JPMorgan’s Playbook for a 10-15% Correction (or Worse) — ft. Michael Cembalest

26:27We're back with Proftree Markets. I just want to unpack something you said about the Trump administration would not have nearly the cloud cover for some of the things he was doing. If these 10 companies were off, the S &P would be flat or down. GDP, the stuff I've said is that we'd actually already be in a recession. So he has a vested interest in this boom continuing. I won't even say this bubble, but this boom continuing. Doesn't that – I feel like all paths lead to the same place, and that is the government will back the debt to continue to make these extraordinary capital purchases, which in my view weakens the strength and integrity of the U.S.

27:07debt markets or treasuries. and is like a further move into socialism. But I predict he is going to back these companies, not the real economy, not the main street economy, not the 490 companies in the S &P that got to actually compete in the capital markets. But he has such a vested interest in the music continuing here that the government will step in and offer in some way to back the exceptional capital expenditures so they can continue to make them. And that is only inflating the bubble to very dangerous territory. Your thoughts on that thesis? That would worry me if I saw it. They've done a couple of things so far that I would, in fairness, put in a different bucket.

27:50Jamie is a very inspirational CEO. And one of the things I admire most about him is he calls it like he sees it, right? So they've done a couple of deals with MP Materials and Intel. Both of those deals fall under traditional industrial policy of trying to rescue supply chains that are rapidly diminishing in the United States with respect to domestic semiconductor production and critical minerals. I think you're being generous. When they pick one company and take a stake and they take a golden share in one steel company, I would argue that is not structural or there's not a systemic strategy there.

28:26That's the blood sugar of a man who thinks he can run these businesses better than the private sector. I'm going to disagree with you on that one. And NP materials in particular. I mean, they have provided a price floor on neodymium and presodymium, which is needed by the U.S. military. It's the last man standing in that sector. If you told me that a presidential administration had to administer an industrial policy to pick winners and losers, this might be the last administration I would want to see do that. That said, you know, you don't get to make your time and place. And as things stand right now, China has a chokehold on those critical minerals.

29:07And whatever administration is in power is responsible for making sure, particularly with China flexing its muscles on export controls, that we start the process of trying to rebuild both mining and processing of critical minerals. If you can't do that, you've got a wide range of both renewable energy and military applications that will soon become untenable. That has to be done. I would have preferred for Eisenhower to do it, okay? But, you know, I'm 63. So I probably would have preferred for George Bush Sr. to do it, right? I'm not sure I would have wanted Obama to do it. I'm not sure I would have wanted Jennifer Granholm to do it.

29:48But you don't get to pick your time and place. Intel was different. There's no guarantee of demand. There's no price floors. It's basically just a cash infusion. And based on everything I understand about Intel, their problem isn't money. So the worst thing about that one is I don't even think whatever it is they did is going to be very impactful. But I do expect to see more intervention by the administration in companies that represent the tail end of surviving supply chains, whether it's shipbuilding or anything else. And I'm actually, I'm not a heritage Cato guy. So I'm in support of that. You oversee and kind of set the strategy and the narrative and the theme for one of the deepest pools of capital in the world.

30:41What, other than just moving to cash, and maybe that's the only thing you can do, How do you, I don't want to say become defensive, but just recognize that traditionally when stocks are this fully valued, the markets tend to have a pretty serious correction or go flat for 10 years. Like how is your recommended asset reallocation? What has it been? What are you recommending to those deep pools of capital other than just going into cash? So the answer to that question I think you'll find interesting because it's less about changing the asset allocation of the different portfolios. It's more about explaining to clients that they may be better off switching from balanced to conservative or from growth to balanced.

31:25When we define the risk contours of a balanced portfolio, there are certain parameters that we can go outside of but usually tend not to want to do. And so if we're really feeling that the risk return of a growth portfolio is changing, we would rather have the student body change from being pre-med to pre-law and migrate down to the balanced portfolio risk rather than have to turn the balanced portfolio or the growth portfolio into something it isn't. Because there's always going to be people with generational money or, quite frankly, the city of Chicago, Cook County, Illinois, New Jersey, plans that are kind of on paper in extreme distress.

