What are the market implications for How should I be positioned? with Torsten Slok (Apollo) and Jason Draho (UBS CIO)?

Traders should closely monitor the next developments in U.S. trade policy and Fed communications, particularly any statements or changes in tariffs, as they may alter positioning in major currency pairs. A sustained break above 1.10 in EUR/USD could indicate stronger sentiment in favor of euro strength amidst these dynamics.

What are the risks to this view on How should I be positioned? with Torsten Slok (Apollo) and Jason Draho (UBS CIO)?

A significant risk to this outlook would be a swift resolution to trade tensions or a dovish pivot from the Federal Reserve, both of which could bolster market confidence and lead to rapid shifts in currency valuations against the U.S. dollar.

How should I be positioned? with Torsten Slok (Apollo) and Jason Draho (UBS CIO)

Q: What's takeaway 1 on How should I be positioned? with Torsten Slok (Apollo) and Jason Draho (UBS CIO)?

Rising tariffs in the U.S. could have a profound impact on market stability and direction.

Q: What's takeaway 2 on How should I be positioned? with Torsten Slok (Apollo) and Jason Draho (UBS CIO)?

The evolving landscape of U.S. trade policy is closely linked to macroeconomic performance and asset allocations.

Hi everyone, Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel. As you know, on this podcast, we do like to catch up with our industry colleagues to share thoughts on the market and macro environment, along with thinking when it comes to asset allocation.

Joining me here from the UBS Chief Investment Office, glad to welcome back Jason Draho, the Head of Asset Allocation for the Americas. Jason and I are very excited to welcome back today his fifth appearance with us, Torsten Slock, Partner and Chief Economist at Apollo Global Management, here at the table with us at the UBS podcast studio in New York. Torsten, it's great to have you back with us.

Jason, nice to be with you as well. I know there's plenty to talk about with our listeners, our clients, so glad we're all together for today's conversation. Welcome back.

Thanks so much, and thanks so much for having us. It's good to be here. Torsten, welcome.

I think you're the second person now to be a member of the Five Timers Club, so congratulations. I'm very honored. Great to be here.

A big milestone in your career, I can imagine. No. Thank you so much again.

Torsten, I was looking back at the archive. You were last on with us, I believe it was December of 2024, so a lot has happened between then and now, most notably developments when it comes to U.S. trade policy. That might be an interesting place to start.

I know trade is really influencing much of the economic, the market outlook at the moment. What are your thoughts as to where we go from here? I know it's very fluid as we're recording here on July 16th, so what's your thoughts on trade and how do you see this evolving through year-end?

Yeah, this obviously is very important for financial markets, and it's very clear since we sat down here six months ago, of course, a lot of things have happened. Most importantly on the trade front, of course, we have had a number of increases in tariffs across a wide range of countries. We are now, of course, in a situation where we are still getting still some deals coming in, but the vast majority of countries still don't have a deal, so it still remains unclear what level of tariffs that we will end up with across countries.

So I would say we have the peak uncertainty behind us, but what we now have ahead of us is the challenge in markets of quantifying the impact, especially going into this earnings season, of what are the implications for earnings across companies. For example, in the first quarter earnings season, we heard Ford Motor Company said that they had significant losses because of tariffs. We heard from Apple that they have had losses because of tariffs.

We heard from Walmart that tariffs are a problem. It is a broad impact on the US economy where the question now becomes, as the – excuse my picture – pigs come through the python and we figure out where is it that we will see a hit, then tariffs do become macroeconomic very important because, most critically, someone has to pay the higher import tax or the tariff that has been raised. Is it consumers through higher inflation or is it companies through lower earnings?

And this earnings season that we are about to enter here is really when we will find out is it consumers through higher inflation that are paying the tariffs or is it companies through lower earnings? And that will be the critical part of this earnings season, namely figuring out what is exactly the quantified impact of the tariffs that were implemented over the last several months. And Jason, as Torsten indicated, a lot of unknowns as we have been talking about with respect to trade policy, the impacts to the economic environment in the US, corporate earnings, we are starting to hear from companies.

What are your thoughts as to how this may progress from here? Well, I think Torsten is right in terms of we don't really know where things are going to go. It is going to depend on President Trump and sort of the final decisions.

The best we can do as investors is try and make some reasonable assumptions of how things could proceed. And one of them is ultimately I think the latest escalation of tariffs, these letters that have gone to countries and sort of raising reciprocal tariff rates effective August 1st, this is still very much a negotiation to try and get concessions, perhaps a sign that countries are stalling on terms or just Trump wants to ramp up the pressure to get better concessions. So I think ultimately the way we think of it is like when the dust settles and we finally have the set of tariffs in place, what is the effective tariff rate, meaning like total value of imports and the total amount of customs paid on that, we think it is going to be around 15% give or take.

