Today's number: 40. That's the percentage of Americans who didn't read a single book last year. True story, Ed. I just read a book on the Dunning-Kruger effect. Ask me anything.
I don't think you're a non-expert on book writing at this point. How many books have you written now?
I want to say I've written more books than I've read in the last five years. That would reveal me for the pseudointellectual douchebag I actually am. Supposedly my publisher told me 1% of the populace buys 90% of the books, which I believe.
As Yoda said, there's do or do not. There is no try.
All right. I guess in the past two months, I have not been reading enough. But before that, I was reading very frequently. I'm going to have to get on to the writing the books game.
Little Miss Sunshine here once has an agent at CIA. He's pretty soon going to have a book agent. I don't like it when people aren't dependent upon me for their livelihood. So Ed, what are you doing in Palm Springs?
Got a speaking gig. Just got here yesterday. First time in Palm Springs. I'm shocked by how nice it is here. I had no idea. I mean, I showed up to the airport and there's literally a gigantic mountain range right in front of me. Perfect weather, extremely pleasant, really nice airport, by the way. And then the drive was just incredible. It's like this beautiful mountainous desert with also palm trees dotted all over the place. I'm just kind of shocked by how great Palm Springs is. I had no idea.
Ed, gay people like Palm Springs. And you didn't know that it's wonderful?
Well, now I know.
It's wonderful. It's got amazing sunsets. It's got a nice vibe. It's got a lot of Neutra architecture. In case you don't know, that's a famous mid-century modern architect.
How are you and where are you? And I also want to hear about Minneapolis.
Oh, I bet you do. You jealous? I'm back in New York. Since I last saw you, I was in Vegas, which was great. I went for the opening of the Zero Bond Club there at the Wynn Hotel. Has anyone ever said anything more douchey than that? And then I got up at O-dark-hundred yesterday, flew to Minneapolis for a much different environment. A lot of white people resisting and unsubscribing. And that event was great. Sold out the Pantages Theater, according to the folks who run the theater, faster than any event. That was great. We interviewed Governor Walz.
People feel very unified in Minneapolis. It was a really... people feel very, I don't know, very strong community feel there right now. That was nice.
What do they think of Tim Walz at this point?
Oh, he's hugely... I mean, at least in this crowd, he's hugely popular. People feel like he's been, you know, really forcefully yet dignified. I think he's handled the situation well, which is like sort of an impossible situation or impossible needle to thread there. He got a standing ovation. We introduced him. He got a standing ovation. He's also, more importantly, he's very good-looking. I saw him in person. You know, I had the same question I'm having with everybody that looks like someone the former person could eat. And that is, I said, 'What are you doing? Are you on Oz?' He's like, 'No, I've been running.' I'm like, 'Wegovy or Ozempic? Come on, boss.' I have a friend who shall go nameless who claims that he's just playing a lot of pickleball. I'm like, 'Yeah, pickleball's known for dropping 80 pounds.' Yeah. You've been three bucks plus, you've been three bucks large your entire life, but now you're playing pickleball. Yeah, that's what obese people do in their 60s to trim down, pickleball.
That's really good. You could write a whole article about that. I'm sure that's becoming a trend.
I do. I'm fascinated by GLP-1. I actually need to put on some weight. I looked in the mirror this morning. I'm looking too skinny. Got to hit weights again. And anyway, so did that. Got home late last night. Got slept just okay. Got up and tired. Did Baltazar, had my quiche and blueberry muffin breakfast, and I'm here stuck with you, Ed. I'm here stuck with you.
That sounds like a good life. Let's get on... what economist are we bringing on now? We got a big one. But before we get to our guest, we have a quick announcement, which is that Prof G Markets is now on Substack. So subscribers can now get ad-free episodes. We've been listening to you guys. You can also access live streams, and it is an exclusive place to engage with us and other listeners. You can find us at profgmarkets.com, ad-free now. Very big news.
Let's get into our conversation with Torsten Slok, partner and chief economist at Apollo. Torsten, thank you very much for joining us.
Oh, thanks for having me.
