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

Summary

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

Podcast: Prof G Markets (Vox Media Podcast Network)
Hosts: Scott Galloway, Ed Elson
Guest: Michael Cembalest, Chairman of Market and Investment Strategy, J.P. Morgan Asset & Wealth Management
Date: November 21, 2025

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Episode Overview

In this episode, Scott Galloway and Ed Elson tackle the mounting anxiety in financial markets regarding a potential correction—especially amid fears of a tech and artificial intelligence (AI) investment bubble. They are joined by Michael Cembalest, a top strategist at J.P. Morgan, to discuss whether today's market exuberance, centered around the "Mag 10" (top 10 tech and AI stocks), is heading for a significant pullback. The conversation ranges from comparisons to past bubbles, portfolio defense strategies, and the geopolitics of tech, to the risks and realities underpinning the AI-driven rally.

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Key Discussion Points & Insights

1. Bearish Market Concerns: Setting the Table

[06:44–10:56]

• The episode opens by referencing a recent highly bearish outlook from Professor Aswath Damodaran.
  • Damodaran’s fear: “There’s no place to hide in stocks. …if the Mag 10 go down by 40%, it’s going to ripple through stocks.” ([07:19])
  • He suggests even considering collectibles/cash, unprecedented for him.
• Cembalest’s response: Skeptical about academic forecasts without real-world track records. Instead points to indicators like Berkshire Hathaway’s cash stockpile as more meaningful than discourse from those not managing actual portfolios ([08:24]).
  • “Professors are basically running fantasy baseball teams by coming out intermittently and telling you what their trades are. …It’s not real money, not real life.” —Michael Cembalest ([08:24])
• Current J.P. Morgan portfolios already hold 30–40% in cash and equivalents, suggesting a “defensive” stance but not outright panic ([10:41]).

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2. Is There an AI Bubble? Tech’s Moonshot Spending

[11:49–14:18]

• 75% of post-2022 revenue/capex growth is from ~40 AI-related stocks.
• Cembalest is particularly unsettled by Meta’s commitment to spend 65–70% of revenues on capex/R&D for AI, paralleling their earlier metaverse ambitions.
  • “As an investor, that doesn’t fill me with a lot of good feeling about where we’re going to be two years from now.” ([11:59])
• Tech capex relative to U.S. GDP now matches major historic undertakings: “the moon landing, the Manhattan Project, the highway system… and the Hoover Dam combined.” ([13:10])
  • Memorable moment: Galloway’s amazement at that scale — “Wow.” ([13:13])
• Positives: Unlike early-2000s bubbles, current tech spending is mostly internally financed (except Oracle), not reliant on debt, so it could last longer but will still require eventual profits ([13:40]).

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3. Market Fragility: Can Mega Tech Drag Down the Market?

[14:18–18:35]

• Galloway outlines a “house of cards” scenario: If just a few major companies roll back on AI, or if OpenAI/Nvidia experience a severe correction, $3 trillion could vanish from markets, triggering flat GDP and systemic fragility.
  • “If Nvidia… goes down 60%... we have a $3 trillion destruction in the capital markets… America has become so fragile because it is now a giant bet on AI.” —Scott Galloway ([15:10])
• Cembalest agrees in part: Yesterday, tech investment was a rounding error for GDP; now, it’s a third of all recent GDP growth. Much current economic strength is “bailed out” by generative AI investment ([16:49]).
• Risks are partially contained because most tech firms (sans Oracle) are funding spending with cash, not debt.

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4. AI Capex and Financial Engineering — Blue Owl, Meta, SPVs

[19:22–22:02]

• Discussion of how some firms (like Meta) are using “off-balance sheet” SPVs to shift capex risk onto private lenders (e.g. Blue Owl), rather than absorbing the debt themselves.
  • “The Meta partnership with Blue Owl… [is] not consolidated onto Meta’s balance sheet… It’s worse. They basically have walkaway rights every four years… So Blue Owl’s holding the bag.” —Michael Cembalest ([20:16])
• While there is “exuberance and hype” around AI, most major players are not yet addicted to debt, which limits systemic danger compared to past bubbles.

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5. Probability and Severity of Correction

[22:02–23:26]

• Cembalest’s forecast: A 10–15% correction in 2026 is likely; much larger (40%) drawdowns would require extreme circumstances.
  • “I’d be really surprised not to see [a 10-15% correction].” —Michael Cembalest ([22:45])
• The severity of the correction (12% vs. 40%) is the key strategic question for investors and pension funds.

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6. The Role of Government and Industrial Policy in the Bubble

[26:27–30:33]

• Galloway posits that because AI is propping up the economy, the government might intervene to prop up these tech giants, inflating the bubble further (echoing socialism).
• Cembalest counters: So far, interventions (e.g., with MP Materials and Intel) are mostly industrial policy to shore up critical infrastructure, not blanket support for big tech. Expects more (targeted) interventions, which he largely supports given the threat from China and supply chain vulnerabilities ([28:31]).

