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[00:01]
Sponsor Voice
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[00:46]
Torsten Slok
from the Goldman Sachs trading floor in 10 minutes or less. Investors and analysts share timely analysis on
[00:54]
Justin Wolfers
the week's market activity.
[00:55]
Torsten Slok
The Markets podcast from Goldman Sachs. Listen now.
[01:02]
Sponsor Voice
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[01:38]
Justin Wolfers
Money Market Matter if money is evil,
[01:40]
Torsten Slok
then that building is hell.
[01:48]
Ed Elson
Welcome to Prof. G Markets. I'm Ed elson. It is July 29th. Let's check in on yesterday's market vitals. The S&P 500 and the Dow rose. Meanwhile the NASDAQ declined as chip stocks got crushed. More on that in a moment. Brent crude declined to about $84 per barrel. The yield on 10 year treasuries fell ahead of the Federal Reserve's interest rate decision due later today. And finally, SpaceX shares fell to a new low of $107 per share, down 52% from their all time high. Okay, what else is happening? The most important sector in the stock market is starting to fall apart. The tech heavy NASDAQ 100 fell for a fifth straight day, briefly entering correction territory, meaning it fell 10% from its highs. Chip companies led the decline. The PHLX semiconductor index sank as much as 6% and micron fell 9%. But the sell off started overnight in Asia where SK Hynix dropped nearly. The KOSPI index fell 11%. This drawdown raises a major red flag. In the first half of this year, nine of the 12 biggest contributors to the S&P 500's return were semiconductor stocks. So investors are left wondering, where can this market go without chip stocks? Here to discuss this, we're speaking with Torsten Slok, chief economist at Apollo Global Management. Torsten, great to see you again. Thank you for joining us. You said a striking quote recently on our friend Steve Isman's podcast. You said, quote, this AI thing better work out because if it doesn't work out, your portfolio will be in trouble. Is this a sign that AI might not be working out?
[03:43]
Torsten Slok
The challenge at the moment is that the hyperscalers and those who are building the infrastructure, they are changing their financing, which used to be mainly from the equity side of the bat balance sheet to now being on the debt side of the balance sheet. And the amount of debt that has come to the market from the hyperscalers, meaning the companies that are building out the infrastructure, has just been enormous. So as a result, we've seen very, very significant increase in supply of investment grade credit that is in the hyperscaler space. And the consequence of that is that we have started to see spreads in credit widened out on that hyperscaler debt. And this has resulted, of course, in a number of questions being asked. Namely, are spreads widening out on hyperscaler debt because of worries about the underlying credit of these companies, meaning their ability to pay back their debt, or is it simply just because of demand and supply that there's just more supply at the moment and now there's just not so much demand? And as a result, spreads have been widening out? The other development more recently to your question, Ed, is also the CDS spreads, meaning the cost of insuring yourself against these companies going under in the next five years. Those CDS spreads have also widened out quite significantly. So one way of answering your question is that there's simply so much debt that has come to the market. The market has now begun to ask some questions around, well, if these companies need all this financing, what is the right interest rate? What is the all in level of yield that is required to finance the build out the way that we're seeing at the moment, and that is really the starting point for how the domino bricks are toppling here, namely that spreads have widened out and as a result, the equity in these companies, the stock price of these companies have also started to underperform. And that is where we are today, namely this discussion around what is the speed of the AI buildout, what is the payoff from the AI buildout? And all those questions, of course, are very important when we think about the stock price, especially for the hyperscalers. And more broadly, the Magnificent Seven.
[05:36]
Ed Elson
Yeah, just looking at the price of those credit default swaps that you mentioned, there some companies whose credit default swap prices have hit record highs in recent weeks, Oracle, SpaceX, Google, Amazon, recently, Nvidia. I mean, from your perspective, how dangerous is the debt situation in AI right now? How likely is it that some of these enormous names that have become so structural and so important to the market could actually go under in the next five years?
[06:12]
Torsten Slok
Remember that all these companies, as you of course know all too well, they are investment grade credits. That means that they are very, very profitable. They have very, very strong earnings growth. They have very high profit margins. They generally have very solid credit fundamentals. That's, of course, very important when we begin to think about the question, will they go under over the next five years? Because companies that are among the most profitable companies in the world and have done exceptionally well in the last three, four years, of course they are very, very unlikely to go under. But that is exactly the mirror image of this discussion. Given everything that if we just agreed on how solid they are from a credit perspective, why is it that these credit spreads are widening out? Especially to your point, why is the CVS widening out? Meaning, why are people buying protection against these companies going under the next five years? What are people really worried about? And that's, of course, why the discussion in the market at the moment is about how can these companies that have been market leading, meaning that they've been driving returns for the S&P 500 so strongly for the last several years? How can it be that suddenly people are beginning to ask questions about what will be the situation for these companies over the next five years? And is that divergence between, hey, fundamentals are really great, but at the same time, market pricing is telling you that there's more and more worries. That is the conversation, is it the market pricing that's wrong and the fundamentals are good, or vice versa? Is the market pricing telling you that there is some more danger coming down the road? And of course, that danger is all about the payoff from AI. How long time will it take before we see the payoff from AI? Remember, as we all know, stock prices today is the net present value of future discounted cash flows. So that means that at the moment, the market has a certain expectation, the consensus has a certain expectation, expectation that returns will look, say, like this. But if the payoff in AI is going to come only like this, that means that the net present value of these companies today should be lower, and that is the risk of course, at the moment that maybe the market pricing is actually correct in the sense that there's more questions being asked about what is the payoff profile, because if it is involving a slower stream of payments in the future, then it does imply that the equity should be lower today and credit spread should be wider today. So this is this discussion around AI implementation. Where are we seeing it paying off? Are we seeing it in form of high productivity? Are we seeing in the form of a stronger economy? That is the very abstract discussion that is behind most of these price movements that we have seen.
[08:43]
Ed Elson
Why do you think this is all happening right now? And when I say this, I refer to the negative sentiment surrounding these companies and surrounding the AI buildup because these are topics that you and I have discussed for many months at this point that other people and other investors have discussed for a long time. But it seems as though, I mean to Jeremy Irons, quote in marginal it seems as if the music is beginning to get quieter only now, and I can't quite tell why that is. Why is it happening at this moment?
[09:17]
Torsten Slok
There's a series of developments that have brought us to this point. First was Amazon issuing debt, and that resulted in some concessions and some changes in the debt that was issued. And it's been trading wider, meaning the market saying that spreads on this particular credit should be a bit wider. We've also seen last week, and you talked about this last week, of course, Google going for the first time in its history to now having negative free cash flow, which is also a development where people are beginning to ask, is there too much investment? Is there too little investment? If there's negative free cash flow, what does that mean? How long time is that going to take? How many years will it take before we see a payoff on those investments? So I think it's a reaction to some of the individual events we've seen around individual names that are moving towards the narrative. Exactly. To your point or in your language, as you just mentioned, the music being a little bit more quiet because people are beginning to ask, okay, yes, this been going on for a while. In fact, for several years this has been the main driver of returns in the S&P 500 and NASDAQ. But now the questions are being asked, well, okay, but what is the profile of this payoff in earnings? So there's two races going on. Namely there's a race to deliver roi, meaning return on investment for AI, and there's a second race, namely that the data center build out requires a lot of financing. And if that financing now is becoming more and more expensive, then people are asking essentially two questions about on the one hand, how quickly will the AI investments pay off, in other words, in the form of higher profit margins, in the form of higher earnings growth, not so much in the Magnificent Seven, but higher profit margins for the S&P 493 and higher earnings growth of the S&P 493. And similarly, the other race is on the other side, namely can we still continue to see issuance of hyperscaler debt of debt for the build out to grow at this very, very rapid pace if the spreads are now widening and if the CDS spreads are also widening. So those two things are the two areas to watch, namely what's the evidence of AI paying off. And the other area is to watch what is the returns and what is there for the spreads that investors require. Especially of course on hyperscaler debt.
[11:25]
Ed Elson
It seems like whenever these questions are put to the CEOs of these companies, these big tech companies, they often avoid the question or they don't answer it fully. Or in the case of Jensen Huang, for example, where it was asked of his company, what's going on with all these circular deals? And his response was, I don't think there's anything circular about what we're doing, which I mean to me is kind of insane. We have big tech earnings coming up. I'm curious if you think that we will get some clarity on a lot of these questions from the leaders of these big tech companies and these hyperscalers. Do you think the fears will be addressed?
[12:05]
Torsten Slok