So, I want to get into Iran is where we probably have to start here. Specifically oil prices, which just skyrocketed over the weekend, went above 100, hit a peak of $118 a barrel. We'll see where things head. I mean, it's very, very volatile at this point. But as the chief economist at Apollo, I just want to hear what you make of what's happening in Iran, how it's affecting commodities prices, and why it matters.
Well, the broader backdrop here is that last year GDP growth in the US was facing headwinds because of the trade war. There were headwinds coming because tariffs went up, and there were headwinds coming because of trade war uncertainty also going up. That narrative has changed quite dramatically in the last few months. Now instead we have a backdrop where the economy is actually doing quite well. We have a lot of AI and data center spending. We also have an industrial renaissance where politicians want to onshore a lot of production of pharmaceuticals, of chips manufacturing, and also even more production of defense. And we also have a third factor that's an engine of growth, namely the One Big Beautiful Bill, which the Congressional Budget Office estimates is going to lift GDP growth by 0.9%. So the backdrop for a conversation about what's happening geopolitically and what's happening to oil prices is that we already have an economy that's in quite good shape. In fact, core PCE inflation, which is what the Fed cares about, is at 3%. And now we're adding on top of that a conversation about how much more would inflation move up because of oil prices moving up. So my answer as an economist to your question is that when you increase oil prices by $35 and you stuff that into the Fed's model of the US economy, that is going to lift headline inflation by 0.7%. And it's going to lift core inflation by 0.1%. So that means that we already have a level of inflation that's at 3% and it should be 2%. And now we're adding even more upward pressure on inflation. Therefore, the answer to your question is that this is about the persistence of the shock. But the sign in front of this shock is that we will likely continue to have an inflation problem for the rest of this year simply because of an economy that's already strong and on the back of that now a geopolitical risk that is going to add more upside pressure to oil prices. So even if oil prices go down a bit more, remember the base case was that we a few weeks ago were just at $65, it is still going to be the main risk that inflation is going to stay higher for longer and therefore that the economy will continue to do well but just is going to continue to wrestle with this issue that we simply still have too much inflation.
So it seems like a big problem as a result of that inflation. Let's assume that oil prices are going to stay elevated. To be clear, Trump has said this is going to be short-term, they're going to come back down, everything's going to be fine. But let's assume, as you're saying, oil prices stay elevated. It translates to higher prices at the pump, which translates to even worse inflation, which is already pretty elevated right now. Doesn't that mean that the Fed is now going to consider raising rates in an environment where the labor market is already showing signs of weakness, where it's already getting tighter and worsening, which to me sounds like actually a double whammy of a problem of both rising prices and also a shaky labor market?
That is the definition of stagflation, namely higher inflation and low growth. In this case, lower employment. The reason why I still think this discussion is a little bit premature is because the labor market report that we had here for February was indeed impacted in a number of different ways, both by a strike, also by very cold weather, and there were also some seasonal issues in terms of looking at the birth-death model of what were the reasons why the labor market in January in the last few years has been very strong and in February has been very weak. That was probably also why financial markets reacted to the employment report in the way they did. Namely, by saying, well, this is not really as bad as the headline number is suggesting. But you're absolutely right. The key issue still is that inflation is just too high. And that's why the FOMC themselves in the latest dot plot, meaning their own expectation of what will happen to interest rates, they only expect one cut in 2026. Our view is that we'll get zero cuts in 2026. And why is that important? Well, that's extremely important for financial markets because in financial markets, if you have a business that has cash flows far out in the future, if you have a business in software, enterprise software, in life sciences that have cash flows far out in the future and no cash flows today, you will have problems paying your debt servicing costs if interest rates are higher for longer. So that's why we're beginning to see both in debt and in equity some differentiation between which names is it that's doing well and which are not doing well as a function of who is it that's more sensitive to interest rates staying higher for longer. So the bottom line is for investors, the key implication of everything that we're talking about here is that when inflation is higher for longer, interest rates will stay higher for longer, and that will have very important implications for asset allocation.
