabilities of recession. Immediately when the Fed began to raise interest rates in March of 2022, the consensus began to lift higher significantly the probability of recession. And he was telling you that all the economists on the street who were looking at what is the implication if the Fed raises interest rates, they were saying it will absolutely be a recession. And what, in my view, was, at least it's clear today and was the reason why we didn't get it, was because we all underestimated fiscal policy.

32:07We underestimated the excess savings, meaning the money that you just mentioned came into people's bank accounts. And we also underestimated the interest rate insensitivity of the data center boom, and also the interest rate insensitivity of energy transition, and also the interest rate insensitivity of the fiscal policy from the CHIPS Act and the Appalachian Auction Act. And those tailwinds have just kept the economy a lot stronger. So people underestimated that it was not just about interest rates going up. There were tailwinds that kept the economy afloat and a lot stronger than what really almost everyone expected.

32:40So in 2024, the Fed finally, talking about waiting for Godot, finally began cutting interest rates. You're one of the few economists who came out and said, hey, the U.S. economy is strong enough. We really don't need rate cuts. Explain your thinking. Yeah, so we said, and we were wrong in the beginning of last year, that the Fed would not cut rates in 2024. They did cut rates now, 100 basis points. It is still being debated. I know this sounds very academic, whether that was actually a good idea or not. But it is clear that the Fed did end up cutting interest rates with the main argument that inflation in June of 2022 was 9%.

33:16And it had come down to around 3%. So the Fed concluded 3 is closer to our target of 2. So this allows us to begin to cut interest rates. The problem is where we sit right now here, of course, at the beginning of 2025, that, well, in the last few months, inflation has proven more sticky. The median CPI measure from the Cleveland Fed, the TRMP mean, the various measures of acyclical inflation, and of course, also various measures from the inflation from the New York Fed that also looks at trends in underlying the UIP measure, are saying that inflation is beginning to move more sideways and some indicators are actually beginning to move up.

33:53So again, even before we have spoken about Trump policies, potentially giving a lift to, even as if it's modest lift to inflation, the problem is that inflation today is three and three is not two. And if I start at three and I begin to add a risk of a strong economy and I add a risk of both tariffs and restrictions on immigration, the risk is not that inflation goes down to two, but the risk is that three begins to become higher. So that's why we still are in the camp of thinking that, well, maybe we are still a little bit early in declaring victory over this issue on, hey, inflation is no longer a problem, because maybe inflation could come back in 2025, and we just don't quite yet have it completely under control.

34:32And that's what FOMC members have been saying in speeches, namely that, well, maybe we need to go a little bit more slowly, and maybe we should even just take a pause and take a break and see, well, how long time will it take before inflation begins to show more signs of it actually continuously moving lower. Well, in the last presser, it's pretty clear Jerome Powell wants to take a break. But it raises the question, if all this is true about the strength of the U.S. economy, and I completely agree with you, I've been trying to figure out what is their thinking? Why would they cut? And I kind of came up with two theories, and I want to bounce them off you.

35:09One is the bottom half of the economy really is feeling the effects of higher credit, whether it's credit cards, automobile loans, say nothing of new mortgage rates. And then second, related to mortgage rates, so many people have locked in low rates. It's almost a set of golden handcuffs, and they're stuck to that house that they can't move out of because the financing costs of a newer house, a larger house, or wherever they want to move is just so much greater than where they are, all the supply is frozen in place. Remotely close, or what do you think? Yeah, so the argument that the Fed or the FOMC laid out for why they were cutting interest rates was simply that inflation had come down.

35:56And their goal at the Federal Reserve is the dual mandate given by Congress, namely they need to have inflation at 2%, and they need to have full employment. And given inflation was closer to 2%, 3 % is closer to 2 % than 9 % is to 2%, they were saying we can begin to cut interest rates. But it's absolutely clear what you're saying, that it was definitely the case and continues to be the case that who is it that is impacted when interest rates are high? It is people and balance sheets with a lot of debt. That is both the case in credit, meaning for firms, but that is also the case for households.

36:31Households that have a lot of debt are more vulnerable when interest rates are high. And who are the households, as you were just saying, who have more debt? That is by definition, young households, because when you're young, you have more debt on your credit card, on your auto loan, on your student loan, on your mortgage. So if interest rates are higher for longer, it by definition has a more negative impact on lower income and younger households, because when you're young, you're generally also lower income. So it is the reality. It's not very comfortable for the Fed to talk about it this way, but it is the reality that Fed policy has distributional consequences.