This is extremely important because I actually think the most important event tomorrow and also on Thursday are the hyperscaler earnings. It's actually become more important than the FOMC meeting. And despite that, I'm an economist who spend all my time when the Fed and you and I have talked about this for a long time, namely that of course Fed action is very important. Are they raising interest rates? Are they not raising interest rates? That's a very important debate at the moment. But currently, because we are approaching, it looks like at least some inflection point and the risks are rising, that the market might interpret this as an inflection point, it becomes very, very important what we get from the three hyperscalers that are reporting tomorrow and Thursday, because to your point, it almost feels like that there's a whole different conversation going on. The labs and the hyperscalers are talking like this is existential, we have to do this. There can be no discussion about it because this is the only thing that's required. So of course we need to create as much compute as we can. Whereas on Wall street the conversation is saying, well, hold on, what is the price for that compute? How much revenue can you generate for that compute? So I think that discussion really is really the technologist talking in the direction of saying, of course we need a lot more tech, we need a lot more compute. And the market and the Wall street language saying, well, no, that price of building that compute is now coming at a wider spread because there's simply not enough capital available to build that compute. And that is coming together tomorrow and the day after in the hyperscaler earnings. Because then we will figure out, is it still the message from them, like it was with Google last week, that we're still growing the capex more and more and more, or are there signs that the capex is beginning to roll lower and how is that then going to be interpreted by market? So there's a lot of different small signals, not so much only about the headline earnings, but also about what is the action from the hyperscalers. How do they think about the spread widening we've seen during this quarter in terms of their plans for the capex continued build out?
[13:53]
Ed Elson
Final question. One of your big themes has been you pointed out how dependent on AI the market has become. And so your advice is try to find areas and investments that are not AI. Can you figure out how to diversify away from AI? And that might be the right investment strategy. First question. I mean, Apple has been the best performer of the year. They're the ones who sat out of the AI race. Number one, is that a non AI investment? And number two, what areas and what sectors are you looking at? What are some, some ways that people and investors can diversify out of AI if they're worried that the AI trade is starting to slow down.
[14:37]
Torsten Slok
If we think about the 6040 portfolio, this is the simplest way of thinking about investing. I have some bonds, I have some equity, and the equity is 60%, the bonds is 40%. Historically this has been very diversified. When stock prices went up, bond prices would go down and vice versa. When stock prices went down, bond prices would go up. So I would be naturally hitched that if one side didn't do well, then the other side would do well. This worked out for a long, long time when interest rates were falling. And that resulted of course, in rising stock markets. And at the same time, whenever there was a bump, it was always a good idea to be in bonds. Today we have a very different situation because in the equity side of my portfolio, the 60, that has to a very significant degree, the returns been driven by AI. The 10 biggest stocks now make up 40% of the index. It's very clear that AI has been dominating returns when it comes to investing in public equities. On the bond side, it's also turning into more and more AI. Hyperscaler issuance is, of course, AI in software. We also have a lot of issuance now in AI and venture capital. It used to be the venture capital was inventing prescription drugs, pharma, biotechs, but now venture capital, 87% is also AI. So the challenge to this discussion is that investors AI is really everywhere. It's in equities, it's in credit, meaning public credit. And it's also, of course, in venture capital. So the answer to your question is exactly that. A good recommendation at the moment is to invest in non AI. And what really is fundamentally non AI is really value. Value investing is not being popular for a long time, but if you look at the factual models at the moment, growth is absolutely crashing completely and value is skyrocketing because people are going away from growth towards value to actually invest in companies that have earnings, to actually invest in companies that are able to pay their debt servicing cost so that they're not vulnerable where interest rates are higher for longer. So non AI, in this case in the public space means the S&P 400. In the private space, it means private equity, that is value investing, then private credit, that is value investing. And more broadly, non AI, of course, also means sectors globally, of course, also commodities that are not directly associated with the AI trade. Those are places to hide and to invest to benefit from not being in the AI trade, because the AI trade, of course, is wobbling at the moment.
[16:58]
Ed Elson
All right. Torsten Slok is chief economist at Apollo Global Management. Torsten, always appreciate your time. Thank you.
[17:05]
Torsten Slok
Anytime, Ed.
[17:05]
Justin Wolfers
Thank you.
[17:09]
Ed Elson
After the break, Justin Wolfers joins the show to break down Trump's latest tariff strategy. And for even more markets insights, you can subscribe to my weekly newsletter, simply put@simply put. Prof.gmedia.com. Support for the show comes from Lisa. If you've ever looked at Maslow's hierarchy of needs, you'll see sleep right there at the foundation, right in between breathing and eating. Good sleep is the bedrock of a good life. And the bedrock of good sleep just might be a Leesa mattress. Leesa has a lineup of beautifully crafted mattresses tailored to how you sleep. Each mattress is designed and assembled in the USA with specific sleep positions and feel preferences in mind. And they back it all up with free shipping, easy returns and a 120 night sleep trial. Our research associate Dan Shalon got a mattress from Lisa. He went with the Sapira Hybrid and he said it provides the perfect amount of support. Plus he's been sleeping noticeably better since he got it, which is great news for all of us. Go to Lisa.com for 30% off select mattresses plus get an extra $50 off with promo code markets exclusive for our listeners, that is L E-E-S A.com promo code markets for 30% off select mattresses plus an extra $50 off and when you use our code, you are Supporting our show Lisa.com promo code markets.
[18:43]
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[20:03]
Ed Elson
We're back with Prof. G Markets Trump's latest trade strategy just took effect. Early on Friday, a new set of tariffs kicked in on 80 countries, covering more than 99% of US imports. These tariffs replaced the temporary levies Trump put in place back in February, the same day the Supreme Court struck down his original Liberation Day tariffs. And this time, the Trump administration is reaching for a new legal tool, section 301 of the Trade act of 1974, the stated rationale countering the loss of US business from the use of forced labor. Countries that have taken steps to ban forced labor will face a 10% tariff, while those without a ban face a 12 and a half percent tariff. The average tariff rate is now 11.1% and it is expected to rise to 11.8% by the end of 2026. That is according to the Yale Budget Lab. Joining us to discuss these tariffs, we're speaking with Justin Wolfers, professor of Public Policy and economics at the University of Michigan and the founder of Platypus Economics. Justin, it is great to see you. It feels like it's been a long time. I'm not sure it has, but it feels that way. We wanted to get your views on this new tariff regime. Specifically, is it different from the previous one? Is it worse? Better? The same. What do you make of it?
[21:30]
Justin Wolfers
I'm gonna give folks at home just a little bit of rewind step, you know, it's three episodes. Episode one was Liberation Day. The Emergency Powers Act. A set of tariffs that they've had to pay back because they were never constitutional. Then they moved to a so called balance of payments crisis, despite the fact that America's balance of payments is, and has been for decades, precisely $0. But that was regarded as a crisis. Those tariffs, it's still unclear if they were legal and whether we might have to pay them back. But by the same token, even if they were legal, they ended last week, six months later, that was the nature of the legislation. So now we need to look around behind the couch and see if we can find a leftover tariff authority that the United States government might be able to use. Remember, actually it's very EAS get tariffs done. If you're the US Government, what you do is you read in the Constitution where it says the right to tax and the right to tariff belongs with Congress. The President refuses to go to Congress because the President doesn't like Congress and Congress doesn't like tariffs. So he fiddles around down the back of the couch and discovers this section 300 One thing that you're talking about. What it does, if you're a White House lawyer, you get to say, you beauty. The boss wanted tariffs. I found a way to give them to him. If there was an economic team at the White House, they would have said, no, no, no, no, no. That one doesn't work because it doesn't actually achieve any of the things we want. Let me explain why. This is a global across the board tariff. Basically 10 or 12.5% on essentially every country we trade with. If what the President wants is bargaining power, when he sits down with President Xi in China, this doesn't give it to him. He can't say, do what I want or this form of tariff goes down, it goes up. And he can't say, thank you for paying homage. I'm going to reduce this form of tariffs. So the very thing the President wants tariffs for, this doesn't deliver. So episode three of the tariff saga is the worst and surprisingly enough, the dumbest one yet.
[23:25]
Ed Elson
I think this brings up an important question, which is like, why are we doing it again? It seems like the consensus from 2025 is it was not paid for by other nations. We have a pretty clear understanding of that. It was paid for mostly by American companies or by American consumers. It was.
[23:47]
Justin Wolfers
We gave the money back. Right when they're illegal and unconstitutional. We didn't even raise money.
[23:52]
Ed Elson
And that was another piece of it, too. So we tried. It didn't work. Then we were told by the Supreme Court, not legal. Now we also have launched a war in Iran, which is adding more fuel to the fire, that is inflation, and we're doubling down. And so I guess the question, like, is there any world in which this makes any economic sense whatsoever, or is this pure grievance, pure politics, just an excitement about bullying other nations? What actually is in it for us here?
[24:24]
Justin Wolfers
