Hawkish Central Banks

SPEAKER_1 (0:02)

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Tom Keene (0:27)

Torsten Slok, Apollo joins us. Now, we got a three-hour conversation, Torsten, we're going to cram in here.

Torsten Slok (0:32)

I'm ready.

Tom Keene (0:33)

To me, the absolutely shock unusual thing is this boom nominal GDP economy.

In the Fed meeting, pretty much everyone at the Fed says, it's just going to keep on going and we're not going to see any decline in real GDP. That's not in the textbooks I studied.

Torsten Slok (0:52)

No, it is really unusual, but that's because we have two very important tailwinds. We have, of course, the AI spending boom. GDP normally grows at 2, and now 1% of growth is coming because of the AI spending boom, not only on data centers and energy, but also spending on tokens. Remember, that also goes into GDP, spending on tools for consumers, spending on tools for corporates. All that spending combined with a wealth effect also coming out of high stock prices is all very, very important for growth at the moment. Combining that with the one big bill for bill, which the CBO says will add about 0.9% to GDP, we have some really, really important, non-sensitive to interest rate tailwinds. And these tailwinds are really the critical reason why the economy continues to do so well.

Tom Keene (1:32)

Are you modeling out a continued 5% nominal GDP, which clearly within Barry Eichengreen's financialization benefits the haves?

Torsten Slok (1:44)

Absolutely. We expect still growth to be strong. And what's really unique, as you also just spoke about a minute ago, is that when interest rates are high, it hurts the interest rate-sensitive parts of the economy, which is housing and autos. So those two sectors are really not doing well with home builders at very low levels at the moment. And of course, also the auto sector not doing well either, because people signing leases have to pay more because interest rates are higher. Mortgage rates during the pandemic were at 2.7. Now mortgage rates are basically 7

It has become very expensive to buy a house. It's become very expensive to buy a car. Those sectors are not doing well, but those sectors are relatively small compared to the tailwind from the AI boom and the tailwind also from the one big bill for bills. So one sentence that's very important here is that this AI thing better work out because we still need some very significant tailwinds coming from AI because it is a very critical reason why the economy does so well.

Paul Sweeney (2:33)

Tom, you know I love to drive up and down the Jersey Shore on my Vespa. And I always see these thousands, tens of thousands of homes, usually on the bays, the river, $2 million homes. They got a million dollar boat behind them. I'm like, who are these people? And I've come to find they're small business owners. And you quote in one of your most recent notes, Torsten, from the new book, The Everywhere Millionaire, it shows that 400 wealthiest Americans on the annual Forbes list, they hold about $4 trillion in combined wealth. Pretty impressive. While the far larger group of private business owners with at least $10 million in net worth, they hold, get this, $46.7 trillion of worth. That is the American economy.

Torsten Slok (3:13)

This is really innovative work by two professors, Joe Insider at Princeton and Eric Zwick at Chicago. And what they did was they looked at de-identified IRS records and asked, who are the millionaires in the US.? Because there is this general impression, oh, this is tech, this is Wall Street. That's where all the money is. But when you actually look at small business owners across the country, that's where people with $10 plus million, the vast majority are living. These are people who own restaurants locally across the country, people who own hardware stores, people who own car dealerships. This is actually a very, very substantial amount of wealth in these parts of the country, exactly where those business owners are located. So exactly to your point, it is indeed very important work that they have done to exactly look at where is the wealth, and that becomes important from a consumer's perspective, namely, where is it also consumption is taking place.

Tom Keene (4:01)

Across America today, good morning in the evening of Europe, good morning in the very far evening of the Pacific Rim, Torsten Slok with his Apollo Global Management. Torsten, I want you to speak to the moment at hand, this worry, that worry, that worry. I'm gonna suggest the institutions, maybe you've missed it, or retails, just fear of missing out and on board. What's the measurement of fear of missing out right now in the institutional community?