# You Think You're Diversified. AI Disagrees. | Prof G Markets Source: https://www.youtube.com/watch?v=44-dH9D2RPU Recap page: https://rapidrecap.app/video/44-dH9D2RPU Generated: 2026-03-13T11:33:11.661+00:00 --- ## Quick Overview The primary economic concern discussed is that elevated oil prices, stemming from geopolitical risk, will persist, adding upside pressure to already high inflation, which forces the Federal Reserve to keep interest rates higher for longer, negatively impacting asset allocation, particularly for long-duration software companies, while the US economy remains relatively insulated compared to Europe and Asia due to its status as an energy exporter. **Key Points:** - Elevated oil prices, peaking above $118 a barrel due to geopolitical events, will lift headline inflation by 0.7% and core inflation by 0.1% on top of the existing 3% core PCE inflation. - The expectation of inflation staying 'higher for longer' means interest rates will remain elevated, leading to the economist's view of 'zero cuts in 2026' and negatively affecting businesses sensitive to interest rates, like software companies. - The US economy is uniquely positioned relative to Europe and Asia as an energy exporter, benefiting from higher oil prices in terms of energy company earnings, despite higher pump prices potentially impacting political calculations ahead of midterms. - AI's macroeconomic impact is uncertain because there is no established framework or Fed model to quantify its effects; consensus earnings expectations for the S&P 493 have remained flat over the last 12 months, though the Magnificent 7 are seeing positive expectations. - The rapid increase in new business formations, seen in weekly data, is a key transmission channel of AI, suggesting increased entrepreneurship and job creation, counteracting fears that AI will cause mass unemployment (which the speaker calls 'science fiction'). - Wealth inequality in the US displays a K-shaped situation where high-income households have seen substantial wealth and income growth since 2019, while low-income households experience limited savings growth, lower wage growth, and higher inflation exposure. - The primary risk for the broader market is ironically overheating, where strong tailwinds from AI spending, industrial renaissance, and the 'one big beautiful bill' keep growth strong, forcing the Fed away from expected cuts toward potential hikes, hurting the 60/40 portfolio. **Context:** The discussion features an interview between hosts, including Professor G, and Torsten Slok, Partner and Chief Economist at Apollo, focusing primarily on the macroeconomic implications of rising oil prices stemming from geopolitical conflict and the uncertain but powerful impact of Artificial Intelligence on the US economy, productivity, and inflation expectations. ## Detailed Analysis The conversation begins with geopolitical concerns, noting oil prices spiked above $100, driven by events in Iran, which economists project will add 0.7% to headline inflation, exacerbating an already high 3% core PCE inflation rate. Torsten Slok argues that this means inflation will persist, compelling the Fed to keep rates high for longer, potentially resulting in zero interest rate cuts through 2026, which severely impacts asset allocation, especially for growth stocks with distant cash flows like software companies. Slok notes that the US is relatively shielded from the negative effects of high oil prices compared to Europe and Asia because the US is now an energy exporter due to the shale revolution, shifting economic focus toward services and tech. Addressing AI, Slok dismisses mass unemployment fears as 'science fiction,' citing a massive increase in new business formations as evidence of AI boosting entrepreneurship, although he admits there is no established framework for quantifying AI's impact, leading to market volatility when anxiety-inducing reports are released. He points out that while AI is showing up in Magnificent 7 earnings, consensus S&P 493 earnings expectations remain flat, suggesting the revolutionary impact is not yet broadly priced in. Finally, the discussion confirms a K-shaped economic reality where high-income households benefit from rising asset values and higher fixed-income cash flows due to high rates, while low-income households suffer from lower wage growth and higher inflation on necessities like food and housing, even as aggregate consumer spending remains resilient. ### Geopolitical Shock and Inflation - Oil prices skyrocketed above $118 a barrel due to Iran conflict - This shock lifts headline inflation by 0.7% on top of existing 3% core PCE - The implication is inflation remains a problem, leading to 'higher for longer' interest rates. ### Interest Rates and Asset Allocation - The Fed's dot plot suggests only one cut in 2026, but Apollo expects zero cuts - Higher rates disproportionately hurt software and enterprise software companies with distant cash flows - Investors must adjust asset allocation due to sustained higher rates. ### The Dual Impact of AI - AI drives a dramatic increase in US business formation, suggesting entrepreneurial tailwinds - Fears of mass unemployment (10-20%) are viewed as 'science fiction' because jobs involve multiple tasks and governments will intervene if unemployment spikes - Consensus S&P 493 earnings expectations remain flat, indicating AI's broad economic benefit is not yet priced in. ### US Energy Status and Global Divergence - The US transitioned from energy importer to exporter via fracking, benefiting energy company earnings when oil prices rise - Europe and Asia are hit harder by high oil prices due to higher energy intensity and less domestic production - This structural difference explains why US markets traded better than Asian/European markets recently. ### K-Shaped Economic Reality - High-income households have seen substantial wealth growth via stocks and high fixed-income returns - Low-income households face lower wage growth and disproportionately higher inflation exposure on necessities (housing, food) - Aggregate consumer spending remains supported, but the divergence across the income spectrum is significant. ### Market Overreaction and Tail Risk - Market volatility regarding AI stems from a lack of a quantified framework (no 'Fed model' for AI) - The probability of tail risks, including geopolitical shocks and AI outcomes, has increased from 10% to 30% - The counter-risk to recession is overheating, which could lead to the Fed hiking rates, severely punishing the 60/40 portfolio.