And so plus or minus a couple of percentage points, I think the market can take it for what it is. For context, after Liberation Day, it was in the high 20s. So I think that is kind of how we sort of play it out.

And given the market reaction kind of almost shrugging their shoulders, you know, the whole taco trade kind of concept suggests that people think ultimately still that is the case, which is scoped for surprise and disappointment, but I think that is the way we kind of play it out. And one very important dimension here is of course that the deadline, as Jason is saying, is exactly as we all know, August 1st. So let us not forget that on July the 31st, we will begin to hear oral arguments in the IEPA case.

In other words, will the appeals court strike down the legality of tariffs? Maybe there is a risk for markets here to the upside and downside that we now need to think about what will be the decision from the courts. Will they again say like the lower court said that the tariffs are simply not legal when it comes to the IEPA because they argued that there is no emergency on immigration, there is no emergency on fentanyl.

So therefore, the argument was let us push this to the higher level of courts. Supreme Court has not yet accepted to take it, but the conclusion is even before we know what the deadline here on August the 1st and what deals we have, then the next issue also that is confusing for markets and we just do not know the answer is what will the appeals court say? Are these tariffs actually legal or not?

Tariffs on sexual areas, meaning 232, are still legal and are still going on on steel, aluminum and other things, but when it comes to individual countries, it could be an extreme scenario that in a few weeks, all the tariffs that have been put on countries are not legal and then we will suddenly in markets need to go back to our spreadsheets and quantify well what does it then mean because as Jason is saying, is it not then 15%? Maybe we are back to 3% or maybe we simply have a lower level of tariffs than what we are all thinking about today. Well, this point about the court ruling, whether the court could say it is illegal, that might be also a factor where other countries are sitting back and say like, well, maybe we will ride this out and like let us just kind of drag this on, so I think that is a possibility.

Predicting what the court will do, that is not my expertise. Predicting what Trump will do is definitely not my expertise, but what I think we can try and do is assess like what is the tariff impact if they are in place. In the consensus view, I think the economic logic would dictate you put on tariffs, this is essentially a tax on consumers, so it is slower growth, higher inflation, at least directionally, but I sort of wondered and I wrote a note a couple of months ago titled like what if.

Essentially, what if this consensus view is wrong because I was getting a sense of sort of deja vu from like a couple of years ago, the consensus view was we will get a recession because the Fed is raising rates. Turns out instead of the economy slowing, it grew far faster than expected the past two years. If there is also ever a situation where companies could be prepared for supply side disruptions because of tariffs, it comes two years after we had a pandemic that completely disrupted supply chains.

So, my conjecture was not that we would not have some negative consequences of tariffs, but maybe it is going to be relatively modest. On the data so far, we just now have seen a big impact and then you could say, well, it is lag, it is lag, it is lag, again, this rings to like two years ago, well, it is going to be a lag, defect, lag, defect and perhaps we are wrong. The latest inflation data we got for June on TPI, you can see directionally, goods a little bit higher, services slower, so suggesting some impact to growth, but also imports, but maybe this is it.

And so, this is a conjecture, it is hard to quantify, but I am wondering as the data has come in over the past few months, we have seen minimal impact. Is it altering your thinking of like perhaps the impact will not be so bad if you talk to other companies, like maybe companies are figuring out a way to sort of manage this that ultimately economic impact will not be as significant? Yes, this is very important.

There are two aspects of this. First of all, we know for a fact now, at the moment, the government is raising about $30 billion in tariff revenue every single month, so $30 billion a month multiplied by 12, that brings you to annual tariff revenue of roughly $400 billion, a little bit less a year. So the key issue here is someone is today paying at an annual rate $400 billion in tariff revenue.

So someone is paying more money for the imports that are coming in. Either it is consumers through higher prices or it will be companies through lower earnings. In my view, there is no free lunch.

You cannot raise $400 billion and no one is paying. Someone is paying. And in particular now, if the level of tariffs could go up even further, Scott Besson has talked about that we might go back to the liberation day, April 2 levels of tariffs in some cases, if countries are dragging their feet, well then you might have even more tax revenue that is being paid by someone.

So if someone is paying that, then the consequence must be that that must either mean that we have a lot more inflation in the pipeline or it must mean that earnings are at risk of going down. So the first thing in my view and the way I think about it is that there is still at least a tax revenue being raised at risk that this is having some either negative consequences for consumers or some negative consequences for firms. And perhaps more importantly, the second point is also Jay Powell has over the last month on three different occasions said we expect a meaningful increase in inflation.

He said that at the press conference. He said that of the June meeting. He said that also in Cintra in Portugal.