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7. Portfolio Defense: How JPMorgan Is Positioning

[31:07–32:39]

• Rather than radically altering asset allocations, J.P. Morgan encourages clients to shift down the risk spectrum (e.g. from “growth” to “balanced”), rather than change portfolio composition entirely.
• Key features of a “defensive” portfolio: 30-40% in cash/short-term paper, heavily diversified hedge funds, municipals, preferreds, with selective equity overweight in underpriced sectors like healthcare ([32:51]).

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8. Tech Valuation: Context in History and ‘Real’ Risk Premia

[33:48–36:29]

• Tech’s high PE ratios are justified—at least in part—due to exceptional margins and capital efficiency compared to other sectors, even pre-AI boom ([33:53]).
• Cembalest is dismissive of using the equity risk premium as a blunt-edged tool; sector nuances matter more.

Memorable Quote on Tech Valuation:

“Just to look at PE differentials is really missing the point… before this generative AI boom… tech had double the margins of the rest of the market.” —Michael Cembalest ([33:53])

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9. Comparisons to 2001 & 2008—How This Cycle Is Different

[36:29–39:49]

• 2001: Obvious bubble—companies had no earnings, discipline was easy for managers.
• 2008: Deep financial system crisis, hidden risks everywhere.
• Today: Big tech is genuinely profitable and innovative, but overextension looms—especially as resource constraints (like power) and capital needs for AI buildout become daunting.
  • “We’re getting closer to a power wall that will prevent OpenAI from getting anywhere near [its goals]… announcements require 30 gigawatts of power, equivalent to 16 Hoover Dams. It’s just not going to happen.” —Michael Cembalest ([38:41])

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10. Labor Market Disruption or Market Repricing?

[41:52–46:36]

• Galloway’s forked path: Either AI’s promised cost savings lead to chaotic labor market layoffs, or the valuations are halved as revenue doesn’t materialize.
  • “Either… chaos in the labor markets for the next three years, or these companies adjust down their expectations and valuations.” —Scott Galloway ([43:33])
• Cembalest: Agrees there’s little hard data connecting AI to actual profitability/productivity at scale. Most labor impact evidence is anecdotal or preliminary.

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11. Geopolitical Risks: China, Taiwan, and the US Tech Moat

[49:06–52:40]

• Cembalest lists four looming risks for 2026:

  1. Power constraints on data center/AI growth.
  2. China achieving AI parity and “dumping” LLMs cheaply on the global market.
  3. Diminished dependence on Taiwan, increasing geopolitical instability.
  4. The risk that investors en masse say, "we can't see the ROI," prompting widespread profit-taking.
  • “China is on a really long-term journey and I would agree that that is very much explicitly their goal [to catch and undercut US AI].” —Michael Cembalest ([51:50])

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12. Global Fragmentation, Inflation, and Fed Policy

[54:53–55:12]

• Fed faces a “fork in the road”: Input prices rising, but wage/labor data softening; yet, the Fed appears poised to cut rates anyway—an unusual and risky move.
  • “The gamble is that the inflationary increase is Tariff related… but that’s a big bet.” ([55:12])
• Immigration and labor supply: Restrictive policy may worsen inflation; US needs more workers to keep wage pressures at bay.

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13. Advice for ‘Everyday’ Investors for 2026

[60:43–62:43]

• Cembalest’s advice: Accumulate dry powder (cash) slowly—the next correction will be an opportunity. Many drawdowns are V-shaped, so having cash on hand is valuable for nimble investors.
  • “Having some spare cash and credit to be able to draw on when these things happen can be helpful… individual investors have an advantage over some of the large institutional investors.” ([61:23])
• His bull case: Real, revenue-driven AI productivity emerges, China cuts back on overproduction, Europe engages in deficit spending for defense. US inflation softens, housing and energy prices moderate. ([62:43–64:29])

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Notable Quotes & Memorable Moments

• On the defensiveness of today’s portfolios:
  “Our normal balanced and conservative portfolios already have 30-40% in cash, cash equivalents, gold, very diversified hedge funds, municipals…”
  —Michael Cembalest ([10:41])

• On AI capex scale:
  “The tech capital spending in 2025 is equal relative to GDP to the moon landing, the Manhattan Project… and the Hoover Dam combined.”
  —Michael Cembalest ([13:10])

• On systemic fragility:
  “There’s the S&P 490 and there’s the S&P 10. And right now everything is banking on these ten companies living up to these extraordinary expectations.”
  —Scott Galloway ([15:10])

• On Meta’s off-balance-sheet debt:
  “They have walkaway rights every four years… Blue Owl’s holding the bag. So Blue Owl is at risk. …It’s essentially releasing risk the likes of which you’ve seen forever in commercial real estate.”
  —Michael Cembalest ([20:16])