There's several questions. One is, is there a world in which there are tariffs that would have an economically defensible rationale? I'm going to say yes, there is. I don't love it. I don't love those tariffs. But we could have a real debate about smart tariffs, targeted tariffs, tariffs that serve the American interest. It would not be tariffs on inputs into American production. It would not be on again, off again, so that businesses could actually make investment if they're lasting businesses would make investments in the United States. There's a bunch of things that you would do completely differently. So could we have a sensible set of tariffs that would not seem like, lose, lose. We could. Is this that. No, what this is is a set of tariffs. Basically. Jamison Greer is a lawyer and the boss asked for tariffs and he found a way to get in tariffs. But Jamison Greer forgot, actually, the reason we want tariffs is to serve America's interest. Ed, I hate doing this to you, but I love it. Which is pretty much at the same time as you release this video, Platypus Economics is going to release one where we take a look at what the underlying theory of international trade is. And I'm happy to repeat any of it for you here, mate.
[25:36]
Ed Elson
Yeah, please.
[25:37]
Justin Wolfers
There is actually, if you listen to Jamison Greeler's very revealing interview on the daily the New York Times podcast, There is actually a very serious theory of the case, but the theory of the case is fundamentally that of a lawyer. A lawyer is the bloke you call in when the other country does something wrong. You have a grievance, you want damages, and you go and you see what you can do. The problem with a lawyer is a lawyer tends to think in very zero sum terms. If you got something, it's something that I didn't get. That is they think about trade very much as zero sum. Head to head battle. It's a war. And Jemison Gree uses a lot of war language, literally war language. Whereas economists start by thinking, why do people trade? Like right now, you and I are engaged in international trade, which is you, a Brit, are trading your services as a podcast host with me, an economist. I'm trading my. An Australian economist, trading my services as a stunningly insightful economic commentator. Now, we're doing that because we're both better off. And if I could like speak for the rest of this and speak over you, and then if you had a zero sum capacity, you'd think, well, Ed lost, therefore Justin gained, Actually, it would just create a shitty podcast, right? We'd both lose and the audience would lose. And that's the fundamental difference, which is you and I understand trade is cooperation. And the moment you understand that, then throwing up roadblocks to cooperation is different than throwing up roadblocks to the other side in a war. So there is a coherent view. It's just muddled.
[27:10]
Ed Elson
It seems like the psychology of the President is that any transaction, any form of business, is a form of war. It's a form of battle. It requires some level of aggression. The thing that is so remarkable about this, though, is how clearly it backfired and hurt him. Not just in terms of what we saw in terms of inflation, but also the polling, because people are seeming to connect the dots here. More tariffs equals more inflation. Which brings me to your views on, or I'd like to get your views on what inflation will look like over the next year. It seems that the Iran war is kind of similar to tariffs last year, which is it's on again, off again, and no one seems to know what's actually happening there, but it's still generally around. Tariffs are the same story. What do you think inflation will look like in 2026? Do you think that this round of tariffs will continue to contribute to higher prices?
[28:11]
Justin Wolfers
The President is actually a really brilliant TV producer, and I'm not being funny there, I think that he has a great sense of Drama of narrative, of intrigue. And I always want to tune in for next week. I didn't actually watch the Apprentice, but we know some people did. He appears to be taking that to the White House. Now, here's. That's the glib part. The analogy, though, is useful, which is it's the same writer's room. It's the same writers room running the trade war as is running the Iran war. And so, Ed, you and I spent a year talking about the trade war, and neither of us has a lot of defense knowledge. I'm happy to admit that I know I look like a soldier, but actually beneath this tough exterior is a quiet professor. But it is the same writers room, and they do seem to be on again, off again in exactly the same way. And I think in season three of tariff wars, we've learned this is a telenovela that's never going away. And look, I really hope the Iran war goes away, but given what we saw on, you know, we've got one production company, they've got one major franchise, the trade wars. We know what their storylines look like. It feels like that's going to be the storyline over in Iran. There's one important thing they both have in common, which is these are both supply shocks, and a supply shock raises the cost of doing business and slows the economy. So two bad things. And the thing is, the Fed can't fix a supply shock. It can fix one of the two symptoms, but not both of them. It's also the case that the economics textbook says when there's a supply shock, you raise the cost of doing business. Everyone raises their prices to take account of that, and that might be the end of it, that we have higher prices. But if that's the end of it and those prices stay high, we get no further inflation. So the economics textbook actually says if you're the Fed, you can afford to wait it out. You can look through it. Partly because I write economics textbooks, I tend to think we should take economic theory a little bit seriously. The counter arguments are very strong. The counterargument, Kevin Walsh has said is we've been out there for five years waiting for transitory to prove itself to be transitory. How much longer can we afford to wait? But I think certainly tariffs are still playing a role. But actually, the effect of tariffs on price levels, it's going to be complete pretty soon. Unless the President does something crazy, the effect of the war probably still has a little bit more to go. Therefore, the effect on inflation through, say, after the midterms might turn out to be relatively minor if we're prepared to be patient.
[30:49]
Ed Elson
So 3.5% right now, I assume that you would agree that that's not a particularly sustainable inflation rate if we sit around there for the next several months, or is that cause for real concern?
[31:04]
Justin Wolfers
The simple answer is simple, which is the Fed says it should be two. We're aiming for two. Three and a half isn't two. That's the very simple answer. And so that's the look, if you guys are going to crush the economy every other time we get inflation, you should do it this time. I want to see some internal consistency. I do think that's a little too glib because of the fact that this is a supply shock. If this were a demand shock, where we're running the economy hot, that's caused 3.5% inflation and the Phillips Curve says it's going to continue to do that and maybe even escalate, then I think there's no case for being patient. But it is one of those finely balanced moments. I checked the markets recently, just literally minutes ago, and they said the betting odds for tomorrow's fed decision is 70, 37,030. Sounds like, oh, great, the markets are pretty confident the Fed's not going to move. Actually, I want folks to understand it's very rare for the day before a Fed decision for things to be that much up in the air. So I want to acknowledge both sides of that debate are actually bringing good faith, good rigor, good arguments. As long as we're within half a percentage point or so of what the right rate is, I don't need to whine about it. So I think we don't know what's going to happen tomorrow. But that gives you a sense of how, how good the arguments are on both sides.
[32:20]
Ed Elson
Just for context for listeners, this goes out, this episode comes out Wednesday. We're recording this Tuesday, July 28, so that interest rate decision will come out later today.
[32:29]
Justin Wolfers
Happy Wednesday, Ed, by the way, what a delightful Wednesday it's been. What about those lotto numbers from yesterday? Could you look em up for me?
[32:35]
Ed Elson
Exactly. I'll check him out. But the expectation is that rates will stay where they are. But as you say, a rate hike isn't off the table. And I thought it was quite interesting. Citadel securities, this quant fund is predicting that the Fed will raise rates. As you say, we don't know and it's very uncertain. And this new Fed chair is unlike other previous Fed chairs where he's kind of refusing to give us much guidance at all. So we don't know. Do you have a prediction though for what might happen here or do you have a thought on what is the right decision?
[33:09]
Justin Wolfers
So on the prediction side, you and I are in slightly different lines of business. You talk directly to people in markets. People don't pay me enough money to do that. If anyone wants to, they're welcome to pay me a lot of money. Given that the markets say it's 70, 30, I reckon the 70% chance thing is more likely to happen than the 30% chance thing. And I think also whoever you interview next who gives a more confident answer should remember actually that markets tend to be better informed than any economist. So I just sounded glib, but actually I wasn't. I was the most accurate economist you'll ever talk to because I said I am dumb relative to markets and I'm the only one dumb enough to admit that. So, you know, and what I'm more interested in is, you know, helping people understand what's going on and if things do go authorized. There are times you and I, Ed, have been having conversations like this before Fed meetings and saying, I can't believe the mistake they're on the cusp of. And so I think at a moment when the debate is, you know, pretty close and it's serious, I actually just want to acknowledge, good job, Fed. You guys have brought out the right arguments. You know, I wasn't a huge fan of Kevin Walsh before the fact. Very interesting Wall Journal article yesterday that seems to suggest there's a little more friction inside the Fed than we'd heard previously. But I do feel like we're in a good place with the Fed and that's fantastic because that's not true for all federal agencies.
[34:34]
Ed Elson
I agree. I think that is good news. Justin Wolfers is Professor of Public Policy and Economics at the University of Michigan. He is the founder of Platypus Economics and you can find some of his economic analysis there. Justin. And we really appreciate your time as always. Thank you.
[34:49]
Justin Wolfers
Great pleasure and happy Wednesday.
[34:56]
Ed Elson
Okay, that's it for today. Tune in tomorrow for our coverage of Microsoft and Meta's earnings. We will see how they fare amid this broader tech sell off. We'll also be covering the Federal Reserve's interest rate decision on Kalshi. The odds that the Fed holds rates steady this time around are actually about 77%. But it's worth noting the odds of a rate hike before year end are at a new high of 74%. Stay tuned. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Kristen o' Donoghue and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Profty Markets from Profgy Media. If you liked what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow.
[35:52]
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[36:28]
Torsten Slok
hey, guys.
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[37:24]
Ed Elson
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Summary7 min read