32:12Their inclination is to take a lot of risk. And so I don't want to change what a growth portfolio does because there are people that are going to allocate to that and have every right to expect a growth portfolio to be positioned the way a growth portfolio looks. So part of our job is to explain to whoever wants to listen that the risk return is skewing because of where the valuations are. So you might want to kind of move down the portfolio chain. What does a balanced or more defensive portfolio look like for those? I mean, just at a very high level, general level, like what does that portfolio look like, bonds versus stocks?

32:51You're talking about 30 to 40 percent of the portfolio being in some kind of combination of cash, short term, A1, P1 commercial paper, municipals for taxable clients, super diversified um hedge funds like 30 to 40 of them where where like the vol turns out to be something like five or six percent um and uh some preferred stock things like that so you're kind of taking a lot of the directional beta risk out of it um you you would you know you're obviously positioning much more defensively health care is trading at like the cheapest valuation on record relative to itself and relative to the market.

33:40So if you're going to take a position someplace, go someplace where you can be paid for the risk a little bit better. You know, so stuff like that. How is tech valued at large right now in terms of paying you for the risk? The first thing people tend to do is say, I'm going to look at the PE of tech, and then I'm going to look at the PE of something else, whether it's industrials or basic materials, consumer discretionary or staples. But for 100 years, people have been adjusting PE ratios for growth, like for earnings growth and ROE and ROA and capital efficiency. So if, and one of the things we do, and we share this in all our publications is we plot both stocks and sectors and industries with return on equity on the X axis and either PE or price to book on the Y axis.

34:27And so there's a lot more consistency to the way the market's valued once you adjust for earnings growth. Now you may think the slope of the curve is too steep and I wouldn't disagree with you, But to just kind of look at PE differentials is really missing the point that even before this generative AI boom, and we roll back the clock to 2019, the tech sector had double the margins of the rest of the market. They had become the things that the tech investors of 2000 would eventually dream they would be, which is highly capital efficient, low employment businesses with huge operating margins. So that's what they were even before this whole AI boom started.

35:05Yeah, something that I was thinking about after we spoke with Aswath, I mean, his core valuation tool is the equity risk premium, which basically, you know, he's taking the rate of return on stocks minus the risk-free rate, and he sort of plots that out. Yeah. And, you know, you're not a fan. It doesn't have any nuance to it. It doesn't look at earnings growth. And, Mario, it doesn't differentiate between sectors. And, you know, and it's, I understand why people want to look at it over the really long run. It can be obviously a helpful tool. Yeah, well, I think it's helpful. It's helpful when you're trying to take a bird's eye view and understand where we are in terms of sentiment.

35:42And the thing that kind of surprised me is, you know, we're at around 3.7 % by that measure. And, you know, to be fair to him, he says, you know, anything below 4 % is a little bit dangerous. But we're also nowhere near where we were in 99 when it was around 2%. And, you know, you're someone, I mean, you were a managing director during the dot-com boom and bust. You were the chief investment officer of J.P. Morgan during the 2008 financial crisis. So you've seen these cycles before. And I think what we're describing here is like, how do we put this in the context of not just tech versus industrials versus consumer, but how do we put it in the context of all of history?

36:25and what does this look like compared to previous crises and previous cycles? I couldn't sleep in March of 2008. Like, I couldn't sleep. The things that we were seeing on a daily basis were so bad. And we knew that it was infecting the entire network of the financial system. And we went underweight, both stocks and high yield. The only mistake we made is we didn't do more of it. Just to show you how hidden those risks were, J.P. Morgan, which is an exceptionally run bank, bought a couple of billion dollars worth of Fannie and Freddie Preferreds that summer for its own balance sheet three months before they went to conservatorship.

37:07Right. So that's how hidden the depth of the problems were. 2001 was easier because the companies weren't making any money. And so as long as you had some degree of discipline and support from your investment committee to go through a period of temporary underperformance as the market was rocking, you did fine. Right. And so that in a way, that was the easiest one. I remember we had this annual MD meeting and the chairman at the time invited a company to come speak to us in 1999. He invited a CEO to come on stage and address all the MDs. And he was the CEO of a company called the globe.com. So I pulled up the globe.com on Bloomberg and I hit DBS.