37:07it hurts those who have debt and it helps those who have assets. And that's exactly the distribution across the income distribution, across age, across FICO scores, namely that if you are low income, low FICO and younger household, you have been hit harder by interest rates being higher. So that's why when interest rates started to go down, that would likely, not that this was the goal, but that would likely then be helping these households that have been harder hit and more negatively impacted by high interest rates. So we look at the inflation rate in the United States hanging around 2.5%, a little under 3%, it depends on whether you're looking at CPI or CORE or PCE or whatever.

37:48But you look around the rest of the world, ex-US, it's like 4.5%. Why does the rest of the world have so much higher of an inflation rate than we do here in the United States? Yeah, so one important answer to that is that Europe is unfortunately not in a particularly good situation relative to the US. Europe is having the challenge that China is slowing down. Remember, China is slowing down for three reasons, slowing down because of demographic problems. Remember, the workforce in China is about a billion people. And the United Nations is forecasting that over the next 10 years, that will shrink from a billion to 900 million.

38:22That means that we are removing 100 million people in the Chinese workforce over the next decade, meaning 100 million people fewer working in the service sector, in the manufacturing sector, 100 million people fewer paying taxes, 100 million people fewer demanding housing and different housing needs. All those things are a Japanese-style headwind to Chinese growth overall. China is also having a deflating housing bubble. Existing home prices are falling 9%. New home prices are falling 6%. And finally, China is also engaged in a trade war. not only with US, but also with Europe. So because of the headwinds to China, we also have some headwinds therefore to Germany in particular, but Europe, because Europe produces a lot of the assembly line in China.

39:03And if we don't have that demand from China for assembly lines and for manufacturing goods and for capital intensive goods, that means that Europe is also in trouble. So the problem which you asked about is Germany and therefore the European economy is not in a good place either. And the challenge now is that the service sector inflation in Europe is driven a lot by wage inflation because a lot of wages are basically directly spilling over in the service sector and therefore that's how it's measured when you measure inflation in services. And the conclusion is because of trade unions and wage negotiations and bargainings being delayed, we still to this day have wage negotiations that are a function of what were inflation numbers for the last several years.

39:44And looking back, inflation was high. So that's why with a delay, wage inflation is also high. And therefore with a delay, service sector inflation is also high. So it's just because of some institutional reasons. Europe just has a different wage and price dynamic because of this delay in wage negotiations. And that is keeping inflation rates more elevated, especially in services inflation in Europe, relative to what we're having in the US. Now, I know the 30-year fixed mortgage is beloved here in the US. Most of Europe, it's a variable rate. How does that variable rate impact inflation in Europe, and how significant is that to their overall equivalent of CPI?

40:25Yeah, and this is really, really important. I mean, as we spoke about earlier, I started my lovely career at the IMF and the OECD, and at the IMF and the OECD, your job is actually quite simple. If the US is good, Europe is good. If the US is bad, Europe is bad. But this is not the case today. And exactly what you're saying is a very important reason, namely that the interest rate sensitivity of the US economy is a lot lower simply because people have locked in interest rates. Whereas think about literally, as you mentioned, all other OECD countries in the UK, in France, Australia, Canada, take the Bank of England.

40:57When interest rates go up, mortgage payments for households go up immediately. So that means that monetary policy has a much more immediate negative impact on the European and in this case, the UK economy than it does in the US simply because exactly the mortgage market is much more a function of short-term interest rates than long-term interest rates. And why is that the case? That's the case because in the US, and you wrote a book about this many years ago, we have decided that for Fannie and Freddie, for you to get a conventional mortgage, you must show up at their doorstep with a 30-year fixed rate mortgage.

41:30You cannot show up with any other mortgage, then the government will not guarantee it. If you show up with that, they will guarantee it. So that means that the mortgage market is 95 % of mortgages outstanding are 30-year fixed. And that is simply not the case basically in any other OECD country. And that means the U.S. has this unique feature that central bank or Fed policy simply has less of an impact. It's simply less potent relative to what you see, especially in Europe, but also, again, UK, Australia, Canada and the rest of the OECD countries. You also dropped a data point that I have to follow up.