• On plausible corrections:
  “It would be kind of shocking if you didn’t have some kind of profit taking correction in 2026… on the order of 10-15%.”
  —Michael Cembalest ([22:45])

• On AI’s actual economic impact:
  “There’s only a handful [of studies]… on the productivity consequences of doing this stuff. And what you can’t find at all is… explicit pathways to profitability for generative AI adoption for the hyperscalers.”
  —Michael Cembalest ([45:38])

• On China’s ambitions:
  “China’s on a really long-term journey and I would agree that that is very much explicitly their goal [to match US AI dominance].”
  —Michael Cembalest ([51:50])

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Timestamps for Key Segments

• [06:44–10:56] — Debate over Aswath Damodaran’s bearishness and real-world vs. theoretical investment advice
• [11:49–14:18] — Discussion of AI boom: moonshot capex, Meta’s spending, sustainability of investment
• [14:18–18:35] — Market fragility if a top AI stock collapses; “house of cards” scenario
• [19:22–22:02] — Financial engineering: how Big Tech is moving capex risk off-balance-sheet
• [22:02–23:26] — Probability/scale of a major correction in 2026
• [26:27–30:33] — Would government intervention drive bigger excesses in Big Tech/AI?
• [31:07–32:39] — How institutional portfolios are adjusting (or not) for risk
• [33:48–36:29] — Valuing tech correctly: growth/margins vs. raw PEs, historic context
• [36:29–39:49] — 2001 vs. 2008 vs. today’s market; new risks (e.g. data center power)
• [41:52–46:36] — Labor market risks and the productivity “pyramid” of AI adoption
• [49:06–52:40] — China’s AI parity/“dumping,” Taiwan/semis risk, power wall as 2026 hazards
• [54:53–55:12] — Global fragmentation, inflation, and the Fed’s “big bet”
• [60:43–62:43] — Practical investor advice: accumulate cash, V-shaped recoveries, bull-case primer

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Tone & Closing Impressions

The discussion is nuanced, data-driven, and candid, with a touch of Prof G’s signature irreverence. Cembalest is “measured, not panicked,” recognizing risks but distinguishing between 10–15% healthy market corrections and catastrophic systemic collapses. Galloway and Elson wrestle with headline risks, systemic overconcentration in mega-cap tech, and the uncertainty of whether today’s “AI moment” will look like the dot-com or something different.

As Cembalest puts it:

“Right now, with a little bit of Fed easing and some steady momentum, I’m more inclined to think of the 12 to 15 and the 40.” ([23:26])

For investors and market-watchers, this episode offers a roadmap to defense, a refresher on economic history, and a reality check on the new AI-fueled market paradigm.

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Transcript

[A]

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[B]

I know.

[A]

By the way, I Made up the last one myself.

[B]

Eddie, listen to me.

[C]

Markets are bigger than us. What you have here is a structural.

[B]

Change in the wealth distribution.

[C]

Cash is trash.

[A]

Stocks look pretty attractive. Something's going to break.

[C]

Forget about it.

[A]

Ed, do you have a nickname for your. For your sperm?

[B]

No, I'm not quite there yet. I'm not really going to play ball with you on this one.

[A]

Also, let me give you a little tip. Just. Just while we're barreling towards cancellation, even Claire looks horrified. It's important and it's fun that every time you orgasm, you yell out the same thing. It's really important. You have to come up with the same thing.

[C]

This is the part where you go. What do you yell out?

[B]

I told you, I'm not playing ball with you.

[A]

Ed's got space in his hands. This has not cmn Joe Kernan.

[B]

I'm not gonna do you the service of asking the question.

[C]

Surrender Dorothy.

[A]

That's what I yell out. From the wizard of Oz. That's what I yell out. And my other wizard of odd references.

[C]

I yell out.

[A]

I'm melting. That's why the fans tune in.

[B]

That's why they tune in.

[A]

Next up, JP Morgan, chief economist for the last time. How are you?

[B]

I'm doing well, Scott. How are you doing?

[A]

I'm good. I've been in L. A the last few days and I'm at the Beverly Hills Hotel where they're charging me $1800 a night so I can have a construction site above my room.

[B]

But they stopped the const. I mean, just off Mike here. You gave the front desk a call, you asked them to stop hammering and they did it. Pretty baller. Good stuff.

[A]

Yeah, no, I. I carry a lot of weight here. Yeah, it's. They're very scared of me.

[B]

Number one client. So what. What have been the highlights from la? Just before we get into this conversation.

[A]

I had a dinner last night, went with like a small dinner with eight people, and I'm totally name dropping. What the fuck? Um, and Larry David. I sat next to Larry David.

[B]

Wow. How is that.

[A]

He is literally the same person in real life. It's not a show, it's a camera following around. He showed up, he's like, nice to meet you guys. Like, why do they serve hors d'?

[B]

Oeuvres?