And he said that in the congressional hearing. It's a very, very strong statement when the Fed chair says we expect a meaningful increase inflation over the coming months. And therefore, if we do not see that, of course, then, yes, we may when we come back again here the sixth time, sit down again and talk about why didn't we see that?

But then I would expect that this earnings is going to deliver worse earnings, especially for those companies that are impacted by terrorists, because someone needs to pay the four hundred billion dollars in tax revenue that's coming into the government at the moment. So the bottom line, in my view, is, yes. And as you're saying, Jason, maybe we can worry about is it just delayed and delayed.

But I think the main argument for why it's delayed is that the inventory to sales ratio went up a lot before terrorists were implemented because companies were front loading inventories in a very significant way. And we've now seen the inventory to sales ratio for retailers come down. That means that companies are running down their inventories at all prices.

And now they're beginning to sell goods at prices that include tariffs. And that's why if you look at the CPI data that came out here for June, it exactly shows that prices are going up very quickly on footwear, on apparel, on furniture, tools, toys, all the categories you would expect. So that's why the market reaction the day the CPI came out was indeed that long rates and short rates began to go up because people are saying, well, maybe there is more momentum building in goods inflation.

So the short answer is goods inflation is probably going to go up significantly. And with that, of course, comes the risk that overall inflation also could be under upward pressure. When then do you think it'll be really definitively evident in the inflation data?

Could it be the July, August? What's your expectation for when that's going to become like? No doubt, there's really a real impact.

Yeah, no. So not to joke too much about it, but remember, we're still in the academic world. They're still debating why we had a Great Depression in the 1930s.

So here, of course, the question is, when will we be sure enough that this is indeed evidence that this was the trade war that began to lift prices? The added issue here is that it's not only the trade war that's lifting prices. You also have the dollar has gone down 10 percent since the beginning of the year.

And the Fed's model of the U.S. economy would tell you when the dollar goes down 10 percent, then inflation go up by 0.3. So that means that you have not only lifted inflation coming from tariffs. You also have lifted inflation coming from the dollar going down.

And finally, we also have some lifted inflation coming from deportations. At the moment, Trump is having the goal of deporting around 3000 people every single day. If you multiply that by 365, you get that the goal is to deport about a million people this year.

That's lowering the labor force and lowering, therefore, the workforce, especially in the sectors where illegal immigrants work, meaning construction, agriculture, hotels and restaurants. So we actually also have an inflationary impulse coming from wage inflation because of deportations, especially in the sectors where illegal immigrants work. So the short answer to your question is I think that inflation will go up not only because of tariffs, but also because of the decline in the dollar and also because of the immigration restrictions that are being implemented.

And the answer to when that will happen, I think we have just started to see the early stages of the lift off. And I expect and that's why Jay Powell is so cautious on lowering rates. But I think that that is what we should expect to see over the coming months, exactly as he's been saying in the congressional hearings at the press conference, namely the Fed expects inflation to go up meaningfully over the next several months.

So in terms of the inflation trajectory, perhaps more of a step increase every month as opposed to like suddenly one month that goes from 0.25 a month to like 0.65, it's going to be like 5, 10 basis points. And at the same time, as you and I have talked about before, namely that goods only make up in very round numbers a third of the CPI basket. So services makes up two thirds of the CPI basket.

And here we mainly talk about goods. So it could be the goods inflation goes up, but it could be that services at the same time is going down so that the overall headline inflation numbers may look slightly better. It could also be services are going up if wages are going up and that could be pushing in the opposite direction.

So let's not forget that you're right. We may not see it as a strong upward trajectory in inflation, but at least watching the components that are impacted by tariffs are really the things that I think investors should be spending most time on, because that begins to become important when we talk about individual equity names or individual credits, namely what is the impact on Walmart earnings, Nike earnings, for a lot of different retailers, a lot of the consumer brands, if you suddenly begin to see that they are actually passing it on to consumers in terms of higher prices. So you mentioned Jay Powell and I want to come back to him because he's been in the news for the past couple of days for various reasons.

But going back to where the tax piece, so the numbers you gave, $30 billion a month gets up to $350 to $400 billion, essentially a tax increase. Someone is paying that. Yeah.

Recently we had, just a couple of weeks, like 10 days ago, the passage of the one big beautiful bill that entails extending tax cuts and some incremental tax cuts on manufacturing, accelerated depreciation. Further down the line, spending cuts. But for 2026, there is directionally positive fiscal stimulus and different models estimate three-tenths of a percent of GDP, others are like 80 basis points, so positive.

When you think about that over the next 12 months, netting out the tax benefits or the economic benefits, let's say, the stimulus benefits of the one big beautiful bill versus tariffs, you think directionally it's still negative. The sequencing suggests that those tax benefits are a 26 story and you actually see the tariff hit this year and then acceleration, like modest acceleration of growth. How do you see those policies, your impact, and what does that mean for the growth trajectory over the next 12 to 18 months?