42:02The billion to 900 million shift in workers over the next decade. essentially you're saying China is losing a million workers a month for the next decade. Imagine if non-farm payroll came out each month and it was negative 850 ,000 people. That's just an astonishing data point. And that is exactly because of the one-child policy that, of course, is beginning to catch up with the Chinese economy. So if you think about the consequences of the one-child policy is, of course, that if you have a smaller population, the population will begin to shrink. And the consequence, of course, is that you will get really what I would describe as Japanese-style headwinds from a demographic perspective, similar to what we have seen in Japan now for many decades.

42:50So we have a soft China, although Japan seems to be getting out of its own way and doing pretty well. Yes. Europe is kind of struggling. the rest of the emerging market world seems to be doing okay outside of hotspots where there are problems. How do you get to a 2.3 % GDP in the U.S., given all that challenging data points around the rest of the world? Yeah, so there are some very important aspects of this. The U.S. is actually, and I know this sounds a little bit academic, but the U.S. is actually the only economy in the world that's a closed economy. And what I mean by that is that that's an economy that does not depend too much on the rest of the world.

43:33You always talk about in the literature, in economics, about the small open economy. So Denmark is a small open economy. Australia is a small open economy. Canada is actually also a small open economy because they depend on others. But the U.S. really doesn't depend to the same degree on others the way that others depend on the U.S. And why is that important here? That's very important because if we take the three reasons we talked about earlier why the U.S. is doing so well, less interest rate sensitivity. We have an AI and data center boom. We have strong fiscal policies. These are all things that we simply don't have in other countries.

44:05Instead, we have some significant headwinds to growth in other countries. So that means that at the aggregate level, the US continues to do well for some very idiosyncratic tailwinds. And Europe and the rest of the world is not doing well from actually some different idiosyncratic headwinds. And now finally, for markets, why is this important? Because if you think about it for the S &P 500, Suddenly this becomes relevant, what's going on in the rest of the world, because the S &P 500 is not the US GDP. 40 % of revenue in the S &P 500 comes from abroad. So if Apple sells fewer iPhones in Canada, in Europe, in Australia, that will have implications for Apple's earnings.

44:42Likewise, S &P 500 companies that sell things abroad, if the rest of the world is bad, that could be one way that this could begin to have negative consequences for the S &P 500. That's not my baseline forecast, But I am getting more and more worried about this divergence with the U.S. doing good and everyone else doing poorly. The consequence of that could be that that could ultimately show up in earnings because the S &P 500 is to a very significant degree. Again, 40 percent of revenue in the S &P 500 comes from abroad. And if the abroad is not doing well, then the revenues from abroad will also begin to have a negative impact on earnings for S &P.

45:18Last international question before we jump to the new Trump administration. position um it's kind of fascinating japan couldn't get out of its own way for decades their market had peaked in 1989 took almost 30 years to to set new highs more more than 30 years why did japan suddenly start performing not just the stock market but their economy suddenly it looks like japan is number two to the u.s and everybody else is a distant third yeah there are three reasons why Japan is doing so well at the moment. Number one is that the exchange rate has depreciated a lot, and Japan is an exporting economy.

45:58It is, again, a small open economy that is definitely experiencing a tailwind to economic growth from exports moving higher, simply because of the depreciation in the exchange rate. The second reason is also that in Japan, there's actually been some quite fundamental changes in governance. There have been some quite fundamental interchanges in the policy setup in terms of how at least the government talks about corporates and how they talk about finance. There is an increased willingness in Japan to give more support to basically people coming and buying companies, lending to companies. So that's why private equity, private credit has been busy in Japan, simply because it's been getting a lot of policy support from politicians that want to change the governance in Japanese companies.

46:46And third and finally, Japan is actually also, and this might sound a little bit peculiar, but they're actually benefiting from some of the problems in China now that suddenly Japan is becoming, of course, still a big manufacturing nation, but also now a place where more investment is taking place now that there have been these renewed worries about the outlook for China. So the short answer to your question is the exchange rate is supporting the Japanese economic outlook. Changes in governance and changes in corporate finance and the political support for activist investors has also been supportive for the Japanese outlook and for Japanese financial markets.

47:21And finally, Japan has also been benefiting for geopolitical reasons for the tailwinds coming because of some of the challenges that we're seeing in China at the moment. Really, really fascinating. I'm Carol Masser. And I'm Tim Stenevec, inviting you to join us for the Bloomberg Business Week Daily Podcast. Now, every day, we are bringing you reporting from the magazine that helps global leaders stay ahead. We've got insight on the people, the companies, and trends that are shaping today's complex economy. That's right, Tim. We're all over global business, finance, tech news, all as it is happening in real time.