[A]

He goes into a bit, he's like. He's like, why would it like. I hate Uber. Do you hate Uber? Let me talk about Uber for. He's literally. I'm like, oh, my God, it's the show. The guy just Shows up and starts doing these bits. But he's very funny. He seems pretty nice. His wife is lovely. I don't know. I enjoyed.

[B]

How did you wind up at a dinner with Larry David?

[A]

I'm what you call right now like an intellectual support animal. And that is all these rich people think it's interesting to have me over for dinner and talk about my book. Like so I think there's two or three of these people every year where they're like, okay, let's all get together. And also at the dinner was my role model, Sam Harris. And I always enjoyed seeing Sam.

[B]

So when you get invited as the intellectual support animal, do you feel a pressure to provide the intellectual support?

[A]

Yeah, that's why you're there.

[B]

Is that fun? That sounds stressful. Maybe that's why Larry David was doing his bit. He was the comedic support animal.

[A]

The answer is yes. And I find as I get older, they called me and they were gonna invite this fairly famous tech couple. And I said no. I'm like, I just don't wanna. I don't wanna meet them, I don't wanna talk about them. I don't. I find that stuff is increasingly intimidating me and I don't wanna. I mean, you know what? I'd rather just stay at home and watch Netflix and have some big Filipino man reheat my soup six or seven times and just sort of start peeing in bottles. Grow my nails really long. Surrender Dorothy. Should we, should we get to AI in the economy?

[B]

Ed, you want to move on now?

[A]

Somebody gave me mushroom chocolates over the weekend. Just saying, just saying.

[B]

Okay, well that explains a lot.

[A]

All right, let's get to the economy.

[B]

Ok, now that we know what happened in L. A this weekend, here is our conversation with Michael Semblas, the chairman of market and investment strategy for J.P. morgan Asset and Wealth Management. Michael, thanks for joining us again on property markets. Good to see you.

[C]

Morning.

[B]

So I'm going to dive right into the questions that we have because we've only got you for so long. Just some context. So last week we had Professor Aswath Demodorin on our podcast. He presented what we think is kind of the most bearish position we've ever seen from him. And this is a very level headed, calm guy who basically told us that he thinks that everything in the stock market is overvalued. He said there's no place to hide in stocks. And I'm just going to play you a short clip that kind of summarizes what he thinks right now to the.

[A]

Extent that there's going to be a correction.

[C]

There's no place to hide in stocks. I can't see a way because if the Mag 10 go down by 40%, it's not like the industrials are going to hold their value while this happens. The panic that that's going to create is going to ripple through stocks.

[A]

You're an investor primarily investment stocks and bonds. My advice is, even though historically you.

[C]

Might never have invested in non financial asset categories, this might be a time.

[A]

Where you think about kind of at.

[C]

Least moving a portion of your portfolio.

[A]

A bigger chunk than ever into cash.

[C]

Or something close to cash or maybe even collectibles, things that I've never owned collectibles.

[A]

But for the first time in my investing history I'm saying maybe I should.

[C]

Hold something that is not going to be effective.

[A]

Inflation goes to 10%. There's a market and economic crisis that is potentially catastrophic.

[B]

So we were very struck by everything he said in that interview. What do you think, Michael? Is he right? Are you concerned like he is? What are your reactions?

[C]

It's hard to react to somebody that doesn't have a long term track record of this is when I bought, this is when I sold, this is what I bought, this is what I sold. You know, professors are basically running fantasy baseball teams by coming out intermittently and telling you what their trades are. It's not real money, not real life. And so, you know, the purpose of Morningstar and Lipper and a lot of other entities out there is to kind of track the people that actually manage money, how do they do over the long run and things like that. So it's a little abstract. A better example might be the cash stockpile that's accumulating at Berkshire Hathaway is probably a much better indicator of people that are having trouble putting money to work because they can't find any value. And certainly it's challenging right now there's a ton of dry powder in private equity and venture. This still has to be put to work. And so it's a challenging time. His premise of, I think I heard him say 10% inflation. Like I'm not prepared to quite buy into a 10% inflation forecast, nor am I prepared to buy into the certainty of a 10%, sorry, a 40% correction in the MAG10 or MAG7. Those stocks have gone up a ton of. And a passing wind could cause profit taking. Right. Similar to what took place earlier this year with the dollar dollar went down 10%. It was at its post financial crisis high. As soon as any asset falls by 10%, Nouriel, Roubini and the rest of the people come out of the woodwork and say, okay, this is it, this is the big one. Everything's gonna go down from here. And then of course, the dollar's been flat since then. The dollar's been actually flat since our podcast in May. So the last time I was on this show, I think people have to have some kind of discipline to recognize that when 20 to 25 year highs, they can correct by 10 or 15%. It doesn't necessarily unfold and unravel into the big 40% corrections that we had in 2009 and then again in 2001. So it sounds, I mean, we're positioning more defensively than we have. But what he's describing there is a bridge too far. Plus, our normal balanced and conservative Portfolios already have 30 to 40% in cash, cash equivalents, gold, very diversified hedge funds, municipals, some short duration preferreds and things like that.