Prof G Markets – Episode Summary

Episode Title: Why The Nasdaq Just Hit Correction Territory
Air Date: July 29, 2026
Hosts: Ed Elson (Prof G Media), with guests Torsten Slok (Apollo Global Management) & Justin Wolfers (University of Michigan)

Overview

This episode provides an incisive analysis of the sharp downturn in the tech-heavy Nasdaq, the structural risks in AI-driven market gains, and the implications of the latest Trump tariff regime. The hosts and expert guests unpack why chip stocks are leading a major pullback, the broader questions facing “hyperscaler” tech companies, and how new tariffs and persistent inflation are reshaping the market outlook.

Key Discussion Points & Insights

1. Market Update: Tech and Chips Under Pressure

S&P 500 and Dow: Up on the day.
Nasdaq: Entered correction territory, down 10% from recent highs, driven by a severe selloff in chip stocks.
Semiconductors: PHLX index down 6%, Micron down 9%, SK Hynix falls overnight, KOSPI index drops 11%.
Insight: Semiconductors have been the prime drivers of market returns; current declines raise questions about broader market direction without this support.
- Ed Elson (02:20): “Nine of the 12 biggest contributors to the S&P 500’s return were semiconductor stocks…Where can this market go without chip stocks?”

2. Interview: Torsten Slok on AI, Debt, and Market Risk

Are AI Bets and Debt Becoming a Problem?

Hyperscalers (Big tech companies building the infrastructure for AI) are shifting from equity to massive debt financing.
Investment Grade Credit Spreads: Widening, signaling rising perceived risk or simply a flood of new debt.
CDS Spreads: Cost to insure against default is up on names like Oracle, SpaceX, Google, Amazon, Nvidia.
Core Question: Are these risks a sign that AI may not pay off as quickly as hoped?

“This AI thing better work out because if it doesn’t work out, your portfolio will be in trouble.”
— Torsten Slok, quoted by Ed Elson (03:24)

Assessing the Credit Risk

Fundamentally, hyperscalers remain very profitable and have strong credit—so why is the market pricing in more risk?
Market dichotomy: Credit fundamentals are strong, but pricing shows fear about a slow or uncertain AI payoff.

“Given everything that…how solid they are from a credit perspective, why is it that these credit spreads are widening out?...that danger is all about the payoff from AI.”
— Torsten Slok (06:45)

Why Now?

Recent events triggered sentiment shift:
- Amazon issued new debt with wider spreads.
- Google reports negative free cash flow for the first time, raising concerns about delayed ROI on AI investments.
Two "races":
1. ROI from AI investments (are higher profits coming, and when?)
2. Can the ongoing data center build-out continue as financing gets pricier?
“It’s a reaction to some of the individual events…now the questions are being asked — what is the profile of this payoff in earnings?”
— Torsten Slok (09:45)

Will Upcoming Tech Earnings Bring Clarity?

Next hyperscaler earnings (coming up this week) are “more important than the Fed meeting.”
Divide between “existential” commitment from tech and a more skeptical Wall Street asking about payoff and cost.
Watch not just earnings headlines, but capex signals and attitudes toward rising debt costs.

“It almost feels like there’s a whole different conversation going on…the labs and the hyperscalers are talking like this is existential…whereas on Wall Street the conversation is saying, well, hold on, what is the price for that compute?”
— Torsten Slok (12:35)

How to Diversify Away from AI Risk?

AI dominance is everywhere: public equities, venture capital, public credit.
True non-AI investments? Value stocks, S&P 400, private equity/credit, non-tech commodities.
Growth is now “crashing” and “value is skyrocketing” as investors flee AI-centric assets.

“A good recommendation at the moment is to invest in non-AI…Value investing is not being popular for a long time, but…people are going away from growth towards value.”
— Torsten Slok (15:22)

3. Justin Wolfers on Tariffs, Inflation, and the Fed

Understanding Trump’s New Tariff Regime

New tariffs apply to 80 countries, covering 99% of US imports.
Justification: Counter forced labor (Section 301, Trade Act 1974); countries with bans on forced labor face 10%, others 12.5%.
Yale Budget Lab: Average tariff is 11.1%, rising to 11.8% by end of 2026.

“Episode three of the tariff saga is the worst and surprisingly enough, the dumbest one yet.”
— Justin Wolfers (23:21)

Why Tariffs Don’t Work This Time

Previous tariffs (Liberation Day, Balance of Payments Crisis) failed constitutionally and economically.
New approach doesn’t serve as a bargaining chip—tariffs are applied equally, offer little leverage.
Cost falls on US businesses and consumers.

"We tried. It didn’t work. Then we were told by the Supreme Court, not legal. Now we also have launched a war in Iran…is there any world in which this makes any economic sense whatsoever...?"
— Ed Elson (23:52)

“Could we have a sensible set of tariffs…that would not seem like lose-lose? We could. Is this that? No.”
— Justin Wolfers (24:31)

Legal Logic vs. Economic Logic

The administration's thinking is fundamentally legalistic and zero-sum (lawyers as ‘warriors’), versus economists’ focus on cooperation and mutual gain in trade.
Wolfers uses his and Ed’s podcast collaboration as a metaphor for positive-sum trade.

"Lawyers tend to think in zero sum terms...whereas economists start by thinking, why do people trade? ... You and I understand trade is cooperation. And the moment you understand that, then throwing up roadblocks to cooperation is different than throwing up roadblocks to the other side in a war."
— Justin Wolfers (26:03)

Tariffs, War, Inflation, and the Fed

Both tariffs and the (ongoing/unresolved) Iran war are “supply shocks,” raising costs and fueling inflation.
Fed is constrained; it can only address the demand side, not these supply-driven problems.
The effect of tariffs on prices nearly “complete,” but any new supply shocks (like more war escalation) could change the outlook.