47:52And we've got complete coverage of the U.S. market close. Got to say, basically, if it impacts financial markets, if it impacts companies, If it's impacting trends and narratives that are out there, we are on it. We also have a lot of fun doing it. Bloomberg Business Week also brings you the analysis behind the headlines through conversations with our expert guests. And we are doing this all live each weekday. And then we bring you the best analysis in our daily podcast. Search for Bloomberg Business Week on YouTube, Apple, Spotify, or anywhere else you listen. Check it out on your way home from work to catch up on the conversations that you miss during the business day.

48:23And on the weekend, check it out for a complete wrap-up of your business week. That's the Bloomberg Businessweek Daily Podcast. I'm Carol Masser. And I'm Tim Stenevec. Subscribe today wherever you get your podcasts. So we were talking about the state of the global economy. Now we have a brand new president. Let's start out just discussing how lucky this guy is to inherit, for the second time, an economy that, to use your words, is firing on all cylinders. Yeah, the economy is actually in great shape today. We have an unemployment rate of 4.1%. GDP growth has for the last several quarters been around 3%.

49:06And that's also what the Atlanta Fed GDP estimate now is for the fourth quarter. So the starting point is a fairly strong economy. The only little macroeconomic thing you can worry about is what we have talked about, namely inflation is still a little bit too high, around 3 % on CPI when it comes to both core and headline. And that's, of course, the challenge here, namely an already strong economy and a little bit too elevated inflation. That's the starting point for where we sit today. So I want to talk about taxes and regulation and tariffs. But before we get there, I know President Trump focuses on the stock market to a lesser degree, the bond market.

49:44How do you think about valuations for both equities and fixed income here in the beginning of 2025? Well, there are various ways of looking at that, but one simple way of looking at that is to go back and look at the Schiller cyclically adjusted PE ratio. And this Schiller cyclically adjusted PE ratio is basically, as you know too well, a complicated way of saying, let's try to take the business cycle out of earnings by taking a 10-year average of earnings for the last 10 years and ask the question, where is the stock market, where is the S &P 500 relative to a 10-year moving average of earnings?

50:19And the answer to that is that the Schiller cyclically adjusted P.E. ratio, which is an attempt to try to correct the stock market valuations for the business cycle, is currently at a very elevated 37. That means, remember, in the long run, the P.E. ratio for the S &P 500 is 16 over the last 50 years. So Schiller cyclically adjusted so-called CAPE ratio at 37 is, and 38 and approaching 40 is indeed a very, very elevated level of valuation. So let me ask you two questions about that. First, we're not that far apart in age. For most of our careers, CAPE has been elevated almost the entire time. If you were not in equities because of an elevated CAPE, well, you missed a hell of a move.

51:05It just happens to be the case that with the Trump presidency, this is the highest level of CAPE at the start of any presidency going back in the last 50 years. So that means that we are starting at an extremely elevated level of valuations, at least on the Shiller cyclically adjusted level. So let's now turn to other things that are going on in the stock market. As you know much better than me, 40 % of the S &P 500 is the top 10 stocks. You also know that most of the returns have been coming from really the NVIDIA having great performance. And we also know very well that, of course, if you have such a high concentration of the Magnificent 7 and the top 10 biggest stocks in your index, this goes completely against page one in my finance textbook.

51:46Page one in my finance textbook says you must diversify. And if you take 100 fresh dollars and put it into the S &P 500 today, you are not diversified. You are basically betting on NVIDIA still having good earnings. And I love sitting there on a Wednesday afternoon looking at whether NVIDIA earnings were good or were bad. and I love the adrenaline rush that comes with investing in NVIDIA and a lot of other magnificent 7 stocks. But the conclusion still is the same, that, well, if I'm saving money for the long run and I'm trying to do capital preservations, do I want to expose myself to the risk that I will basically be putting all my money on red, namely on NVIDIA, and for that matter, Tesla and the other names that are in the magnificent 7 still doing well?