[B]

Just to play defense for Aswath, you know, that clip that we got was the most bearish string of sentences that he uttered. Otherwise, I think if you listen to the full podcast, it would sound less hyperbolic perhaps. But you know, in sum, he's concerned, but also so is everyone else. And right now, this AI bubble, more and more people are talking about it, more and more people are googling it. We're now beginning to see a little bit of a correction in tech stocks as we speak. Small, small. The fears of this AI bubble are quite strong or stronger than they have been before. What do you make of those fears? Do you think that they are warranted? And how are you at JP Morgan thinking about it?

[C]

Something like 75% of all of the revenues, profits and capital spending since November 2022 have come from 40 AI related stocks. So there's almost no justification to spend time on anything but this. And I try to be an even keel kind of person, but the meta number threw me. A company announcing that they're spending 65 to 70% of their revenues on capital spending and R and D without even knowing what the destination is that they're going to. As an investor, that doesn't fill me with a lot of good feeling about where we're going to be two years from now. And it was only two years ago that they reached the same peak of 65% of revenues investing in the metaverse, which obviously hasn't really turned out to be anything. So there's a lot more behind this particular generative AI boom. But the numbers I Put together something Scott, I think you'd appreciate this, that you like this kind of historical context. The tech capital spending in 2025 is equal relative to GDP of the moon landing, the Manhattan Project, the interstate highway system, electrification of farming, the Tribor Bridge, the Mintown Tunnel, the Golden Digate Bridge.

[A]

And the Hoover Dam combined. Yeah.

[B]

Wow.

[A]

Yeah.

[C]

There's all these futurists hovering around like bats telling us how all of this is going to magically make some fantastic future. And there are surely bits and pieces of evidence here and there of real productivity gains coming from this. But this is a scarier version of the ICT revolution of the early 90s. The only silver lining that I latch onto is that whether it's 2001 or the casino build out, airlines, fiber optics, the Calpine gas turbine era, all of those capital spending booms were financed with debt. And this one, with the exception of Oracle, is being financed with internally generated cash flow. But that simply means it can go on for longer before it gets unplugged by the debt markets. It doesn't relieve you of the ultimate need for there to be substantial profit generation to remunerate the trillion 2 of capital that's been spent since November 2022.

[A]

I want to recognize I'm feeling defensive around my colleague. I've been following Aswath for 20 years and he does the work around valuations and there's few people in the alternative investment space or invest that at least in my observation, have been more right more often than him. And it did rattle us because he generally. I want to acknowledge your point. It's easier to sound smart when you're a catastrophist. You just sound smarter, right? And the best traders, the best historians, the best politicians have erred on the side of asking themselves what could go right because the markets over the medium and long term are up and to the right. So I want to acknowledge that the. I want you, I want to put forward a thesis and have you respond to it. And that is if you look at every single of the company, one of the companies we're talking about, they have all had years where they're down 50 to 70% in that 12 month period. And the thing that's scary now is if a company like Nvidia, which hasn't had one of those years, I don't think, or maybe did in 2022, if that happens to a company that's now got the market cap of the GDP of whatever Germany, that, that, that might take the entire market down, that essentially America has become so fragile, because it is now a giant bet on AI. And if OpenAI, which, you know, I mean, 60% of cap, 60% of revenues on CapEx is one thing. As far as I can tell, OpenAI is about at, you know, 30 times, 30 times the revenue going into CapEx. If OpenAI are some big customers. Here's the thesis. And you, you tell me where I got this wrong. Some standard S and P companies, PepsiCo, Caterpillar, P&G announced, Look, AI is great, but we are out over our skis. We're not seeing the return we'd hoped for. We're scaling back the investment. OpenAI in the secondary market trades way down. And then, and then Nvidia is, Is, goes down 60%, which would not be unusual. It wouldn't look cheap. And then we have a $3 trillion destruction in the capital markets and we basically overnight have flat markets, GDP growth of zero, and the whole market. You know, these companies sneeze. We're not catching a cold, we're catching pneumonia. The thing that worries me the most, and I want to get your response, is we have inadvertently turned our markets into, into a very fragile house of cards. There's the S&P 490 and there's the S&P 10. And right now everything is banking on these 10 companies living up to these extraordinary expectations. Your thoughts?

[C]

I agree with most of that. One of the data points that was really disturbing is 2 years ago someone talking about GDP growth would not have mentioned tech capital spending. It would have been a rounding error. Last quarter it was a third of gdp growth and US GDP growth would already be 1% if it weren't for this tech AI build out. And you know how people get upset when the private sector gets bailed out by the public sector. I would argue this year generative AI has bailed out the public sector like the, you know, these, the hyperscalers bailed out the Trump administration because without them they'd be staring a 1% GDP growth number in the face and having to explain it, which they're in really no position to do. And by the way, I don't think it's a coincidence that we track all of the country product tariff matrix combinations, the AI infrastructure, about 70 to 90% of those imports are exempt from tariffs right now. So those sectors and companies have also done a very good job navigating however one has to these days, Washington, in order to get their imports, which are critical to their survival, exempt from tariffs. So yeah, I'm nervous about it. Again, the fact that it's being financed through cash flow means that we don't have quite the same risk of a sudden seize up because bonds can't be placed. You're not going to have a hung bridge loan that gets the broker dealers in trouble and have to go to the Fed's primary dealer credit facility. You're not going to have something like that. Oracle's really the only one that's financing any material amount of this through debt.