37:55And it said, this company has no business model at the time. So we're sitting there like the chairman has invited a guy who runs a company with no business model to address us. I think we'll go underweight now. Right. I mean, so that was pretty easy. This is a harder one. because, you know, in many ways, Google is one of the most successful companies in the history of the markets. I personally think their AI-related language model products are better than everybody else. And I think they're the long-term winners in this race. And so I have a lot of respect for what that company's accomplished.

38:34You know, I have similar feelings about what Amazon and Microsoft are doing. But, like, Microsoft signed a deal recently with Constellation Energy to turn back on a nuclear power plant in Three Mile Island. Three Mile Island. They've agreed to pay something in the neighborhood of$130 a megawatt hour. Now, most of your listeners don't know what that means. That's double wholesale power prices for an average 20-year PPA agreement. The other risk that we need to acknowledge is we're getting closer to a power wall that will prevent open AI from getting anywhere near. Like they've announced partnerships with Broadcom, Oracle, AMD, and NVIDIA that would require 30 gigawatts of power, which is the equivalent of 16 Hoover dams.

39:31Like that's just not going to happen. So what we're trying to figure out is how much of what's in the price of this whole AI boom is the expectation that these announcements are actually going to come to fruition under some three to five year timeframe? Because it's impossible. Yeah, it seems kind of obvious to almost everyone. I mean, if you look at the numbers, when you see the amount of power that it's going to take to build out AI the way OpenAI would like, it's like, oh, yeah, that's not possible. And, you know, one of the things that we've been talking a lot about recently is that crazy interaction between Sam Altman and Brad Gerstner.

40:10I don't know if you saw this, where Brad Gerstner says, you know, you're going to spend, you're making$13 billion in revenue. You plan to spend one and a half trillion dollars over the next few years. How are you going to pay for it? To which Sam Altman responds, if you want to sell your stock, you can. Be my guest. There are plenty of other buyers out there who would love to buy OpenAI stock. It sounds like what happens when there's a syndicated loan distribution now on Wall Street. There's so much demand that if you press the button that says on the syndicate call, I have a question about the documents, you get disconnected.

40:47Like, if you have a question on the docs, you don't need to be part of the syndicate. So I would agree with you. Those are the signs that are kind of telling me that we've entered into a period where the risk-taking isn't there, that the underwriting has gotten sloppy. When we look at like in the innards of the private credit markets, private credit five years ago was substantially different than leveraged loans in really boring ways having to do with maintenance covenants, IP blockers, and all sorts of stuff. And over that five-year period, it's converging rapidly towards the Levitz loan market, which basically doesn't apply much of an underwriting wall at all.

41:30So we're kind of preparing for a profit-taking spark that comes from things we might not be able to anticipate, a violent correction in overbid assets, and then some period of kind of recovery and calm that follows. In a previous life, Michael, I used to take boards and management teams outside and do scenario planning as an exercise for how they allocate their capital. And if I were going to do this for a bank or anyone else, there's a couple scenarios I want to outline. And you tell me if they're realistic, if you think they might happen, and if so, how to respond. The first scenario is, all right, built into these, baked into these valuations of these AI companies is what I've read, the assumption that they're going to be able to find or inspire across their clients$3 to$5 trillion in incremental revenues or efficiencies.

42:28Now, I don't see a lot of AI moisturizer out there. What I do see is companies saying, okay, we're cutting our legal expenses. We're cutting compliance. There's real savings and efficiencies, which is sort of Latin for layoffs. And if you think that 160 million people in the nation work, if half of them are in industries immune to AI, chiropractors, you know, welders, 80 million are quote unquote vulnerable. If you were to not inspire, which I have not seen a ton of incremental revenue growth from AI products, but all efficiencies, say a trillion a year,$100 ,000 average load per job, You're talking about a destruction in the labor market of 10 million jobs a year across the 80 million jobs that are vulnerable or a 12.5 % labor destruction per year in certain industries, which may not sound like a lot, but that's chaos.