52:25That could be that they will do well. There are also some arguments why they will not do well, but they're certainly very expensive. And that's an argument, in my view, for definitely being more diversified rather than just having exposure in the S &P 500, mainly to those major names that have gotten so much attention. So could we make that same argument for a long time? It was Intel and then it was Cisco. And it seems like every decade you have this concentration at the top. But since the S &P 500 is market cap weighted, and at one point in time, 25 years ago, Cisco was the biggest stock in the S &P 500 and the NASDAQ 100.

53:03Doesn't it sort of automatically adjust as the company shrinks? You own less of it in the index. And I don't know if self-correcting is the right word, but it seems that you buy the whole basket, you'll have the NVIDIAs along with a whole lot of other dogs. 100%. I do think that's absolutely correct. But that's why where we're sitting today, if we agree, and listeners don't have to agree with this, but let's say that at least some people think that the Magnificent 7 are very, very expensive. The trailing PE ratio for Tesla is 180. The trailing PE ratio for NVIDIA is like 60. The trailing PE ratio for Amazon is like 45.

53:39Remember, again, the PE ratio has historically, on average, in the last 50 years, been 16. So if it is the case that these companies are expensive, I think that a more intelligent approach, in my opinion, would be to say, we're probably going to see some of these companies actually begin to fade and other companies begin to come in. It's a hard issue to pick which ones it is. But maybe at least in this situation, let's agree that maybe it may be a better strategy at least to buy the S &P 493 because at least I'm not exposed to those seven stocks that are so expensive. But by the equal weight and that way you're not overexposed.

54:13So in that sense, I, of course, hear and I understand what you're saying. And I do know that the returns in the last two years have been coming to a very large degree from those specific stocks. But all I'm saying is that if we all agree that this is the case, why not take the consequence? And then alternatively, if you have to be in public equities, you could buy the S &P 400, which is a way to have exposure not to the small cap companies. Remember in the Russell 2000, 40 % of companies have no earnings. So if interest rates are higher for longer and you have no earnings, that means that your coverage ratios are low.

54:42That means, of course, that therefore you're going to struggle more if interest rates are indeed higher for longer. So I don't like large cap because I think they're so expensive. I don't like small cap because I think they have no earnings. That's why I think value stocks or companies in the middle, both in public and private space, but in this case, if you have to be in public, S &P 400 will be probably doing, at least in my reading, a better job relative to the other parts of the spectrum. So we're here during inauguration week. Let's talk a little bit about the new administration. Probably the we can't go anywhere without starting with tariffs.

55:18How do you feel our trading partners are going to respond to Trump's tariffs? Is this is he serious about this? Is this a negotiating tactic? How do you put this into your intellectual framework? So the Tax Foundation has quantified that if Trump does do 60 % on China, 25 % on Canada, 25 % on Mexico and 10 % on Europe, we will get an overall level of tariffs that will go up to 18%, which is the same level that we had in the 1930s when we had trade wars and the economy was not doing very well. So if you do have a complete all-in on all fronts when it comes to tariffs, then, of course, we should begin to worry about that if everything we buy, you and me, in stores goes up, quote-unquote, by 60%, because now there's 60 % tariffs on China, then a good guess is that that means that sales by stores in the US is going to go down.

56:09and if sales start to go down, that means the GDP will also be at risk of going down. So that's why tariffs, of course, comes by definition with a stagflationary risk that you raise prices and you lower sales. So with that in mind, that doesn't mean that we will not get tariffs. It doesn't mean that we will get all-in tariffs. No one really knows exactly how much we will get, but we do know that a very important aspect of this is that we also don't know how the retaliation will be, exactly as you're highlighting, from other countries. So that's why tariffs overall and remains, we didn't get any executive orders on tariffs other than saying that we will investigate it here.

56:45But we didn't get any executive orders on tariffs on day one. So we'll see how far we go and what will happen. But at this point, it's very clear that if tariffs are imposed, it is something that the textbook would tell you that it would involve higher inflation and at the same time downward pressure on GDP. And just to clarify, that plus 60%, that's not your forecast as to what's going to happen. And that's, hey, if what we're discussing gets put into place, this is the worst case scenario. Exactly. Because the thing is, I mean, Trump on the campaign trail talked about this in many different ways.

57:17But if this were to be implemented at 60 percent towards China, think about it. Everything you buy, your iPhone, your T-shirt, your clothing, toys for your kids, everything would go up in theory by 60 percent. And that's, of course, something that would have implications both for prices of those things, but also for the sales of those things. What about the restrictions on immigration, both legal and illegal? So Pew estimates that there are about 11 million illegal immigrants in the U.S., and roughly half of them probably have a job, so that's around 6 million. Total employment in the U.S. is about 160 million.