[B]

My understanding. So Oracle is raising a ton of debt and capital markets are concerned about this and we're seeing that reflected in the stock price and it's essentially underwater since the deal with OpenAI was announced. My understanding though is that the other big hyperscalers are going out and beginning to raise debt. I mean we just saw a big announcement from Amazon. I think we saw that from Meta a couple weeks ago as well. I don't know the exact numbers, but my understanding is they are going and financing this with a ton of debt. Perhaps not debt that they necessarily have to raise, perhaps they have the cash surplus to finance this, but they are going and raising debt and it's record amounts of debt that they are raising. Is that wrong?

[C]

Of the 40 companies I mentioned, there's AI stocks, 30 are technology, what you and I would agree are technology companies. Five are capital equipment companies like GE Vernova that make the turbines and then five are utilities. Let's look at the 30 AI stocks. Something like 25 of them actually have negative net debt to EBITDA ratios because they have more cash and cash equivalents on their balance sheet than debt. So for the most part the debt's not an issue. The Oracle's an exception and is in part a reflection of the fact that Ellison's been buying back stock for 15 years and taking, taking money out that way. At some point Oracle's going to have to be recapitalized if it's going to be borrowing like this. The Meta deal was interesting and when I explain how I view it, you'll probably say, well, that's even scarier than if it was Meta.

[B]

Let's hear it.

[C]

The Meta partnership with Blue owl that borrowed 27 billion in the investment grade bond markets was an SPV with a strange French name and the debt's not consolidated onto Meta's balance sheet. Initially I was concerned that that was some kind of sleight of hand. It's not, it's worse. They basically have walkaway rights every four years and a declining residual value guarantee. Blue Owl's holding the bag. So Blue OWL is at risk. If at any point Meta basically says, you know this, we're not getting a return on this particular data center complex, were out and blue out and the people that have put up the money for Blue Owl will be the ones holding the bag. So I think S and P was right to kind of withhold consolidation of that obligation. But it says, it says a lot about the underwriting discipline that's taking place in private credit and in other places that are financing these data centers because they're the ones that are taking the risk. It's essentially releasing risk the likes of which you've seen forever in the commercial real estate markets.

[B]

So it sounds like someone is on the hook in this case, it's Blue Owl. And we're probably seeing equivalence in these other debt deals. And by the way, we're seeing this kind of reflect in the stock right now. Blue Owl is publicly traded and it's been, it's declining this week. But is the, is the conclusion then? Because it sounds like you agree with Aswath. We are seeing some, we're seeing some form of a bubble. People are exuberant. There's a lot of hype and a lot of excitement that isn't fully tethered to reality right now when it comes to AI. But it sounds like what you disagree is the extent and scale of the damage that we're going to see if something blows up, or at least the likelihood that there will be some sort of blowout.

[C]

Last year was a perfect example. My forecast for the year was the Trump people were going to break something. We'd have a 15% to 20% correction, but stocks would end the year higher than where they began. It happened within 50 days of the inauguration. They broke everything. Markets went down, they eventually came back. I wouldn't describe any of the subsequent recovery as the byproduct of administration policy. But I think you and Scott are right, which is it would be kind of shocking if you didn't have some kind of profit taking correction in 2026 at some point on the order of 10 to 15%. I'd be really surprised not to see that.

[A]

Yeah.

[C]

The big question is if you told me the drawdown is 12%, I don't really have to make any substantial portfolio allocation changes here. We can work through that with the way that we manage money. If it's 40, that's different. And so that's essentially the big call that asset allocators and ERISA plans and endowments and validations have to make. Are we looking at a 12 to 15% correction or are we looking at something that's going to end up at 40? Right now, with a little bit of fed easing and some steady momentum, I'm more inclined to think of the 12 to 15 and the 40.

[B]

We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us if you haven't already.

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[C]

Markets.

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[B]

We're back with Profitary Markets.

[A]

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 and 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, right? 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 US debt markets or Treasuries and it's like a further move into socialism. But I predict he is going to back these companies, not the other, not the real economy, not the Main street economy, not the 490 companies in the S and P that got 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 such that they can continue to make them. And that is only inflating the bubble to very dangerous territory. Your thoughts on that thesis?

[C]

That would worry me if I saw it. They've done a couple things so far that I would in fairness put in different bucket. Jamie 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 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.