43:23or these companies' valuations get cut in half. I see this as a pretty definitive fork in the road, either pretty much chaos in the labor markets for the next three years, or these companies adjust down their expectations and valuations. What are your thoughts on that scenario? Those are some important questions. That says it all. The first kind of thought piece that OpenAI published after GPT was released was a piece that kind of jumped out and said, Genre of AI is going to be complementary to workers and not destructive. And I remember thinking, uh-oh, it's going to be bad. Because they were ready to go out of the gate with a paper to defend the labor market.

44:11So true. Like right away to try to get out in front of it, which demonstrates that they kind of knew what this would be able to do to certain industries. You know, the other thing that happened and I wrote about this. A couple months ago, there was a couple of papers that came out. There was this chart showing that the unemployment rate for reaching college graduates for the first time in about 60 years is higher now than the overall unemployment rate rather than lower. So the first two pieces that come out say it has nothing to do with generative AI. So, you know, you go to the back and you're like, who wrote this piece?

44:45And as you unravel the threads, they're Silicon Valley think tanks. And so then I kind of went to David O'Tor and Darren Osamoglu at Harvard at MIT and John Berjolfson at Stanford. You get a different answer, which is, yes, it's kind of looking like generative AI is beginning to affect those young college graduates. So we're starting to see that. We made this pyramid of things about AI. And the bottom of the parrot is the most ubiquitous thing you can find, which is like futurist forecasts and all sorts of stuff. And then as you go a little narrower, it's lab studies of AI doing non-business related things.

45:32They're great, right? It plays chess. It plays Go. It can do all sorts of non-business related things extremely well. It can play your Wordle for you, right? Then now let's see how does it do an actual business related task? Pyramids getting narrower, but there are some studies out there showing this in a lab setting. Then you want like surveys of adoption, but then you get those kind of bland, you know, cream of chicken soup pieces from McKinsey, where all they do is call companies and say, hey, are you using it? Right. And you don't really learn anything from that. And then you keep going up the pyramid to hardcore stuff where what are the revenue and profit and productivity consequences of doing this stuff there's only a handful of those and what you can't find at all is the top of the pyramid which are pathways explicit pathways to profitability for generative AI adoption for the hyperscalers we'll be right back and for even more markets content sign up for our newsletter at profgmarkets.com slash subscribe.

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49:51We're back with Prof. G Markets. I think China's pissed off. I think they're sick of trying to figure out the U.S.-China relationship, plan their economy, and they're diversifying away from us. 24 % of their exports use to come to the U.S., not 17. But they really feel as if they have—I believe they feel we have declared economic war on them and that they are going to punch back. And one way they might punch back, or what I would do if I were Xi, we run companies for profit. They sort of run companies for control and geopolitical advantage. And if I were them, I would begin a government-sponsored drive of capital and strategy to essentially engage in what in the 80s they did with steel, but with AI, and engage in massive AI dumping.

50:37And that is create a ton of LLMs that have near parity technically to US LLMs and then dump them into the market, you know, kind of these open weight, open source LLMs that basically do what China does. And that is offer 95, 97 percent of the premium high end U.S. product for five percent of the price. And then essentially cut, go for the jugular, just flood the market with open weight LLMs and AI products for near free. It takes down, massively erodes the margin power of these companies, takes them down and thereby takes the U.S. economy down. Your thoughts. So the outlook for this year has four major risks.

51:23Number one is the power constraint wall. Number two is the thing you just said, which is that China basically scales the moat on its own. As recently as three years ago, that scenario you just described would have been impossible. um china is the world leader in a lot of things you know fission they've made more fusion advances they're ahead in genetic testing of certain new drugs they have there's a really cool thing that looks at the complexity of exports um it's i think the it's one of the harvard labs that does it they've converged now with the united states so the complexity in the industrial complexity and sophistication of their exports has matched that of the United States.

52:03But as recently as five years ago, they couldn't figure out the semiconductor thing. And through a combination of ingenuity and theft, they have now acquired a lot of things. There's a long list of people that used to work for, you know, either TSMC or ASML that are now working for Huawei. And Huawei has announced that next year, they expect to sell, to your point, Scott, a chip cluster that matches or exceeds the performance of what you can get from NVIDIA. Now, it's got more—it matches the power. The chip—on a per-chip basis, it's only, let's say, a third as powerful, but they say, fine, we'll just use three times as many chips.