57:49So if there's 160 million people in the U.S. in total that have a job, and 6 million of these are illegal immigrants, that means if you remove millions of people through deportations, you remove like 2%, 3%, 4 % of the workforce. And Pew and others, American Immigration Council, they find that where do illegal immigrants work? They work in three sectors, agriculture, construction, and restaurants or services. So the consequence of this, it's up to 14 % of workers in agriculture and construction who are illegal immigrants. And if this is the case, then of course means that you will likely see wage inflation in construction, wage inflation in agriculture, and wage inflation in restaurants.

58:27So that also means that if we do get deportations, even if we get restrictions on immigration, that's very meaningful, in particular because the starting point is a very strong economy. The consequence is that I will begin to worry again about not only overheating in inflation, but maybe also overheating in the labor market if you remove workers and suddenly there are fewer workers left to compete for the available jobs. And that could exactly be why you're beginning to see in the jolts that job openings are actually beginning to move higher, because it could be that there's already some issues around what is the labor market going to look like if we are going down a road where we may see deportations or some very significant restrictions on immigration.

59:05All right. So those first two are the negative policies. Let's talk about potentially positive policies like corporate tax cuts and deregulation. How do you see that impacting the economy and the markets? Yeah, so if we rewind just for a second and think back to 2017, where the corporate tax rates were lower from 35 to 21 percent. I remember household taxes were lower from 39.6 to 37 percent. In 2017, we saw both household taxes came down and corporate taxes came down. And now Trump has talked about lowering corporate taxes on domestic manufacturers in addition to from 21, but all the way down to 15 percent.

59:41That means that manufacturers will now see, if this happens, of course, a tailwind to production. Just as a footnote, as you and I, of course, also talk about often, manufacturing is actually only about 10 % of GDP and 10 % of employment. So it's a little bit special that a sector that's only 10 % of the economy continues to get so much attention. But nevertheless, the definition of make America great, again, is probably that manufacturing should come back. And if that's the case, even though it only makes up 10 % of GDP, lowering corporate taxes for domestic manufacturers would indeed also be something that's positive.

1:00:13So that policy alone would be a lift to inflation and also a lift to GDP. And on deregulation, of course, we don't know quite exactly what deregulation is going to look like, if it's for financial services, if it's for energy, if it's for transportation. It remains to be seen what area it will be in. But broadly speaking, of course, deregulation would also be releasing animal spirits. It would also be boosting GDP growth. And it would actually, ultimately, deregulation normally would be putting downward pressure on inflation. at least in the longer run. So those policies, exactly as you're saying, Barry, would certainly be tailwinds, in particular to GDP growth.

1:00:49So you've discussed policy uncertainty as a potential concern, because we have no idea what the tariffs are going to look like, what the deregulations are going to look like. At least there's some specificity with manufacturing corporate tax rates and exactly where where the president wants those to go. How do you deal with the variability of, hey, we have no idea what this looks like. How do you build a model with so many unknowns built into it? This is indeed very complicated from a forecasting perspective. There is no room in my Excel spreadsheet for the U.S. economic outlook to stuff in uncertainty.

1:01:30I can have, and I do have, various small Mickey Mouse models where VIX and the move index and volatility measures are included, but they are not a central part of the overall outlook simply because, as you're saying, we just don't know exactly how to quantify that risk. But that being said, it is still the case that if there is uncertainty, that does obviously have implications for business planning, for household planning. If you don't know what's coming, if you don't know exactly what the nature of policies is going to look like, then, of course, it does bring some elevated levels of risk that people may be holding back with doing things they otherwise would have done simply because of the uncertainty of everything from immigration policies, tax policies, tariffs, and all the other things that we have talked about.

1:02:14So that's why policy uncertainty is something that is holding back investment and spending decisions by households and by firms. So we talked earlier about CapEx, how significant are administration policies to corporate America spending and investing and building out what is likely to be the next generation of economic drivers. Well, I think that there are two dimensions to that issue. Namely, first of all, we already have in place a number of important tailwinds to CapEx and business spending, namely AI and data center boom. It doesn't matter what the Fed funds rate is doing. We will have an AI and data center boom no matter what interest rates are doing because everyone wants to invest and should be investing in AI.