Why do you say it's premature exactly? Because this, to me, has been the big question surrounding Iran, where we saw the Iran strikes. It seemed to me as an observer as a very uncertain environment that perhaps would be a problem for investors, but then markets basically told us and investors basically told us like we don't really know yet. And if anything, this has put more certainty on the situation because now we've, you know, concluded something to this Iran chapter. We've ended Ham's regime and now we're in a new chapter. And this idea of prematurity was a big debate where I was looking at oil prices, I'm thinking they should be higher, like people should be more concerned, but then other people say no, we don't know anything yet. Well, now here we're in a situation where oil prices have risen, maybe they'll come back down, but I guess the question for me when I look at markets, the question for investors is why isn't it good to have a premature conversation? Is that not the way we should be thinking about something that is as uncertain as it is today?
I think a key aspect of this discussion is the number of ballistic missiles and drones that have been fired by Iran. And that is literally, if you look at the charts for this, going down to zero. In other words, in the immediate days after the hit, they did fire a lot of different missiles and different military weapons in a lot of different directions. But in the last few days, it is really converging down to a very low level, again, very close to zero. So one thing at least when we think about the Strait of Hormuz, yes, it may be that there is a very limited amount of ships going east to west and west to east, but at least when you look at the data for this that comes out every day, but I would still expect that as Iran simply loses more firepower, that we will get a more and more stable situation. So yes, I understand what you're saying, and there was just another headline here that now the son of Khamenei apparently also was hit. So there's more uncertainty on their side. I still come to the conclusion that from a military perspective, if we think about the supply of oil, it looks like at least we're getting to a point where there's some limits to how much worse it can get, at least on the supply front. So let me put that differently. I would absolutely expect that yes, maybe the Strait is basically essentially closed at the moment. And then there are other ways to deliver oil. And from here there's just a lot of upside risk in the probability that maybe they will be opening at least more, either with military escort of the boats as has been talked about, or alternatively also if Iran simply ends up having any firepower that it could reopen again completely. The other things that of course are also on the table is that we've just had recent conversations. Scott Bessent talked about shorting futures in oil. There's a very important strategic oil reserve that also hundreds of millions of barrels that could also be released. It's come down and was not filled up by Trump back to the levels that Biden had. But the short answer to your question is there's a lot of things that policymakers can do if they do want to get oil prices to go down, and there's a lot of good reasons to expect that policymakers are worried about oil prices at $100 a barrel, in particular if this shock does persist.
One of the stats I always think about is that 80% of news coverage in the UK or of their news programs tonight is about international and 20% about Britain. And it's exactly the opposite in the US. In the US we look out the window and we see ourselves. And the headlines yesterday: oil 110 bucks, Dow futures off a thousand points, which is what, 2%? The Kospi, the index or the equivalent of the S&P in South Korea, was off 6%. I mean, the markets in Asia, the Straits of Hormuz being closed is an inconvenience for us. It's a disaster for Asian nations. Talk to us a little bit about how much our allies are being strained in Asia and what impact that might have globally.
What is really unique to the US is that over the last several decades, we have actually gone from being an energy importer to now becoming an energy exporter. This was to a large degree driven by the shale and fracking revolution, meaning that we started producing so much more energy and in particular so much more oil that we suddenly have a situation today where the US is now an oil exporter. So therefore, comparing that to your good question here, Scott, with what's going on in Europe, what's going on in Asia, even what's going on in China. Remember, China used to... 20% of their imports of energy used to come from Iran. So now China also needs to go out and find energy and oil elsewhere. So the short answer to your question is that the US, when oil prices go up, if you are an oil exporter, you actually benefit from oil prices going up, at least when it comes to earnings for energy companies, whereas this is not the case in Europe, this is not the case in most of Asia. So that's why markets have traded the way they have, namely that Europe and Asia and also Latin America for that matter, when oil prices go up, these other economies are just hit a lot harder because their energy intensity has not declined as much as we have seen in the US. So at the core of this discussion is the fact that the US economy has become less energy intensive, meaning it's become more... the service sector has become more, tech has become more, services. It's become lawyers going to restaurants. Those things have gotten a bigger share of GDP overall. That's also happened in Europe, but the challenge is in Europe that they do not have the same energy production and the same energy resources that we have in the US. And that's why the US has traded better than Europe and Asia in the last few days.