52:51And so that's—they're trying to use a combination of brain and brawn to do that. But that kind of still feels two years away. But China's on a really long-term journey. And I would agree that that is very much explicitly their goal. I want to talk more about your 2026 outlook. So you mentioned that the number one risks or the number one risk is power constraints. We don't have enough power to build all the things that we want to build, particularly AI. You said number two is China. What else should we know in terms of risks? Well, the two other ones is the more that China is able to rely on its own chip ecosystem, that means the number three risk has to be Taiwan.

53:42Because, you know, Taiwan essentially was always protected by the fact that China relied 90 percent for its advanced chips on Taiwanese output. But, you know, the day we wake up and that number is below 50 percent, I think you have to start to reevaluate some of the geopolitical contingencies around this whole thing. There's great work. CSIS is the best think tank in the world on this kind of stuff. And they showed us some data. Something like 85 percent of Chinese military assets are in the Taiwanese strait. They have been partnering with Russia to do drills on how to drop heavy equipment out of specially designed parachutes from helicopters.

54:26You know, this is moving in another direction, in another clear direction here. And you don't know when, you don't know how, you don't know why. And maybe it's a quarantine, maybe it's a blockade, maybe it's not a full-out invasion. but there are going to be some challenging times for the West within the next five years as it relates to its almost exclusive reliance on this, you know, NVIDIA, ASML, TSMC partnership. Then the fourth one is the stuff we've been talking about, which is this kind of collective metaverse moment where investors in aggregate say like, okay, it's not a waste of money, but we can't see the ROI.

55:08We're going to take profits until we have a clearer vision of where this is going. I'm still digging through it. There was a, for every good paper, there's a negative paper, right? So for every good paper on AI adoption, there was one that you should read it. It came from this group called MIT Nanda, N-A-N-D-A. Yeah, the 95 % one, yeah. Yeah. Like, you know, I read through the details on that one. Those are a lot of companies that kind of tried it, played around with it, and said, you know what, we're just going to keep doing things the way we're doing it. The other thing that the outlook mentions, there are three forces that will define next year's market.

55:48They are, according to your report, AI. We've discussed that. I think everyone understands that. Global fragmentation and inflation. Describe global fragmentation and inflation for us. Let me just summarize by saying like the Fed is facing a peculiar fork in the road here. It's not a violent differential, but there's a meaningful differential right now between, we look at the PMI surveys, right, the ISM and PMI surveys of prices paid. Those are going up. The PMI surveys on labor, they're going down, right? So what's a Federal Reserve to do when you have a dual mandate that They're going in opposite directions.

56:27Historically, the Fed has almost never cut rates when prices paid surveys are going up. Why would they, right? I mean, you'd be easing into an inflationary environment. It looks like they're going to do that. And it's a huge gamble. The gamble is that the inflationary increase is tariff-related, and once it makes its way through the system, it will not ignite some kind of wage-price spiral, and inflation will be coming down by the spring and the Fed will be vindicated. But that's a big bet. And that's the bet that we're looking at as we're heading into the end of the year and early next year. And the markets are pricing in a couple of cuts here because of that.

57:07I'm less worried about tariffs than immigration policy as it relates to this stuff we're talking about. I think the president is less committed to some of these things than he appears to be. They're already adding massive numbers of products to the exemption list of tariffs. So I think the tariff stuff will turn out to be less damaging. But the latest data from the Fed is that 50 ,000 payroll growth is inflationary. Like the Nehru of inflation for wages is 50 ,000. So yeah, they shut the border. We all understand what political forces they are reacting to. But the United States needs people to grow.

57:51And if you get wage inflation at 50 ,000 payroll growth, you have a labor supply problem. And so they're going to have to make a change soon on that one or else they're going to have bigger problems. Yeah, the report also says tariffs are here to stay no matter what the Supreme Court rules. what are you thinking about in terms of the supreme court ruling on tariffs right now you know gorsuch has been kind of tilting is he's showing you i don't know the poker analogy because i don't play i don't gamble um but what whatever is is it the thing where you hold your cards and people can see what you have or something i mean he's he's been showing his cards a little um during during the hearing and um i think he and barrett will side with the liberals.