Yeah, this is really important and exactly as you're saying, I completely agree with your sequencing, namely that in the near term, we know tariffs have gone up, so companies have to respond to that now. But companies are not really responding to much on the one big beautiful bill before next year. And the main reason why the one big beautiful bill is only going to, exactly as you said, a relatively limited boost to GDP in our calculations, only 0.3, is because the one big beautiful bill was really just a continuation of tax cuts that were already put in place 10 years ago.

So 10 years ago, household taxes were lowered to 37%, corporate taxes were lowered to 21%. So that was corporate taxes last year was 21%, next year they will also be 21%. The reason why the one big beautiful bill was put in place was that if they had not done the one big beautiful bill, then corporate tax rates would have gone back up from 21% to 35%.

So now they're just preventing or avoiding that increase in taxes. So in some sense, you and my taxes last year were 37%, now they're 37% next year. That doesn't mean anything for my consumption and your consumption.

So therefore, GDP impact is going to be relatively limited, because we just don't have any impact and I'm not seeing lower taxes. So why should I go out and spend directly from just extending the tax level and tax rate that I had last year to also what I have next year. So that's why it's some smaller things in the bill that ends up being the reasons why people are expecting, including us, that it will give a mild boost next year.

So I do think that as, and forgive the picture again, the pig comes through the python and trade and we figure out how a company is responding to this, are they eating the tariffs, are they passing on to consumers, then we'll begin to find out. Maybe next year we get some lift from the fiscal stimulus, but the immediate next term several quarters issue is that we have a slowdown in growth, most likely simply because of tariffs being raised and this having an impact on earnings, because someone has to pay the $400 million to the government that they're collecting at the moment in tariffs. Going specifically to the big beautiful bill, the tax incentives on the corporate side, the manufacturing, the accelerated depreciation, I'm curious, in your role at Apollo, talking to companies, talking to your colleagues, do you think that matters much for companies making investment decisions?

Could it stimulate it? Or like, you know, the uncertainty of tariffs is more than offsetting investment decisions, and it's like, again, it's not really going to move the needle. What's your sense, more anecdotally, of how that could actually matter for investment?

Yeah, exactly. I think that's, as Dan was saying from the beginning, that the uncertainty that we've had for the last six months in terms of investment decisions, hiring decisions, what do we know about policy tomorrow, next month, three months, six months ahead, and if this uncertainty is hanging as a cloud over the outlook, that has resulted in the Fed surveys that ask companies, are you planning to do more CapEx in the next six months? Companies are saying, no, we're not planning to do more CapEx, and they have really come down very significantly.

And that uncertainty is and continues to be a drag on CapEx spending and continues to be a drag on the economy. Likewise, consumer confidence has also declined dramatically, is also likely holding back consumer spending. And now, as you're saying, Jason, at the other end of the rope, you now have some accelerated depreciation that may be helpful, but I worry just that this cloud hanging over us of how long time will we have tariffs, on which countries, what is the level, I still worry about that this is going to slow things down.

And that's only, of course, my worry. That's also the worry in the Fed forecast. That's also where in the consensus forecast, namely that we will likely see GDP growth slow down.

So this is likely for the listeners here, like a Nike swoosh, where we get a slowdown in the next several quarters, and then things will begin to get better as companies have adjusted to the level of tariffs we have at the moment. The Nike swoosh does not dip below zero, so it's not a recession, but it's a Nike swoosh that makes us worried about we have some headwinds, especially from tariffs. And we also have headwinds.

Let's not forget also that if we have deportations, then employment growth will also be weaker. And let's not forget a third headwind we also have, namely that two months ago, we had student loan payments restarted, and we have about 11 million people that are not paying their student loans at the moment. And now suddenly that's being recorded by the rating agencies, and that has consequences for their ability to borrow.

So if I add up the headwinds to the economy, tariffs, and therefore lower sales are a headwind. We have less growth in employment because of deportations. And we now also have, unfortunately, a headwind to especially middle-income consumers as a result of student loan payments restarting.

That means the student loan payments have been on hold for a while because of the pandemic, and now student loan payments are restarting. And if you don't pay your student loan now, starting in May, your credit score will go down. The New York Fed has quantified that your FICO score could drop as much as 75 points.

So if my FICO score today is 725, my FICO score would ultimately the day after be 650. That is a pretty significant risk to, again, 11 million people that are now at risk of simply not being able to buy a car, buy a house, buy a washer and dryer. So the short answer to your question is that we still worry quite a bit a number of things that are the headwinds.

And we think that's exactly why the consensus has this view of the Nike swoosh slowdown in growth over the coming quarters. So I think this podcast is breaking economic terminology. People talk about U-shape recovery, V-shape, L-shape.