“Tariffs are still playing a role, but…the effect of tariffs on price levels, it’s going to be complete pretty soon, unless the President does something crazy.”
— Justin Wolfers (29:20)

Inflation and Interest Rate Outlook

Current inflation ~3.5%.
The debate: is this persistent enough to warrant more hikes, or can the Fed “wait it out” since these are supply shocks?
Markets betting 70/30 that the Fed holds rates (as of recording time); notable for the persistent uncertainty just a day before decision.

“The simple answer is simple, which is the Fed says it should be two. We're aiming for two. Three and a half isn’t two…So I think we don’t know what’s going to happen tomorrow. But that gives you a sense of how good the arguments are on both sides.”
— Justin Wolfers (31:08; 32:20)

Notable Quotes

Torsten Slok (AI debt risk):

"This AI thing better work out because if it doesn’t work out, your portfolio will be in trouble." (03:24; repeated throughout discussion)
Torsten Slok (market anxiety):

"Is the market pricing that's wrong and the fundamentals are good, or vice versa...? That danger is all about the payoff from AI." (06:45)
Justin Wolfers (tariff critique):

"Episode three of the tariff saga is the worst and, surprisingly enough, the dumbest one yet." (23:21)
Justin Wolfers (legal vs economic thinking):

"A lawyer tends to think in very zero-sum terms… whereas economists start by thinking, why do people trade?... throwing up roadblocks to cooperation is different than throwing up roadblocks to the other side in a war." (25:40–26:20)
Justin Wolfers (inflation & the Fed):

"The simple answer is... the Fed says it should be two. We’re aiming for two. Three and a half isn’t two… that’s the very simple answer." (31:04)

Important Timestamps

Nasdaq and chip market collapse: 02:20–03:40
AI debt, credit spreads, and risk discussion: 03:42–13:52
Diversifying away from AI: 13:52–16:57
Trump tariffs breakdown: 20:03–27:09
Tariffs, inflation, war, and Fed outlook: 27:09–34:49

Episode Tone and Style

Direct, jargon-free, and sometimes irreverent (true to Prof G Media’s “no-BS” promise)
Blunt critiques of policy and market mania (especially on tariffs and AI exuberance)
High-level but accessible explanations; avoids technical fog, favors clear analogies and real-world stakes

For Listeners/Readers Who Missed the Episode

This episode provides a crucial warning: the last several years’ market gains have been almost entirely tech and AI-powered, and cracks are showing as both equity and credit markets start to question the payout.
Tech earnings and corporate capex plans in the next week are pivotal. If these “hyperscalers” falter, more volatility is likely.
On policy: Trump’s latest tariffs have little economic logic and are warned to hurt domestic businesses and consumers.
Inflation and rates: Persistent supply shocks (war, tariffs) have the Fed boxed in; everyone’s guessing what happens next, but patience may be warranted if these are one-off shocks and markets remain near consensus.

This summary aims to give you all the insights, structure, and memorable commentary found in the episode, without the ads, detours, or extraneous setup. All times MM:SS.