58:39And that would reduce the effective tariff rate from like 15 to 7. And then they would try to replace 2 % or 3 % of them with some other clauses, but a bunch of them get defanged and are not so easy to replace. Do you think there might be a ruling where they have to pay back the tariffs to the companies the tariffs were imposed on? I do, over some period of time. And, you know, they would make that as difficult as possible. And, you know, It would be extremely messy.

59:12Think about the messiness of the PPP loans as people started to kind of clean up after them. I mean, it's a messy thing to do. And of course, the Doge people cut a lot of the staffing as it relates to the enforcement and tracking of this stuff. So one of the reasons that tariffs haven't been quite as much of an impact on the economy is a lot of companies are recategorizing goods so that they fall under different tariff buckets that they may not necessarily supposed to apply to. But if you've gutted the enforcement of the people that look at that, then that's what companies are going to do. So, you know, earlier in the year, a lot of people were trying to convince me that there was this holistic vision that they had about what they were trying to accomplish.

1:00:02and I've struggled with that because I see too many policies that conflict with each other. Like if you're really trying to attract foreign direct investment, why would you expel all of those South Korean factory workers? There's just too many policies that don't seem to be aligned with what the administration says its goals are. So, which has given me less confidence that there's a kind of a playlist here that is all adding up to some big coherent grand vision. You've got to work overtime to justify how it all makes sense and how it all plays into a specific strategy. And then, which leads you to believe, okay, that's not what's happening.

1:00:41This is policy by tweets. If you have time on the weekend and you really want to, you know, read something interesting, the Washington Post had an editorial recently from every single living prior surgeon general about what they thought about the leadership at HHS. And I'm not going to go into any more detail. We'll check it out on our own time. Just final question for me. Scott might have one as well. we've talked about some kind of concerning stuff on this podcast. And you said that you thought it was, and correct me if I'm wrong, you thought it would be unlikely to see some sort of profit-taking event to the tune of 10 to 12 to 15 percent next year.

1:01:30No, that's the one I thought was likely. I misspoke. That's what I meant. That is a likely scenario. That's almost your base case for next year. And perhaps there is a more shocking event, like 40 percent. But you're thinking, you know, you're going to see 10, 12, 15 % correction. For someone who has kind of a regular portfolio, a regular investor who is, you know, dollar cost averaging into the market, into the S &P, they've been doing that for a few years. Maybe they haven't looked at bonds too closely in the past. What is your general advice for those people going into 2026? How should they think about their portfolio and how should they invest right now?

1:02:10Well, you know, based on what we've just discussed, it would make sense to start accumulating some dry powder to take advantage of whatever opportunities may exist. A lot of times when you get sell-offs like that, a bunch of things sell off. All of a sudden, you start seeing industrial and utility preferred stock sell off two to three points, which can be the equivalent of 50, 60, 80 basis points. So, you know, having some spare cash and credit to be able to draw on when these things happen can be helpful. A lot of these things tend to be very V-shaped, right? If you look back at almost every single one of these corrections, including the one that happened last year, there's this rapid, violent unwinding of risk.

1:02:58I think a lot of the hedge fund, the big risk parity funds are kind of partially responsible for that. But then it tends to snap back where it comes back roughly at the same speed at which it declined. In that regard, individual investors have an advantage over some of the large institutional investors. I mean, the average endowment or foundation meets quarterly. They're not even set up to respond to some of these things. Yeah, that's interesting. So I think it's, you know, retail investors have at least the flexibility to try to act when these things happen. Make the bull case for 2026. You start seeing more concrete evidence of AI adoption that companies are willing to pay for.

1:03:43And you start seeing productivity benefits that are based equally on revenues and not entirely on the backs of lower rates of hiring. um china starts to cut back on its excess production policy they announced this involution campaign a few months ago that's designed to make chinese companies more profitable by telling them to stop overproducing i'll believe it when i see it um you get fiscal stimulus in europe in part because trump is basically forcing them to defend themselves another policy that I think is long overdue. Europe agreed in 2006 to spend 2 % of GDP on defense, and it took them until 2021 to finally get there.