1:02:57Secondly, we probably also have energy transition because energy is needed to power the data centers. I also think strongly this is getting financing, including from us at Apollo, long-term investments in energy transition, long-term investments in data centers because these long-term investments are simply needed and this is something that needs to be done. We will also have a structural table and also from probably defense. Defense spending has been going up. The rest of the world is also spending more on defense. Again, that is also something that is humming in the background, supporting growth overall.

1:03:26Now, specifically to different policies, obviously with deregulation, obviously with tax cuts, obviously, broadly speaking, with policies that are America first and make America great again, will probably, from a cyclical perspective, also be giving a boost to CapEx spending domestically. One way of saying the cyclical part of the outlook is really that the animal spirits that have been released after Trump was elected, now that companies have, at least the view seems to be that there's a more business friendly environment. And for that reason, more business spending will be taking place, is from a cyclical perspective, adding to the other structural things that I just listed.

1:04:03So that's a reason to be actually quite bullish overall on the CapEx and business spending outlook. So you mentioned defense, you mentioned energy. What about technology and what about crypto seems to have found a whole new tailwind with the most recent election? Yeah. So that's, of course, a lot more complicated. And more recently, we got a coin both from the president and of course also for melania and this is raising of course some different questions about the crypto world more generally but i will say that the technology and blockchain and investment in ai and investment generally speaking and getting more productive and doing things more productively and efficiently is certainly something that is here to stay and i think that that broadly speaking is also a tailwind to the overall outlook huh really fascinating i only have you for a couple more minutes, let's jump to our favorite questions that I get to ask all of my guests.

1:05:01It's great having that baseline of what everybody else has said. But let's just start really simply. What's keeping you entertained these days? What are you watching or listening to? So one of my favorite podcasts, of course, is Masters in Business. Stop. Enough. Okay. But that's true. I know you're up to more than 500 episodes. I can't believe it. It's 10 years ago since I sat with you here last time. I know. When I first began, I had dark hair. I actually had hair. So I think that I was perhaps one of your first customers here in the studio. But I do also listen to, we have actually our own view from Apollo podcast, but I also watch one series that I've been watching is The Jackal on Peacock, which is basically a very, very James Bond-like series about a guy who's going around Europe and doing all kinds of things.

1:05:49and what's the name of that? Jackal? Jackal or Shagal? Yeah, the Jackal. How are you pronounces? Here comes my Danish accent. Like the spy novel, The Jackal? Exactly. Oh, really? I'm trying to remember who wrote that. This was originally a movie in France in the 1970s, but this is something that's playing now on Peacock, and I have been watching, this is like, I think it's eight episodes, and he's traveling around Europe. It's really fascinating. It's really well done. We mentioned Binky earlier. Tell us about your mentors. Who helped shape your career? Well, my first mentor was my professor in economics in Copenhagen.

1:06:25His name is Nils Tiggerson. He just turned 90, and I celebrated his birthday here in December. But he was the one that really put me on track to thinking about economics. I did my PhD with him, and he sent me that year to Princeton. And he was the one who got me going first. And then when I joined the IMF, Binky was there. There were also several others. David Fogas-Landau also played a very important role. And there was also another, actually happened to be a Danish guy. His name is Fleming Larsen. He's now retired, who was also a very important mentor for me. And then when I came to the OECD, I worked very closely together with a gentleman called Vincent Cohen, who's actually still there also, and also another colleague, Alain Desers, who's also still there.

1:07:04So they have all been teaching me various ways of how do you think about things, the importance of a framework, the importance of what are the arguments that we put up on the scale for something happening. There are some arguments why the stock market may be going up. There are some arguments why the stock market may be going down. Let's try to have a systematic approach to how it is that we talk about things. So that's been very influential. And finally, on Wall Street, on Deutsche Bank, and of course also here at Apollo, everyone around me and living in the private sector and the commercial world, and of course, very importantly, also here thinking about investing in private assets, not least my current CEO, Mark Rowan, and inspiration in terms of how he is really, in my view, a genius, changing the financial system and moving things in the direction that's the future of finance is playing a very important role and having an important impact on my thinking also today.

1:07:58Really, really fascinating. Let's talk about books. What are some of your favorites? What are you reading right now? So I have been reading, and I just finished, The Two Parent Privileged by Melissa Kearney. and that has to do with this, of course, unique discussion around what does it mean to have two parents, what does it mean to have one parent, what are the differences from a sociological perspective for different types of organizing yourself as a family. This has been very interesting and quite eye-opening when you think about a lot of different things going on in society today. Give us one other.

