Global Economic Outlook 2026│Torsten Sløk, Larry Hatheway, William Lee

[00:00:00] Bill: Thank you all for being here. This is a very incredible session that we're going to have about the outlook for the coming year. But unlike any other outlook session, it's going to be high tech. Torsten Sloke, one of our speakers, is somewhere on the earth, and he's not here, but he's going to give a talk that will frame a lot of these issues. But what I'd like to do to let you know what we're going to cover is that we're going to talk about three separate topics that I think are very important in shaping anybody's outlook. First, the big elephant in the room is about tariffs and what the tariff policy of the United States has done to globalization and how globalization has really changed because of that and what it implies for export-oriented economies here in Asia. The second topic, of course, has to do with interest rates, exchange rates, valuations, and asset prices, which I think many of you in the audience are interested in. And I think Torsten is going to talk about that, and I'll be asking Larry a bunch of questions about that. The third issue is going to cover asset markets and how capital markets are changing and how the mix between private and public markets may be influencing the way you will be conducting your investment strategies going forward. So those are the three main topics that I think will shape everybody's outlook, and a lot of them are structural issues, some of them are cyclical issues, and some of them are very relevant for any kind of policy analysis that you may be interested in doing. So that's the shape of the session, and I think we can go to Torsten right now and hear what wisdom he has to lay on us. But before he does, if you haven't done so already, tell all your friends, this is the place to be, right? Forget about the other sessions, because this is the one that you want to be at. So I see Torsten is ready to talk, and I'll let him start. [00:01:49] Torsten Sloke: Thanks so much, Bill. Thanks, and thank you so much, everyone, for coming today, and thank you for having me. So let me share my screen and show you a few slides about how we think about the outlook for the U.S. economy and the global economy. The key issue when we think about the outlook is to try to identify what are the headwinds and what are the tailwinds. And if we look at the list of headwinds, number one on the list is indeed tariffs. So as you can see on this slide, tariffs are, of course, something that's holding the economy back. Why is tariffs holding the economy back? Because tariffs means higher prices, simply more expensive to import things into the U.S. And as Walmart has been saying, when prices go up, sales go down. So this is the number one headwind. This has been with us now for six months. It continues to be a very important aspect of the economic outlook, and it continues to weigh on GDP and put upward pressure on inflation. Secondly, immigration restrictions. This is also a headwind to the economic outlook. At the moment, the Trump administration has the goal of deporting 3,000 people every single day. If you multiply 3,000 by 365, you get that the total number of people who will be deported in 2025 could be roughly around a million. Remember also that there are about 12 million unauthorized immigrants in the U.S. So if we remove a million this year, maybe also a million next year, that will begin to lower the labor supply, that will begin to lower employment growth, and that will ultimately also begin to put upward pressure on wages in the sectors where illegal immigrants work, in particular in construction, in agriculture, in hotels, and in restaurants. So therefore, immigration restrictions and deportations is also a headwind to the economy. Finally, the third headwind to the economy is student loan payments restarting. Remember during the pandemic, if you had a student loan in the U.S., it was put on pause. In other words, you no longer had to pay back your student loan. That pause ended now in May. That means now, three months ago, if I had a student loan and I'm not paying it back, my credit score, and therefore my possibility of borrowing money to buy a car, to buy a house, will be much worse. So that's a different way of saying student loan payments restarting means that more people need to pay back their student loans, and therefore taken together. The headwinds are three things, namely tariffs is slowing the economy down. Immigration restrictions are slowing the economy down, because now we simply have less labor, fewer people. That means lower employment growth. We saw some of that last Friday, with the non-farm payrolls data being weaker. But broadly speaking, this is likely to continue, so this means also a headwind to employment, and headwind therefore to GDP. And lastly, student loan payments restarting is also a headwind, because now consumers have less money, and that is also holding back, broadly speaking, on the economy at the moment. Tailwinds are also important to remember, but the tailwinds are less forceful, less important relative to the headwinds. But there are some tailwinds, namely high stock prices, tight credit spreads, we have Fed cuts coming, and we have had the dollar going down. All those things are putting mild tailwinds on the economic outlook. But when we add these things together, we come to the conclusion that the headwinds are stronger than the tailwinds, and that's why we should expect to see the economy begin to slow down over the coming quarters. That's why one way of describing the economic outlook is the chart to the right, which shows you the slowdown in growth over the coming quarters, and then things getting gradually better in 2026. In other words, this is not the chart to the left where we had Lehman Brothers, we had the COVID shock, where we got a recession. We do not expect that we will get a recession, but there's still an elevated risk of a slowdown, ultimately resulting in a recession. But what we are watching, and therefore important for us as investors, is the three things I have written at the bottom, namely what is going on with the trade wall, what is going on with immigration, and what's going on with student loan payments restarting. So in summary, these things