1:04:30And so you're starting to see more defense spending in Europe, which is stimulative. And then in the U.S., the Fed is vindicated where inflation starts to roll over, aided and abetted by an enormous amount of multifamily and single-family real estate supply pushing down housing-related inflation. And the administration figures out through some combination of relaxation in certain regulations and things like that to ramp up U.S. oil and gas production. So energy prices come down. So that's kind of your bull case.

1:05:42market's fixed income. And you can discover more of his insights by reading Eye on the Market or listening to his podcast by the same name, Michael. Always really insightful. Really appreciate your time. Thank you. Good to see you, Michael. Thank you very much. Good to see you, Scott.

1:06:06Ed, what did you think? I thought I was very, he knows everything, which is so, it's so helpful um i mean he's kind of overseeing one of the largest portfolios in terms of AUM in the world so i mean he's got so much data um i i'm i think i agree with him on pretty much everything he said i mean our reactions to us while this interview i thought it was really striking but i didn't feel quite as bearish um as as professor de modem was when we interviewed him i feel like Michael's sentiment is more where I'm at right now in terms of valuations, where I'm kind of expecting some sort of correction, but not something that is kind of going to cause a major, major crisis.

1:06:56So, yeah, I thought that was informative, made me feel maybe a little better. I think he's very measured because the last thing he wants to do is spook, you know, the$2 trillion in value or in assets they oversee, but he sounded, he sounded measured and a little bit, I don't want to say nervous, but, and I might be, it might be just confirmation bias, but whether it's Sam Altman or Alex Karp getting defensive or demotoring saying, Aswath is the least panicked person I've ever met. And, and then And Michael sort of, Michael seems really measured, not to a fault, but really measured like, okay, I don't want to spook all the capital I oversee, but I'm having a tough time defending this market.

1:07:48And I think part of the reason he's in the position he is, is this guy is just, he's very measured. He just doesn't scare easily, right? But I don't know. And again, I can't figure I can't suss out. Like when I hate everyone around me, I know it's my depression. Like when I literally hate everybody, I know it's my depression speaking. And I'm pretty convinced now we're in for a serious, pretty rocky road in the next 12 months. and I can't, I can't suss out my old man boomer anger from the actual data, but the data I just think looks, I think if the market goes down 40%, if the NASDAQ goes down 40 % in the next 90 days or a hundred, we're going to be like, well, of course it fucking did.

1:08:32I think it's going to be like the most obvious thing in the rear view mirror that it happened. So, but anyways, back to Michael, I, I like him cause he's measured and just, I like that he pauses and thinks about questions. He wants to answer them, answer them correctly. I appreciate that too. Yeah. And, you know, what he said foots with what you're saying. I think he is anxious and kind of expressed that. I mean, he said that his base case is a 10 to 12 to 15 % correction, which is kind of a big deal in and of itself. I mean, the question is, do you think it's going to be like that? Or do you think it's going to be 40%, which again, he didn't rule out.

1:09:10He said that it was unlikely. He doesn't think it's going to happen, but he didn't fully rule it out. I think that the part that he's gotten right is that there is crazy amounts of leverage and debt that's being accumulated, but only in certain contained spaces. So he mentioned Oracle. I've talked about how OpenAI, they haven't gotten there yet, but they're going to have to raise huge amounts of debt in order to support the amount of AI that they want to build and spend on over the next few years. He mentioned Blue Owl and the idea that Meta is raising debt, but using these SPVs to sort of protect themselves.

1:09:50So I think where he's probably right is that the debt and the leverage that we're seeing isn't quite as systemic as we've seen in previous crises, which is probably going to be a good thing. It means that whatever correction we see is going to be at least more contained than it has been in previous crises. I think that's quite a sound analysis. The question then becomes, well, how much more debt are we going to see in the pipeline? I mean, is it just Oracle? Or are we going to start seeing crazy amounts of debt from Amazon and Microsoft and meta? Are they going to ramp it up? That's sort of the next question.

1:10:31But in terms of his views on what the implosion will look like, I think he's pretty spot on.

1:10:43This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our research team is Dan Shalon, Isabella Kinsel, Chris Nodonohue and Mia Silverio. Drew Burrows is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

1:11:22Reunion As the world turns And the dark flies In love

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