[A]

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. That's the blood sugar of a man who thinks he can run these businesses better than the private sector.

[C]

I'm going to disagree with you on that one. And NP materials in particular. I mean, they, they have provided a price floor on, on neodymium and praseodymium, which is needed by the US Military. It's the last man standing in that sector. If you told me that, that an admit 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 the time and place and as things stand right now, China has a chokehold on those critical minerals. And 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 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. But 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.

[A]

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 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?

[C]

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. When 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. Their 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.

[B]

What does a balanced or more defensive portfolio look like for those, I mean, just at a very high level, general level, what does that portfolio look like? Bonds versus stocks.

[C]

You're talking about 30 to 40% of the portfolio being in some combination of cash, short term, A1, P1, commercial paper, municipals for taxable clients, super diversified hedge funds, like 30 to 40 of them, where, where like the volume turns out to be something like 5 or 6% and some preferred stock, things like that. So you're kind of taking a lot of the directional beta risk out of it. You, you would, you know, you're obviously positioning much more defensively. Healthcare is trading at like the cheapest valuation on record relative to itself and relative to the market. So 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.

[B]

How is tech valued at large right now? In terms of paying you for the risk.

[C]

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. And 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.

[B]

Yeah. Something that I was thinking about after we spoke with Aswath, I mean his core valuation tool is the equity risk premium, which basically he's taking the rate of return on stocks minus the risk free rate and he sort of plots that out. And you're not a fan.

[C]

It doesn't have any nuance to it. It doesn't look at earnings growth and more, it doesn't differentiate between sectors. And I understand why people want to look at it over the really long run. It can be obviously a helpful tool.

[B]

Yeah, well, I think it's helpful when you're trying to take a bird's eye view and understand where we are in terms of sentiment. And the thing that kind of surprised me is we're at around 3.7% by that measure. And 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 JP Morgan during the 2008 financial crisis. So you've seen these cycles before. And I think what we're describing here is 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? And what does this look like compared to previous crises and previous cycles?

[C]

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 like 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. Right. 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 DES and 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're a little underweight now, right? I mean, so that was pretty easy. This is a harder one because in many ways Google's 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. You 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 $130amegawatt hour. Now, most of your listeners don't know what that means. That's double wholesale power prices for, for an average 20 year, you know, PPA agreement the other risk that we need to acknowledge is we're getting closer to a power wall that will prevent OpenAI 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. 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 time frame. Because it's impossible.

[B]

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 one of the things that we've been talking a lot about recently is that crazy interaction between Sam Altman and Brad Gerstner. I don't know if you saw this, where Brad Gerstner says 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 pay for it? To which some. 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.

[C]

It sounds like what happens when, when there's a syndicated loan distribution now on Wall street, there's so much demand that if you, if you press the button that says on the syndicate call, I have a question about the documents, you get disconnected. Like the, 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 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 leveraged loan market, which basically doesn't apply much of an underwriting wall at all. So 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.

[A]

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 dollars in incremental revenues or efficiencies. Now, 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, welders, 80 million are vulnerable. If you were to not inspire, which I have not seen a ton of incremental revenue growth from AI products, but, 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 and a half percent labor destruction per year in certain industries, which may not sound like a lot, but that's chaos. Or 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?

[C]

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 generative AI is going to be complementary to workers and not destructive. And I remember thinking, 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 of this stuff, 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. The other thing that happened, and I wrote about this a couple months ago, there was a couple of papers that came out, there's 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, has nothing to do with generative AI. So you go to the back and like, who wrote this piece? And as you unravel the threads, they're Silicon Valley think tanks. And so then I kind of went to David Otor and Darren Osomoglu at Harvard at MIT and Johnson 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 pyramid 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. They'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 in actual business related tasks? Pyramid's 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 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 the 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.

[B]

We'll be right back. And for even more markets content. Sign up for our [e-mail] Subscribe.

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[A]

I think China is pissed off. I think they're sick of trying to figure out the US China relationship, plan their economy and they're diversifying away from us. 24% of their exports used to come to the US now at 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 and that has 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% of the premium high end US product for 5% of the price and then essentially go for the jugular. Just flood the market with open weight LLMs and AI products for near free. That takes down massively erodes the margin power of these companies, takes them down and thereby takes the US Economy down. Your thoughts?

[C]

So the outlook for this year has four major risks. Number 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. China is the world's leader in a lot of things. Fission. They've made more fusion advances. They're ahead in genetic testing of certain new drugs. There's a really cool thing that looks at the complexity of exports. I think it's one of the Harvard labs that does it. They've converged now with the United States. So the complexity and the industrial complexity and sophistication of their exports has matched that of the United States. But 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 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 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. And so they're trying to use a combination of brain and brawn to do that. 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.

[B]

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?