Loading summary

Transcript47 lines

[00:01]
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[00:46]
Torsten Slok
from the Goldman Sachs trading floor in 10 minutes or less. Investors and analysts share timely analysis on
[00:54]
Justin Wolfers
the week's market activity.
[00:55]
Torsten Slok
The Markets podcast from Goldman Sachs. Listen now.
[01:02]
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[01:38]
Justin Wolfers
Money Market Matter if money is evil,
[01:40]
Torsten Slok
then that building is hell.
[01:48]
Ed Elson
Welcome to Prof. G Markets. I'm Ed elson. It is July 29th. Let's check in on yesterday's market vitals. The S&P 500 and the Dow rose. Meanwhile the NASDAQ declined as chip stocks got crushed. More on that in a moment. Brent crude declined to about $84 per barrel. The yield on 10 year treasuries fell ahead of the Federal Reserve's interest rate decision due later today. And finally, SpaceX shares fell to a new low of $107 per share, down 52% from their all time high. Okay, what else is happening? The most important sector in the stock market is starting to fall apart. The tech heavy NASDAQ 100 fell for a fifth straight day, briefly entering correction territory, meaning it fell 10% from its highs. Chip companies led the decline. The PHLX semiconductor index sank as much as 6% and micron fell 9%. But the sell off started overnight in Asia where SK Hynix dropped nearly. The KOSPI index fell 11%. This drawdown raises a major red flag. In the first half of this year, nine of the 12 biggest contributors to the S&P 500's return were semiconductor stocks. So investors are left wondering, where can this market go without chip stocks? Here to discuss this, we're speaking with Torsten Slok, chief economist at Apollo Global Management. Torsten, great to see you again. Thank you for joining us. You said a striking quote recently on our friend Steve Isman's podcast. You said, quote, this AI thing better work out because if it doesn't work out, your portfolio will be in trouble. Is this a sign that AI might not be working out?
[03:43]
Torsten Slok
The challenge at the moment is that the hyperscalers and those who are building the infrastructure, they are changing their financing, which used to be mainly from the equity side of the bat balance sheet to now being on the debt side of the balance sheet. And the amount of debt that has come to the market from the hyperscalers, meaning the companies that are building out the infrastructure, has just been enormous. So as a result, we've seen very, very significant increase in supply of investment grade credit that is in the hyperscaler space. And the consequence of that is that we have started to see spreads in credit widened out on that hyperscaler debt. And this has resulted, of course, in a number of questions being asked. Namely, are spreads widening out on hyperscaler debt because of worries about the underlying credit of these companies, meaning their ability to pay back their debt, or is it simply just because of demand and supply that there's just more supply at the moment and now there's just not so much demand? And as a result, spreads have been widening out? The other development more recently to your question, Ed, is also the CDS spreads, meaning the cost of insuring yourself against these companies going under in the next five years. Those CDS spreads have also widened out quite significantly. So one way of answering your question is that there's simply so much debt that has come to the market. The market has now begun to ask some questions around, well, if these companies need all this financing, what is the right interest rate? What is the all in level of yield that is required to finance the build out the way that we're seeing at the moment, and that is really the starting point for how the domino bricks are toppling here, namely that spreads have widened out and as a result, the equity in these companies, the stock price of these companies have also started to underperform. And that is where we are today, namely this discussion around what is the speed of the AI buildout, what is the payoff from the AI buildout? And all those questions, of course, are very important when we think about the stock price, especially for the hyperscalers. And more broadly, the Magnificent Seven.
[05:36]
Ed Elson
Yeah, just looking at the price of those credit default swaps that you mentioned, there some companies whose credit default swap prices have hit record highs in recent weeks, Oracle, SpaceX, Google, Amazon, recently, Nvidia. I mean, from your perspective, how dangerous is the debt situation in AI right now? How likely is it that some of these enormous names that have become so structural and so important to the market could actually go under in the next five years?
[06:12]
Torsten Slok
Remember that all these companies, as you of course know all too well, they are investment grade credits. That means that they are very, very profitable. They have very, very strong earnings growth. They have very high profit margins. They generally have very solid credit fundamentals. That's, of course, very important when we begin to think about the question, will they go under over the next five years? Because companies that are among the most profitable companies in the world and have done exceptionally well in the last three, four years, of course they are very, very unlikely to go under. But that is exactly the mirror image of this discussion. Given everything that if we just agreed on how solid they are from a credit perspective, why is it that these credit spreads are widening out? Especially to your point, why is the CVS widening out? Meaning, why are people buying protection against these companies going under the next five years? What are people really worried about? And that's, of course, why the discussion in the market at the moment is about how can these companies that have been market leading, meaning that they've been driving returns for the S&P 500 so strongly for the last several years? How can it be that suddenly people are beginning to ask questions about what will be the situation for these companies over the next five years? And is that divergence between, hey, fundamentals are really great, but at the same time, market pricing is telling you that there's more and more worries. That is the conversation, is it the market pricing that's wrong and the fundamentals are good, or vice versa? Is the market pricing telling you that there is some more danger coming down the road? And of course, that danger is all about the payoff from AI. How long time will it take before we see the payoff from AI? Remember, as we all know, stock prices today is the net present value of future discounted cash flows. So that means that at the moment, the market has a certain expectation, the consensus has a certain expectation, expectation that returns will look, say, like this. But if the payoff in AI is going to come only like this, that means that the net present value of these companies today should be lower, and that is the risk of course, at the moment that maybe the market pricing is actually correct in the sense that there's more questions being asked about what is the payoff profile, because if it is involving a slower stream of payments in the future, then it does imply that the equity should be lower today and credit spread should be wider today. So this is this discussion around AI implementation. Where are we seeing it paying off? Are we seeing it in form of high productivity? Are we seeing in the form of a stronger economy? That is the very abstract discussion that is behind most of these price movements that we have seen.
[08:43]
Ed Elson
Why do you think this is all happening right now? And when I say this, I refer to the negative sentiment surrounding these companies and surrounding the AI buildup because these are topics that you and I have discussed for many months at this point that other people and other investors have discussed for a long time. But it seems as though, I mean to Jeremy Irons, quote in marginal it seems as if the music is beginning to get quieter only now, and I can't quite tell why that is. Why is it happening at this moment?
[09:17]
Torsten Slok
There's a series of developments that have brought us to this point. First was Amazon issuing debt, and that resulted in some concessions and some changes in the debt that was issued. And it's been trading wider, meaning the market saying that spreads on this particular credit should be a bit wider. We've also seen last week, and you talked about this last week, of course, Google going for the first time in its history to now having negative free cash flow, which is also a development where people are beginning to ask, is there too much investment? Is there too little investment? If there's negative free cash flow, what does that mean? How long time is that going to take? How many years will it take before we see a payoff on those investments? So I think it's a reaction to some of the individual events we've seen around individual names that are moving towards the narrative. Exactly. To your point or in your language, as you just mentioned, the music being a little bit more quiet because people are beginning to ask, okay, yes, this been going on for a while. In fact, for several years this has been the main driver of returns in the S&P 500 and NASDAQ. But now the questions are being asked, well, okay, but what is the profile of this payoff in earnings? So there's two races going on. Namely there's a race to deliver roi, meaning return on investment for AI, and there's a second race, namely that the data center build out requires a lot of financing. And if that financing now is becoming more and more expensive, then people are asking essentially two questions about on the one hand, how quickly will the AI investments pay off, in other words, in the form of higher profit margins, in the form of higher earnings growth, not so much in the Magnificent Seven, but higher profit margins for the S&P 493 and higher earnings growth of the S&P 493. And similarly, the other race is on the other side, namely can we still continue to see issuance of hyperscaler debt of debt for the build out to grow at this very, very rapid pace if the spreads are now widening and if the CDS spreads are also widening. So those two things are the two areas to watch, namely what's the evidence of AI paying off. And the other area is to watch what is the returns and what is there for the spreads that investors require. Especially of course on hyperscaler debt.
[11:25]
Ed Elson
It seems like whenever these questions are put to the CEOs of these companies, these big tech companies, they often avoid the question or they don't answer it fully. Or in the case of Jensen Huang, for example, where it was asked of his company, what's going on with all these circular deals? And his response was, I don't think there's anything circular about what we're doing, which I mean to me is kind of insane. We have big tech earnings coming up. I'm curious if you think that we will get some clarity on a lot of these questions from the leaders of these big tech companies and these hyperscalers. Do you think the fears will be addressed?
[12:05]
Torsten Slok
This is extremely important because I actually think the most important event tomorrow and also on Thursday are the hyperscaler earnings. It's actually become more important than the FOMC meeting. And despite that, I'm an economist who spend all my time when the Fed and you and I have talked about this for a long time, namely that of course Fed action is very important. Are they raising interest rates? Are they not raising interest rates? That's a very important debate at the moment. But currently, because we are approaching, it looks like at least some inflection point and the risks are rising, that the market might interpret this as an inflection point, it becomes very, very important what we get from the three hyperscalers that are reporting tomorrow and Thursday, because to your point, it almost feels like that there's a whole different conversation going on. The labs and the hyperscalers are talking like this is existential, we have to do this. There can be no discussion about it because this is the only thing that's required. So of course we need to create as much compute as we can. Whereas on Wall street the conversation is saying, well, hold on, what is the price for that compute? How much revenue can you generate for that compute? So I think that discussion really is really the technologist talking in the direction of saying, of course we need a lot more tech, we need a lot more compute. And the market and the Wall street language saying, well, no, that price of building that compute is now coming at a wider spread because there's simply not enough capital available to build that compute. And that is coming together tomorrow and the day after in the hyperscaler earnings. Because then we will figure out, is it still the message from them, like it was with Google last week, that we're still growing the capex more and more and more, or are there signs that the capex is beginning to roll lower and how is that then going to be interpreted by market? So there's a lot of different small signals, not so much only about the headline earnings, but also about what is the action from the hyperscalers. How do they think about the spread widening we've seen during this quarter in terms of their plans for the capex continued build out?
[13:53]
Ed Elson
Final question. One of your big themes has been you pointed out how dependent on AI the market has become. And so your advice is try to find areas and investments that are not AI. Can you figure out how to diversify away from AI? And that might be the right investment strategy. First question. I mean, Apple has been the best performer of the year. They're the ones who sat out of the AI race. Number one, is that a non AI investment? And number two, what areas and what sectors are you looking at? What are some, some ways that people and investors can diversify out of AI if they're worried that the AI trade is starting to slow down.
[14:37]
Torsten Slok
If we think about the 6040 portfolio, this is the simplest way of thinking about investing. I have some bonds, I have some equity, and the equity is 60%, the bonds is 40%. Historically this has been very diversified. When stock prices went up, bond prices would go down and vice versa. When stock prices went down, bond prices would go up. So I would be naturally hitched that if one side didn't do well, then the other side would do well. This worked out for a long, long time when interest rates were falling. And that resulted of course, in rising stock markets. And at the same time, whenever there was a bump, it was always a good idea to be in bonds. Today we have a very different situation because in the equity side of my portfolio, the 60, that has to a very significant degree, the returns been driven by AI. The 10 biggest stocks now make up 40% of the index. It's very clear that AI has been dominating returns when it comes to investing in public equities. On the bond side, it's also turning into more and more AI. Hyperscaler issuance is, of course, AI in software. We also have a lot of issuance now in AI and venture capital. It used to be the venture capital was inventing prescription drugs, pharma, biotechs, but now venture capital, 87% is also AI. So the challenge to this discussion is that investors AI is really everywhere. It's in equities, it's in credit, meaning public credit. And it's also, of course, in venture capital. So the answer to your question is exactly that. A good recommendation at the moment is to invest in non AI. And what really is fundamentally non AI is really value. Value investing is not being popular for a long time, but if you look at the factual models at the moment, growth is absolutely crashing completely and value is skyrocketing because people are going away from growth towards value to actually invest in companies that have earnings, to actually invest in companies that are able to pay their debt servicing cost so that they're not vulnerable where interest rates are higher for longer. So non AI, in this case in the public space means the S&P 400. In the private space, it means private equity, that is value investing, then private credit, that is value investing. And more broadly, non AI, of course, also means sectors globally, of course, also commodities that are not directly associated with the AI trade. Those are places to hide and to invest to benefit from not being in the AI trade, because the AI trade, of course, is wobbling at the moment.
[16:58]
Ed Elson
All right. Torsten Slok is chief economist at Apollo Global Management. Torsten, always appreciate your time. Thank you.
[17:05]
Torsten Slok
Anytime, Ed.
[17:05]
Justin Wolfers
Thank you.
[17:09]
Ed Elson