We now have the swoosh shape recovery. I know. We don't have any chance to show here.

I know. Well, I think everyone is familiar with the swoosh. Thank you so much.

I know, but this is a landmark discussion here in economic history. So we've covered fiscal policy. Let's pivot to monetary policy and we're recording this on Wednesday, July 16th.

Within the hour before recording this, Bloomberg reports that President Trump is very close to announcing he's going to fire Fed Chair Jay Powell. Then shortly thereafter, there's another story like literally minutes before we started recording that no, it's very unlikely they would fire him. They're just kind of floating a trial balloon to see how the markets react.

We can't predict again what they will do. I think the grounds for firing is tenuous at best, but that, of course, wouldn't stop them if the administration wants to proceed. So I want to come back to maybe the implications of that, but let's assume Powell stays in the seat until next May as scheduled and this kind of quiets down.

How do you see, given the economic trajectory we've just laid out, the swoosh shape recovery, what do you expect from the Fed putting all the politics aside? And then we'll come back to like, well, how could the Fed reaction function perhaps be impacted by this? Yeah, we also have my great colleagues, Catherine and Haley, here in the studio.

And when we were walking down from Apollo down to down 6th Avenue, exactly we saw the headline come through that, wow, now Powell is maybe not getting fired. So it is somewhat confusing exactly in the market here to figure out what's happening and what's not happening. But it's very clear that when you look at it from a market perspective, that obviously the independence of the Federal Reserve is absolutely critical.

This is so well established in so many academic papers for literally generations, where if you do not have an independent central bank, if the central bank in countries such as Turkey, Argentina, South Africa, if you begin to have a central bank that just lowers interest rates because this is what the politicians want, it opens up a lot of questions from in particular foreigners and foreigners own about 25 percent of U.S. treasuries. So this is, of course, important for foreign investors in U.S. government bonds. But it also opens up questions about the currency, where the dollar then goes down a lot.

The dollar reaction exactly this morning when it came out that there was maybe the likelihood that Jay Powell could get fired, the dollar immediately started going down. So the answer to your question here is it's very clear that it is very, very important that the Fed follows the dual mandate. And that's why Fed Speaker after Fed Speaker after Fed Speaker keeps on saying we are following the dual mandate we have been given by Congress.

And that is two things. Inflation must be 2 percent and we must have full employment. And then you can discuss how much weight should I put on inflation part of the mandate, how much weight should I put on the employment side of the mandate.

But overall, it's very clear that the Fed needs to stay and remain independent because the risk, of course, is that if it is no longer independent and if it's simply because of some political desires, as we see in other countries, changes to someone who is not politically independent and simply follows political purposes, it begins to run the risk that we could see two things, namely the dollar go down as the rest of the world begins to worry about U.S. policymaking. And even worse, maybe that long term interest rates go up because foreign investors and domestic investors may begin to say, well, hold on, maybe inflation is not going to be higher for political reasons. And if inflation suddenly is no longer 2 percent and I'm a bond investor, well, I'm used to 2 percent erosion of my bond portfolio.

Now it goes up to, say, 4 percent. Now I need 4 percent erosion of my bond portfolio. I need to have compensation for that.

So I need a risk premium and a term premium and therefore a high level of long term interest rates. And that's the fear that now is much more the conversation in markets than it's been for a long time, namely that if we do get a new Fed chair, even if Jay Powell stays through his old term until May of next year, then whoever is the next Fed chair needs to be someone who is independent. Otherwise, markets might begin to push the dollar down and push long term interest rates up.

And that's, of course, not desirable from a macroeconomic perspective. Do you think so on the betting markets, Pauli Mark, I think Kevin Hassard right now, who's the head of the Council of Economic Advisors, is 40 percent probability. These are shifting around.

I did not see your name on there. Maybe I'll check after to see where that stands. Do you think, like this is the risk you've laid it out, you know, Trump appoints someone who would be loyal to him, like cut the rates as, you know, that Trump wants, at least that's, you know, going in.

Once the person, whether it's Hassard or someone else, actually gets in the seat, you know, it's one thing to criticize the Fed. And, you know, it's really easy to criticize the Fed when it's an outsider, but when you have the responsibility for setting a monetary policy that has impacts 330 million Americans lives or economic well-being, that's a very, very serious job. And so the institutional but also there's institutional constraints.

It's the chair doesn't have, you know, uniform decision. There's other committee members. You know, you can have a lot of dissent.

So it could bias the person like they want to cut, but they're not going to go crazy with the cuts. Do you think relative to baseline of, again, status quo, Powell stays in place. Trump, let's say, quiets down.