1:08:36What's one of your all-time favorites? Well, of course, there's your book, After the Bailout. Okay, so now we have that, just to make sure we have that on the record. But I think that, broadly speaking, I spend a lot of my time, just getting back to square the circle here in terms of what we spoke about earlier, I do spend a lot of my time reading The Economist, reading newspapers, try to come up with ideas for daily sparks. I try to think about questions I get from clients, questions I get internally. Can we get data with this? I asked my team, which several of them are sitting in India, hey, can you overnight come up with a chart on this and that?

1:09:11Can we find data for how many people go to Broadway shows? Can we find data for all kinds of things that I would normally try to say, well, we can't really find any data for this, but let's try to dig a little bit deeper and see if there is any data that can help us. So I do also spend a lot of my time on Twitter, social media, reading newspapers, watching Bloomberg shows and figuring out what are we talking about, What data do we have? Is this conversation correct? Or are there actually ways where we should take this conversation in a different direction? Because there are other dimensions that are more important.

1:09:42Really, really fascinating. Our final two questions. What sort of advice would you give to a recent college grad interested in a career in either economics or finance? Well, I think this is, of course, a very important question. But I would say read The Economist. Watch Bloomberg Surveillance. listen to podcasts like Masters in Business, try to do the homework that is really, really hard. And we have all been through this process. You will feel that it's quote unquote not rewarded, but you will learn more and more. You will get to know and understand more and more. And in particular, given how the world is moving with private markets becoming more and more important, try to understand and get a good understanding on what is private equity, what is private credit, what is the evolution in private markets, how is that relative to public markets, try to get a broader view on what does finance mean and where is finance going.

1:10:37And that can really only be done by reading your textbooks, trying to stay up to date on recent developments. The textbooks in some cases are a little bit behind, but really trying to listen and try to think hard about it and lean back in your chair. Go for a long walk in a green park and think about, okay, what is it that I have just learned? What is it that I've just been told? And how does that fit in with my view of what is overall the outlook for financial markets and how should I think about how the financial system hangs together. Really interesting. And our final question, what do you know about the world of investing today you wish you knew 30 years ago or so when you were first getting started?

1:11:14Well, this is something that's very important and close to my heart because what I had not appreciated until recently is the very important part that private markets play. So there are 6 million businesses in the U.S. with employment. So that's a complicated way of saying there are 6 million businesses that have workers working inside those businesses. And why is that important? Because we spend so much time on the S &P 500 and we study these companies in incredible detail. And you then turn around and say, okay, those 500 companies are really interesting. But what about the remaining 5.9 million companies that are not in the S &P 500?

1:11:53How do they get financing? Who owns them? how do they get financing for expanding if they want to build a new factory? How do they get financing if they want to hire more workers? How do they get financing if they want to expand in another country? And private markets and the role of private markets, I wish that I earlier on in my macroeconomic career had spent some more time thinking much more deeper around what is it that's going on in everything else than in the S &P 500. Because remember, of total employment in the US, total employment in the S &P 500 companies in very round numbers is about 25 million people and total employment in the US is 160 million people.

1:12:30So it is only in round numbers around 20 % of employment in the US economy that is in the S &P 500. That's a very high estimate because S &P also employs people outside the US. So that means that 80 % of employment in the US is outside the S &P 500. What do these people do? How do we measure them? And what businesses do they work in? And do they have the financing? Can they get the financing? How do they get growth so that the economy can grow also outside the S &P 500. Thorsten, this has been absolutely fascinating. I really appreciate how generous you've been with your time. We have been speaking with Thorsten Schlack.

1:13:05He is the chief economist and partner at Apollo Global Management. If you enjoy this conversation, well, be sure and check out any of the previous 530 we've done over the past 10 and a half years. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you find your favorite podcasts. And be sure and check out my new book coming March 18th, How Not to Invest, The Ideas, Numbers, and Behavior That Destroy Wealth. How Not to Invest at Your Favorite Bookstores, March 18th. I would be remiss if I did not thank the crack staff that helps us put these conversations together each week. Sarah Livesey is my audio engineer.

1:13:50Anna Luke is my producer. Sean Russo is my researcher. Sage Bauman is the head of podcasts at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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