After the break, Justin Wolfers joins the show to break down Trump's latest tariff strategy. And for even more markets insights, you can subscribe to my weekly newsletter, simply put@simply put. Prof.gmedia.com. Support for the show comes from Lisa. If you've ever looked at Maslow's hierarchy of needs, you'll see sleep right there at the foundation, right in between breathing and eating. Good sleep is the bedrock of a good life. And the bedrock of good sleep just might be a Leesa mattress. Leesa has a lineup of beautifully crafted mattresses tailored to how you sleep. Each mattress is designed and assembled in the USA with specific sleep positions and feel preferences in mind. And they back it all up with free shipping, easy returns and a 120 night sleep trial. Our research associate Dan Shalon got a mattress from Lisa. He went with the Sapira Hybrid and he said it provides the perfect amount of support. Plus he's been sleeping noticeably better since he got it, which is great news for all of us. Go to Lisa.com for 30% off select mattresses plus get an extra $50 off with promo code markets exclusive for our listeners, that is L E-E-S A.com promo code markets for 30% off select mattresses plus an extra $50 off and when you use our code, you are Supporting our show Lisa.com promo code markets.
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[20:03]
Ed Elson
We're back with Prof. G Markets Trump's latest trade strategy just took effect. Early on Friday, a new set of tariffs kicked in on 80 countries, covering more than 99% of US imports. These tariffs replaced the temporary levies Trump put in place back in February, the same day the Supreme Court struck down his original Liberation Day tariffs. And this time, the Trump administration is reaching for a new legal tool, section 301 of the Trade act of 1974, the stated rationale countering the loss of US business from the use of forced labor. Countries that have taken steps to ban forced labor will face a 10% tariff, while those without a ban face a 12 and a half percent tariff. The average tariff rate is now 11.1% and it is expected to rise to 11.8% by the end of 2026. That is according to the Yale Budget Lab. Joining us to discuss these tariffs, we're speaking with Justin Wolfers, professor of Public Policy and economics at the University of Michigan and the founder of Platypus Economics. Justin, it is great to see you. It feels like it's been a long time. I'm not sure it has, but it feels that way. We wanted to get your views on this new tariff regime. Specifically, is it different from the previous one? Is it worse? Better? The same. What do you make of it?
[21:30]
Justin Wolfers
I'm gonna give folks at home just a little bit of rewind step, you know, it's three episodes. Episode one was Liberation Day. The Emergency Powers Act. A set of tariffs that they've had to pay back because they were never constitutional. Then they moved to a so called balance of payments crisis, despite the fact that America's balance of payments is, and has been for decades, precisely $0. But that was regarded as a crisis. Those tariffs, it's still unclear if they were legal and whether we might have to pay them back. But by the same token, even if they were legal, they ended last week, six months later, that was the nature of the legislation. So now we need to look around behind the couch and see if we can find a leftover tariff authority that the United States government might be able to use. Remember, actually it's very EAS get tariffs done. If you're the US Government, what you do is you read in the Constitution where it says the right to tax and the right to tariff belongs with Congress. The President refuses to go to Congress because the President doesn't like Congress and Congress doesn't like tariffs. So he fiddles around down the back of the couch and discovers this section 300 One thing that you're talking about. What it does, if you're a White House lawyer, you get to say, you beauty. The boss wanted tariffs. I found a way to give them to him. If there was an economic team at the White House, they would have said, no, no, no, no, no. That one doesn't work because it doesn't actually achieve any of the things we want. Let me explain why. This is a global across the board tariff. Basically 10 or 12.5% on essentially every country we trade with. If what the President wants is bargaining power, when he sits down with President Xi in China, this doesn't give it to him. He can't say, do what I want or this form of tariff goes down, it goes up. And he can't say, thank you for paying homage. I'm going to reduce this form of tariffs. So the very thing the President wants tariffs for, this doesn't deliver. So episode three of the tariff saga is the worst and surprisingly enough, the dumbest one yet.
[23:25]
Ed Elson
I think this brings up an important question, which is like, why are we doing it again? It seems like the consensus from 2025 is it was not paid for by other nations. We have a pretty clear understanding of that. It was paid for mostly by American companies or by American consumers. It was.
[23:47]
Justin Wolfers
We gave the money back. Right when they're illegal and unconstitutional. We didn't even raise money.
[23:52]
Ed Elson
And that was another piece of it, too. So we tried. It didn't work. Then we were told by the Supreme Court, not legal. Now we also have launched a war in Iran, which is adding more fuel to the fire, that is inflation, and we're doubling down. And so I guess the question, like, is there any world in which this makes any economic sense whatsoever, or is this pure grievance, pure politics, just an excitement about bullying other nations? What actually is in it for us here?
[24:24]
Justin Wolfers
There's several questions. One is, is there a world in which there are tariffs that would have an economically defensible rationale? I'm going to say yes, there is. I don't love it. I don't love those tariffs. But we could have a real debate about smart tariffs, targeted tariffs, tariffs that serve the American interest. It would not be tariffs on inputs into American production. It would not be on again, off again, so that businesses could actually make investment if they're lasting businesses would make investments in the United States. There's a bunch of things that you would do completely differently. So could we have a sensible set of tariffs that would not seem like, lose, lose. We could. Is this that. No, what this is is a set of tariffs. Basically. Jamison Greer is a lawyer and the boss asked for tariffs and he found a way to get in tariffs. But Jamison Greer forgot, actually, the reason we want tariffs is to serve America's interest. Ed, I hate doing this to you, but I love it. Which is pretty much at the same time as you release this video, Platypus Economics is going to release one where we take a look at what the underlying theory of international trade is. And I'm happy to repeat any of it for you here, mate.
[25:36]
Ed Elson
Yeah, please.
[25:37]
Justin Wolfers
There is actually, if you listen to Jamison Greeler's very revealing interview on the daily the New York Times podcast, There is actually a very serious theory of the case, but the theory of the case is fundamentally that of a lawyer. A lawyer is the bloke you call in when the other country does something wrong. You have a grievance, you want damages, and you go and you see what you can do. The problem with a lawyer is a lawyer tends to think in very zero sum terms. If you got something, it's something that I didn't get. That is they think about trade very much as zero sum. Head to head battle. It's a war. And Jemison Gree uses a lot of war language, literally war language. Whereas economists start by thinking, why do people trade? Like right now, you and I are engaged in international trade, which is you, a Brit, are trading your services as a podcast host with me, an economist. I'm trading my. An Australian economist, trading my services as a stunningly insightful economic commentator. Now, we're doing that because we're both better off. And if I could like speak for the rest of this and speak over you, and then if you had a zero sum capacity, you'd think, well, Ed lost, therefore Justin gained, Actually, it would just create a shitty podcast, right? We'd both lose and the audience would lose. And that's the fundamental difference, which is you and I understand trade is cooperation. And the moment you understand that, then throwing up roadblocks to cooperation is different than throwing up roadblocks to the other side in a war. So there is a coherent view. It's just muddled.
[27:10]
Ed Elson
It seems like the psychology of the President is that any transaction, any form of business, is a form of war. It's a form of battle. It requires some level of aggression. The thing that is so remarkable about this, though, is how clearly it backfired and hurt him. Not just in terms of what we saw in terms of inflation, but also the polling, because people are seeming to connect the dots here. More tariffs equals more inflation. Which brings me to your views on, or I'd like to get your views on what inflation will look like over the next year. It seems that the Iran war is kind of similar to tariffs last year, which is it's on again, off again, and no one seems to know what's actually happening there, but it's still generally around. Tariffs are the same story. What do you think inflation will look like in 2026? Do you think that this round of tariffs will continue to contribute to higher prices?
[28:11]
Justin Wolfers
The President is actually a really brilliant TV producer, and I'm not being funny there, I think that he has a great sense of Drama of narrative, of intrigue. And I always want to tune in for next week. I didn't actually watch the Apprentice, but we know some people did. He appears to be taking that to the White House. Now, here's. That's the glib part. The analogy, though, is useful, which is it's the same writer's room. It's the same writers room running the trade war as is running the Iran war. And so, Ed, you and I spent a year talking about the trade war, and neither of us has a lot of defense knowledge. I'm happy to admit that I know I look like a soldier, but actually beneath this tough exterior is a quiet professor. But it is the same writers room, and they do seem to be on again, off again in exactly the same way. And I think in season three of tariff wars, we've learned this is a telenovela that's never going away. And look, I really hope the Iran war goes away, but given what we saw on, you know, we've got one production company, they've got one major franchise, the trade wars. We know what their storylines look like. It feels like that's going to be the storyline over in Iran. There's one important thing they both have in common, which is these are both supply shocks, and a supply shock raises the cost of doing business and slows the economy. So two bad things. And the thing is, the Fed can't fix a supply shock. It can fix one of the two symptoms, but not both of them. It's also the case that the economics textbook says when there's a supply shock, you raise the cost of doing business. Everyone raises their prices to take account of that, and that might be the end of it, that we have higher prices. But if that's the end of it and those prices stay high, we get no further inflation. So the economics textbook actually says if you're the Fed, you can afford to wait it out. You can look through it. Partly because I write economics textbooks, I tend to think we should take economic theory a little bit seriously. The counter arguments are very strong. The counterargument, Kevin Walsh has said is we've been out there for five years waiting for transitory to prove itself to be transitory. How much longer can we afford to wait? But I think certainly tariffs are still playing a role. But actually, the effect of tariffs on price levels, it's going to be complete pretty soon. Unless the President does something crazy, the effect of the war probably still has a little bit more to go. Therefore, the effect on inflation through, say, after the midterms might turn out to be relatively minor if we're prepared to be patient.
[30:49]
Ed Elson
So 3.5% right now, I assume that you would agree that that's not a particularly sustainable inflation rate if we sit around there for the next several months, or is that cause for real concern?
[31:04]
Justin Wolfers
The simple answer is simple, which is the Fed says it should be two. We're aiming for two. Three and a half isn't two. That's the very simple answer. And so that's the look, if you guys are going to crush the economy every other time we get inflation, you should do it this time. I want to see some internal consistency. I do think that's a little too glib because of the fact that this is a supply shock. If this were a demand shock, where we're running the economy hot, that's caused 3.5% inflation and the Phillips Curve says it's going to continue to do that and maybe even escalate, then I think there's no case for being patient. But it is one of those finely balanced moments. I checked the markets recently, just literally minutes ago, and they said the betting odds for tomorrow's fed decision is 70, 37,030. Sounds like, oh, great, the markets are pretty confident the Fed's not going to move. Actually, I want folks to understand it's very rare for the day before a Fed decision for things to be that much up in the air. So I want to acknowledge both sides of that debate are actually bringing good faith, good rigor, good arguments. As long as we're within half a percentage point or so of what the right rate is, I don't need to whine about it. So I think we don't know what's going to happen tomorrow. But that gives you a sense of how, how good the arguments are on both sides.
[32:20]
Ed Elson
Just for context for listeners, this goes out, this episode comes out Wednesday. We're recording this Tuesday, July 28, so that interest rate decision will come out later today.
[32:29]
Justin Wolfers
Happy Wednesday, Ed, by the way, what a delightful Wednesday it's been. What about those lotto numbers from yesterday? Could you look em up for me?
[32:35]
Ed Elson
Exactly. I'll check him out. But the expectation is that rates will stay where they are. But as you say, a rate hike isn't off the table. And I thought it was quite interesting. Citadel securities, this quant fund is predicting that the Fed will raise rates. As you say, we don't know and it's very uncertain. And this new Fed chair is unlike other previous Fed chairs where he's kind of refusing to give us much guidance at all. So we don't know. Do you have a prediction though for what might happen here or do you have a thought on what is the right decision?
[33:09]
Justin Wolfers
So on the prediction side, you and I are in slightly different lines of business. You talk directly to people in markets. People don't pay me enough money to do that. If anyone wants to, they're welcome to pay me a lot of money. Given that the markets say it's 70, 30, I reckon the 70% chance thing is more likely to happen than the 30% chance thing. And I think also whoever you interview next who gives a more confident answer should remember actually that markets tend to be better informed than any economist. So I just sounded glib, but actually I wasn't. I was the most accurate economist you'll ever talk to because I said I am dumb relative to markets and I'm the only one dumb enough to admit that. So, you know, and what I'm more interested in is, you know, helping people understand what's going on and if things do go authorized. There are times you and I, Ed, have been having conversations like this before Fed meetings and saying, I can't believe the mistake they're on the cusp of. And so I think at a moment when the debate is, you know, pretty close and it's serious, I actually just want to acknowledge, good job, Fed. You guys have brought out the right arguments. You know, I wasn't a huge fan of Kevin Walsh before the fact. Very interesting Wall Journal article yesterday that seems to suggest there's a little more friction inside the Fed than we'd heard previously. But I do feel like we're in a good place with the Fed and that's fantastic because that's not true for all federal agencies.
[34:34]
Ed Elson
I agree. I think that is good news. Justin Wolfers is Professor of Public Policy and Economics at the University of Michigan. He is the founder of Platypus Economics and you can find some of his economic analysis there. Justin. And we really appreciate your time as always. Thank you.
[34:49]
Justin Wolfers
Great pleasure and happy Wednesday.
[34:56]
Ed Elson
Okay, that's it for today. Tune in tomorrow for our coverage of Microsoft and Meta's earnings. We will see how they fare amid this broader tech sell off. We'll also be covering the Federal Reserve's interest rate decision on Kalshi. The odds that the Fed holds rates steady this time around are actually about 77%. But it's worth noting the odds of a rate hike before year end are at a new high of 74%. Stay tuned. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Kristen o' Donoghue and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Profty Markets from Profgy Media. If you liked what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow.
[35:52]
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[37:24]
Ed Elson
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Prof G Markets – Episode Summary