[C]

Well, the two other ones is the more that China is able to rely on its own chip ecosystem. That means that number three risk has to be Taiwan. Because, you know, the, the Taiwan essentially was always protected by the fact that China relied 90% for its advanced chips on Taiwanese output. You know, the, the day we wake up and that number is below 50%, 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% 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. You know, this is, this is moving in another direction, in another clear direction here. And again, you don't know when and you don't know how and 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 Nvidia ASML TSMC partnership. And 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 the, we don't, we can't see the roi, we'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%. Yeah, yeah. Like, you know, I read through the details on that one, that those are a lot of companies that, 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.

[B]

The other thing that the Outlook mentions, there are three forces that will define next year's market. They 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.

[C]

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 are going in opposite directions? Historically, 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, I'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. The nairu of inflation for wages is 50,000. Yeah, they shut the border. We all understand what political forces they are reacting to, but the United States needs people to grow. And 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.

[B]

Yeah. The report also says, it 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?

[C]

You know, Gorsuch has been kind of tilting his showing. I don't know the poker analogy because I don't play, I don't gamble. But is it the thing where you hold your cards and people can see what you have or something? I mean, he's been showing his cards a little during the hearing and I think he and Barrett will side with the liberals and 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.

[A]

Do you think there might be a ruling where they have to pay back the tariffs to the companies that tariffs were imposed on?

[C]

I do, over some period of time. And, you know, they would make that as difficult as possible and you know that it would be extremely messy. You know, it would be, you know, think, think about the messiness of the PPP loans as people started to kind of clean up after them. I mean, it's, it's, it's a messy thing to do. And of course, the, 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 the 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. And 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, a playlist here that is all adding up to some big, coherent, grand vision.

[B]

You've gotta work overtime to justify how it all makes sense and how it all plays into a specific strategy which leads you to believe, okay, that's not what's happening. This is policy by tweets.

[C]

If you have time on the weekend and you really want to 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.

[B]

We'll check it out on our own time. Just. Sorry, 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% next year.

[C]

No, that's the one I thought was likely.

[B]

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%, but you're thinking you're going to see 10, 12, 15%. Correction. For someone who has kind of a regular portfolio, a regular investor who is dollar cost averaging into the market, into the S and 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?

[C]

Well, 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 2 to 3 points, which is, can be the equivalent of 50, 60, 80 basis points. So you know, having, 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. 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. I think a lot of the hedge fund, the big risk parity funds, are 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.

[B]

Yeah, interesting.

[C]

I think it's retail investors have at least the flexibility to try to act when these things happen.

[A]

Make the bull case for 2026, you.

[C]

Start seeing more concrete evidence of, of AI adoption that companies are willing to pay for. And you, you start seeing productivity benefits that are based equally on revenues and not entirely on the backs of lower rates of hiring. 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. 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. And so you're starting to see more defense spending in Europe, which is stimulative. And then in the US 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 US oil and gas production so energy prices come down. So that's kind of your bull case.

[B]

Michael Semblis is the chairman of market and investment strategy for J.P. morgan Asset and Wealth Management. A global leader in investment management and private banking, with $6 trillion of client assets under management worldwide, he's responsible for the development of market and investment insights across the firm's institutional funds and private banking businesses. Michael joined J.P. morgan in 1987. He has previously served as Chief Investment Officer for the firm's global private bank and head strategist for emerging markets 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.

[A]

Good to see you, Michael.

[C]

Thank you very much. Good to see you, Scott.

[A]

Ed, what'd you think?

[B]

I thought I was right. He knows everything, which is so. It's so helpful. 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. I think I agree with him on pretty much everything he said. I mean, our reactions to Aswath's interview, I thought it was really striking, but I didn't feel quite as bearish as Professor Demoderin was when we interviewed him. I feel like Michael's sentiment is more where I'm at, 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. So, yeah, I thought that was informative. Made me feel maybe a little better.

[A]

I think he's very measured because the last thing he wants to do is spook 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 Demoterin saying Aswath is the least panicked person I've ever met. And then 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. And 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 boomeranger from the actual data. But the data I just think looks, I think if the market goes down 40%, the NASDAQ goes down 40% in the next 90 days or 100, we're going to be like, well, of course it fucking did. I think it's going to be like the most obvious thing in the rearview mirror that it happens. So. But anyways, back to Michael. I, I like him because he's measured and just, I like that he pauses and thinks about questions. He wants to answer them, answer them correctly.

[B]

I appreciate that too. Yeah. And, and you know what he said, foots with what you're saying? I think he, 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. He said that it was unlikely. He doesn't think it's going to happen, but he didn't fully rule it out. I think 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. So 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, 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, that, that's sort of the next question. But in terms of his views on like what the implosion will look like. I think he. I think he's pretty spot on. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our research team is Dan Shalon, Isabella Kinsel, Kristen o' Donoghue and Mia Silverio. Drew Burrows is our Technical Director and Captain Katherine Dillon is our Executive producer. Thank you for listening to Prof. G Markets from Profgy Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

[C]

In kind reunion.

[A]

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[C]

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[A]

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