That's your baseline, assuming the same set of economic data versus someone like a Hassard, but like, you know, person X goes in the role. Do you think the Fed policy would actually change that much? So I think the market might be giving the person the benefit of the doubt.

It could be Scott Besson. There's even been talk about Scott Besson, both be the treasury secretary and the Fed chair. That would be highly unusual.

We saw that in the 1930s. But it's extremely unusual, of course, to both have the treasury secretary and the Fed chair have the same job at the same time, because then, of course, it does look like it potentially could become more politically complicated if you both have a politician and a Fed chair that is trying to do two jobs at the same time. Other names, exactly.

Kevin Hassett, who has, as you said, namely been a name that has been mentioned. He's the head of the National Economic Council and he is in the White House and very close to Trump. I do think that him and Kevin Walsh, there's also other names that have been mentioned.

Chris Waller, also Mickey Bowman. Generally speaking, in my personal opinion, I think these names would all get the benefit of the doubt of saying, OK, now you've got the job. So now show us, show us the money, show us what you're actually going to do.

Are you actually going to do what the dual mandate tells you to do? Are you actually going to put more weight and say, I'm just going to ignore inflation and I'm just going to cut interest rates because there is a political desire to do this? So we still don't know.

But these names have been bandied around in a way where I still think that the market is saying, let's give the person the benefit of the doubt. And importantly also, even if that person does come in, there's a lot of nuances in this. Remember that any decision on interest rates and any decision on QE is done as a committee and there are 12 voting members on the FOMC.

So we could have the highly unusual situation that the Fed chair comes in and says, I want to lower interest rates. But the 11 other members say, no, we don't want to lower interest rates. And there you could have a vote and it could also be that interest rates are not going down because the 11 members, of course, would be outvoting the one member, namely the Fed chair, which would be really unusual, who would be saying that we think interest rates should go down.

And the last point on this is and I know this is way into the weeds, but it is actually the case that the president appoints the chair of the Board of Governors. And then once that chair is appointed, then the FOMC meets in the first meeting afterwards and then they elect the chair of the FOMC. So there could be this extremely unusual situation where maybe the president appoints the Board of Governors, but when the FOMC meets, they say, we don't want to elect that person to be Fed chair.

We want the chair of the FOMC, meaning of the meetings and the committee, to be someone else. It could be John Williams. It could be someone else who is a more conventional and traditional candidate who's already on the FOMC.

So in that case, we would have a really, really unusual situation. And the one running the Federal Reserve as an institution would be someone that Trump appoints. And the other one actually running monetary policy decision, namely the Fed chair, would be someone who the FOMC committee appoints.

So this would, of course, be drama at a very high level in the rates and Fed watching and bond community. But I think that there's a lot of speculation around the legalities of how do we think about who it will be, what will they do and what decisions can they make? And the last point maybe on this is also remember when we have a lot of government debt, there's also conversations around, well, now that government debt is going up and issuance of treasuries is going up, well, can the Fed just do QE and who would decide to do QE, meaning can they buy U.S. treasuries if they worry about that interest rates are too high?

In other words, could Trump order the Fed chair not only to lower short term interest rates, but also to lower long term interest rates by buying long term government bonds? And the answer to that is that the QE decision is also a committee decision. So you could also have that the Fed chair says, let's go and buy U.S. treasuries.

That's a good idea. But the 11 other members are saying, no, we don't think that's a good idea. So the tension is there's a risk of some drama here, which is normally a very boring job to be a Fed watcher.

But there's a risk of some drama here when it comes over the next. And we do need a new Fed chair. So and remember, Jay Powell stepped down in May.

Adriana Kugler, who's another FOMC member, stepped down in January. So whoever gets Adriana's job will probably be the next Fed chair. So we will know in the next three months.

So if you are an investor and if you're listening to this, you can't just hide under the table and say, this is not important for me. This is really, really, really important because it becomes absolutely critical. This decision needs to be made to watch what is this new Fed chair doing and what is this person actually doing?

Is it moving in the direction of the dual mandate or moving in the direction of somewhere else? All this Fed watching, the people need to focus on it has made me a popular person at this summer cocktail circuit, so that's always good. I mean, one thing you didn't mention, another sort of institutional constraint, the Fed chair has to be approved by the Senate, right?

So there's a lot of factors that would weed out kind of extreme candidates. So Don Jr. is not going to be the next Fed chair. It's not quite Turkey at this point in time.

So I mean, I would agree with you. I think there's a risk premium that has to be priced in the market, especially the long end of the curve, because ultimately this kind of biases. If the Fed is going to be more dovish, well, the inflation risk premium has to go up.

Negative for the dollar, all is equal. The question is just how extreme does it get? Yeah, and either that risk premium is going to be small and maybe even zero or that risk premium is in the worst case going to be significantly higher than what we imagine today.