Episode Title: Why The Nasdaq Just Hit Correction Territory Air Date: July 29, 2026 Hosts: Ed Elson (Prof G Media), with guests Torsten Slok (Apollo Global Management) & Justin Wolfers (University of Michigan)

Overview

Key Discussion Points & Insights

1. Market Update: Tech and Chips Under Pressure

2. Interview: Torsten Slok on AI, Debt, and Market Risk

Are AI Bets and Debt Becoming a Problem?

Assessing the Credit Risk

Why Now?

Will Upcoming Tech Earnings Bring Clarity?

How to Diversify Away from AI Risk?

3. Justin Wolfers on Tariffs, Inflation, and the Fed

Understanding Trump’s New Tariff Regime

Why Tariffs Don’t Work This Time

Legal Logic vs. Economic Logic

Tariffs, War, Inflation, and the Fed

Inflation and Interest Rate Outlook

Notable Quotes

Important Timestamps

Episode Tone and Style

For Listeners/Readers Who Missed the Episode

Prof G Markets – Episode Summary

Episode Title: Why The Nasdaq Just Hit Correction Territory Air Date: July 29, 2026 Hosts: Ed Elson (Prof G Media), with guests Torsten Slok (Apollo Global Management) & Justin Wolfers (University of Michigan)

Overview

Key Discussion Points & Insights

1. Market Update: Tech and Chips Under Pressure

2. Interview: Torsten Slok on AI, Debt, and Market Risk

Are AI Bets and Debt Becoming a Problem?

Assessing the Credit Risk

Why Now?

Will Upcoming Tech Earnings Bring Clarity?

How to Diversify Away from AI Risk?

3. Justin Wolfers on Tariffs, Inflation, and the Fed

Understanding Trump’s New Tariff Regime

Why Tariffs Don’t Work This Time

Legal Logic vs. Economic Logic

Tariffs, War, Inflation, and the Fed

Inflation and Interest Rate Outlook

Notable Quotes

Important Timestamps

Episode Tone and Style

For Listeners/Readers Who Missed the Episode

Episode Title: Why The Nasdaq Just Hit Correction Territory
Air Date: July 29, 2026
Hosts: Ed Elson (Prof G Media), with guests Torsten Slok (Apollo Global Management) & Justin Wolfers (University of Michigan)

Episode Title: Why The Nasdaq Just Hit Correction Territory
Air Date: July 29, 2026
Hosts: Ed Elson (Prof G Media), with guests Torsten Slok (Apollo Global Management) & Justin Wolfers (University of Michigan)