Which I think then gets into either like that, like you get the bond vigilantes essentially disciplining like any administration because it works against your... And they have been hibernating now for, if not decades, for a very, very long time. So this is the question is if this jolt will be what wakes up the bond vigilantes and people say, well, now there is more risk in the long end of the yield curve than what we appreciated for a long time.

So that's not my baseline. And I assume that's not your baseline either. But just saying that this is certainly now suddenly when we have this choice of that the Fed chair needs to be reappointed sometime in the next three to six months, then, of course, this is something that all investors, at least to have some awareness of what are these types of risks when you construct your portfolio and think about what are one of the bonds and what are the equities and what do I do in alternatives?

Well, I think the one thing also just stepping back from this near term debate about the Fed chairs, you mentioned the debt situation. It is on an unsustainable trajectory. The bill did not sort of do anything to address that.

And presumably the next three and a half years with President Trump, that's not going to change, which just means the situation will get worse. So longer term and whether it's the next year or two or five years or 10 years, the possibility of some sort of financial repression or monetary policy having to subserve to fiscal policy, I mean, that's a real risk of some form, which is all equal biases to like inflation being higher than it was before. I think that's the one thing we can say with some confidence.

And one very important, I couldn't agree more also on that. One very important comment on that, of course, is that the administration is moving towards more demand for stable coins and stable coins has this unique feature that if you own a stable coin, it is in most cases, the vast majority backed by a T-bill. So if you issue more T-bills and stable coins is going to grow in size today, stable coins make up roughly in very round numbers, 140 billion dollars in demand for T-bills.

If you suddenly get stable coins to be used when we all travel to Europe, to Asia, to the Middle East, then suddenly maybe there will be a growth in global demand for stable coins for transactional purposes. In other words, I travel to, say, Germany or to Copenhagen and I buy a cup of coffee with a dollar based stable coin that will grow demand for dollars globally. And one of the ideas with increasing the supply of stable coins is, of course, that therefore the Treasury has talked about and Scott Besson has talked about, let's issue a lot of T-bills in the very front end because they are needed to back up stable coins.

So the more demand for dollars you can create around the world, the more you will also be needing more T-bills. So that's why issuance in the front end is being spoken about as growing potentially tenfold from the very round numbers, 200 billion today to maybe 2 trillion. And that will, of course, increase dramatically the demand for T-bills that needs to come to the market.

So the question is if stable coins for a little while will be able to provide some patch and some solution to the demand for government debt. But ultimately, I couldn't agree more with what you're saying that ultimately this is unsustainable. So therefore, yes, we may be able to create some extra demand for government bonds for a little while.

But over the next five, 10 years, the trend is very clear, namely that government debt will just continue to go up. So we could go on to this topic in length in terms of especially the financing, the nuances, which, again, is a pretty, let's face it, dry topic, but it's actually becoming quite important. So I think the sixth visit we can kind of have more information and dive into that.

Look forward to that. I do want to spend a little bit of time that we have left just in terms of the markets, because the markets to me are pricing equity markets. I'm going to start with that, but you can see it in credit spreads for U.S. equity markets have recovered a lot, 25 percent from the April lows, still up 6 percent for the year.

Good recovery for multiples at 22. I'd say pricing in a relatively benign outcome for tariffs, for all these other risks. And then I would note and highlight your Daily Spark email today.

I think you mentioned that the AI, if you use the word bubble, but like AI valuations are more stretched than the dot-com bubble. So maybe just kind of elaborate why you see that the case. And, you know, we can kind of segue into a little bit of a number of things that are very important in that discussion.

So the way I look at it also at the moment is that, yes, we all agree that AI will have a dramatic impact. It's already having a dramatic impact on our lives. We all use in different forms, chat-GVT, perplexity.

We all now buy our Big Macs over a screen in McDonald's. I mean, there's so many ways where technology is just making things more efficient. And also, likewise, for doctors, for lawyers across the board, including at Apollo, we deploy AI in many ways and we see significant productivity gains as a result of that.

The only issue around that, we all agree that that's the case. Let's now ask the next question, which is exactly what you're saying, Jason, namely. OK, so the companies who provide those services, are they correctly valued?

Well, if you go back and look at the top 10 biggest companies in the S&P 500 today, they today have a P-E ratio that is higher than the 10 biggest companies had during the IT bubble in the 1990s. So that's another way of saying, well, hold on. That means that, yes, IT companies today, they are larger than what they were in the 1990s.

But it means that these companies have a lot riding on them, delivering significant earnings. And now we're even beginning to have discussions around, well, maybe Tesla is different. So let's just talk about Magnificent 6.

And you say, OK, but these six companies still do very different things. So maybe why wouldn't it be Magnificent 5 or 3? Or sometimes with maybe some countries or some companies are more successful in some areas than others.

So the worry I have is that from a pure portfolio perspective, about 40 percent of the S&P now is the 10 biggest companies. That is an extreme degree of concentration. So if you and I have a hundred dollars and you say, let's just buy this S&P 500, it's very diversified.

It's 500 different companies. The answer is no, it's not. It ends up being basically a bet on AI and the AI bubble continuing in valuations.

So I'm worried that fresh money that you put to work in the S&P 500 is really just a bet on Nvidia still doing well. I know that's a bit extreme, but it ends up being really important. A part of the recovery, as you just mentioned, has been in the tech companies.

So if these Magnificent 7 companies are not going to deliver for whatever reason, and they are, by the way, expected to slow down in earnings growth, then the fear you can have is, of course, that, well, maybe I should be looking broader than just thinking about, hey, the S&P 500 gives me broad diversification because that's just simply no longer the case. So the short answer to your question is that I worry about the concentration. I worry about the indexation and the correlation that it's all essentially become one big bet on AI almost everywhere.

And maybe you can say, yeah, I believe that's the case. Well, if that's the case, why don't you just buy Nvidia? Why then buy the S&P 500?

So in my view, I think that investors need to think more broadly and in particular with what we just talked about in bonds in mind, that in bonds, you can also now get a level of yields, including, of course, in private credit, but a level of yields. If you have inflation higher for longer and if you have upward pressure on the long end, the whole yield curve is going to be higher for longer. And that brings also, therefore, bonds still very relatively attractive, especially high quality and in our world, first lean, senior secure, top of the capital structure, where you can get protection against some of these downside risks and you can get away from only having some exposure to AI.

So there's a lot of different dimensions and everyone has an individual pie chart of portfolio construction. But it's just to say that, yes, I love the AI story and I think it's awesome. But what we also be asking ourselves is, well, what is the valuation of these companies?

Yes, we may all be using it, but that doesn't mean that the valuation is attractive. That could actually still mean that the valuation is very unattractive relative to what our expectations to growth going forward. So I would kind of invoke the history rhymes.

It doesn't repeat analogy. I agree with a lot of what you say, like the stocks, the S&P for multiple at 22. It's not cheap.

You know, these are like for the market. Sixteen historically on average. So it's definitely elevated, which we know is a pretty good predictor for long term returns.

When I think about the dotcom era, though, one difference now versus then is is the speculative mania for like the non-profitable companies. That's not nearly as present. If anything, 2020, 21, when you had a lot of companies going public, these SPACs and there's some signs of some SPACs, you know, kind of, you know, kind of resurfacing that kind of, you know, kind of pure frenzy.

We don't see that right now. So when I use the analogy, like if this is like the 1990s, what time period would we be? Is this 94, 96, 99?

I'd still on the side. This is more like a 96 as opposed to 99. And a very absolutely and a very important part of what you're saying is exactly the S&P 500, of course, is large cap companies.

But if you look at the Russell 2000, that is extremely unattractive at the moment. Forty percent of companies in the Russell 2000 have negative earnings. So you also look at that and say maybe we have simply just filled it out of the S&P, those companies that have all the problems, namely those that are in the Russell 2000, they have a significant share, again, 40 percent that have no earnings.

That, of course, means when interest rates are higher for longer, 40 percent of companies have no earnings in small cap. The consequence is that they cannot service that debt servicing cost. That's why a lot of the stresses are in the tail in terms of company size.

So, yes, I agree. Large cap are generally and the S&P 400 is probably the sweetest spot in the public market. But the bottom line here is small cap is at risk of being hit by interest rates higher for longer and the Magnificent 70 is at risk of being hit by the concentration issue.

I mean, one also just other difference between now and the 90s, you mentioned small caps. You know, the private equity universe is much, much bigger now than it was then. The number of listed companies is half of what it was in the 1990s.

So a lot of those companies that existed before now, they're owned by private companies. So it's just it's also a different kind of market. And let's not forget private credit, of course, also has a lot of opportunities with it at the moment where you can exactly go first lien, senior secured, some of the capital structure, best protection, large cap businesses that are well protected, have diversified business areas and businesses that generally speaking, at least are at the diversified level, less sensitive to all these whims of who's the Fed chair, what's going on with trade policy, what's going on with the dollar and therefore give a diversified exposure to what you might, of course, in from a portfolio perspective, see from a private credit perspective.

Well, when I think about the various topics we've covered and what we'll revisit in the next, the next time, the tariffs, where that stands, you know, the fiscal situation, the Fed's AI, whether it's progressing or not, a lot of things that are continuing to be sort of dominate the market. So we think we've touched on a lot of stuff, but there's certainly there's many, probably more questions than answers at this point in time. So thanks so much.

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