combined argue for a mild slowdown, but a slowdown where we at the same time have some upward pressure on inflation. And what's been important more recently is what this has done to the dollar. This chart here shows you net foreign purchases of U.S. assets. So let's do this carefully. This shows you what did foreigners do in U.S. financial markets in January, February, March, April, May, and June. And let's go all the way to the left. The orange bar shows you that in April, when Liberation Day started, when Trump started his trade war, foreigners were selling in April U.S. assets. Which assets were they selling? They were selling, if you look at the next part of the slide, treasury bonds and notes. They were selling equities. They were buying corporate bonds, but they were also selling government agency bonds. So in April, it was absolutely the case. Foreigners did not want to buy U.S. assets. But have a look at now what happened in May. The red bar shows you that in May, foreigners came back very significantly as buyers of U.S. assets. What were foreigners buying? They were buying in the red bar, you see, treasuries. They were buying equities. They were buying corporate bonds. And they were buying government agency bonds. And then finally, the data just came out for June, and that is the gray bar. The gray bar is also strong in aggregate. But now have a look at what did foreigners buy in June. Well, now you suddenly see foreigners did not buy much in treasuries. In fact, they were selling a little bit. They were buying equities. They were also buying some corporate bonds and very little also in agencies. But the conclusion is, we have to watch very, very carefully in this tick data, what are foreigners doing in U.S. financial markets. And as you can see, foreigners have been still actively buying U.S. assets, but they've been buying more equities. And they have become a little bit more worried about interest rates, government bonds. And that is, of course, because of the problems that are with the fiscal situation at the moment. This chart shows you debt to GDP in the U.S. And as you can see, that's expected to go up over the coming years. This continues to be a major issue for financial markets. This is treasury issuance across the yield curve. This is measured in billions of dollars. You can see that issuance is high for two-year rates, three-year rates, five-year rates to the left in the chart. And issuance is actually low in the long end of the yield curve. There's very little issuance of 20-year government bonds. And there's also very limited issuance of 30-year government bonds. So this is why watching what's going on with issuance, how are treasury auctions going to work, are there problems with not enough demand, is very important when you have the outlook that the fiscal situation continues to deteriorate. So this is a major structural risk in the background that we're spending some time on, simply because this risk continues to be very important as a factor in the outlook as of risk in terms of how we think about it. Lastly, let me end on the last slide, namely, let's now take a look at, okay, so what is now the economic outlook for the U.S. for the next 18 months? How should I think about investing for the next 18 months? And what you see in this chart here is the consensus economic forecast. The orange numbers is the historical data, the white numbers is the forecast. And there's about 60 people who submit the forecast to Bloomberg, and this is their view of the economic outlook. And let's look at the three squared boxes I'm showing here. In the upper right-hand corner, the first observation is the consensus today is saying that the probability of a recession is 30%. That's a pretty high number. If you look at the stock market, if you look at credit markets, IG, high-yield loans, it doesn't look like financial markets are expecting a 30% chance of a recession. So why is the consensus having the view that there's a 30% chance of a recession? It probably has to do with these fears that there might be more problems from the trade war. There might be more problems because of immigration and deportation. And there might also be more problems because of the headwinds to consumers, because of student loan payments restarting. And that is exactly the forecast you see in the second squared box for real GDP. If you look to the left for real GDP, it was last year 3.1, 2.4. Those are high numbers. But look at what the expectation is now. It is this Nike swoosh slowdown with 1.1, 1.1, 1.5, 1.8, 1.9. In other words, a gradual slowdown where things get better as we get into 2026. So the expectation from the market, the expectation to earnings in the S&P 500, the expectations to earnings for AI companies, the Magnificent Seven, is that growth is expected to slow down. It will be at different levels, but it's clear that a slowdown is coming in the pipeline because of tariffs, because of mainly most of course the trade war, but also because of the headwinds coming from immigration restrictions, and also the headwinds coming from deportations, and of course also what's going on with student loan payments. And now finally, look at the last squared box. If you had asked me, growth is slowing down, what do you think will happen to inflation? I would have said, well, if growth is slowing down, inflation should also slow down. But have a look at what consensus is expecting for inflation. The consensus is expecting inflation to go from 2.5 in the second quarter of this year to go up to 2.9312930. In other words, this is highly, highly unusual. Namely, the consensus and the Fed and we at Apollo expect growth to slow down and inflation to go up. That's why investors are now in a situation where there is stagflation in the forecast. And now we need to think about what are the implications for stagflation. And the implications of course are downward pressure on earnings, upward pressure on interest rates. That's a very different environment from overheating, which is where we were from 2023-24. Goldilocks, which is a situation where inflation is low, GDP growth and earnings are high. That's where we were from 2009 to 2022. And of course, very, very different from a recession, which is where we were in 2008 and 2020. So the key challenge for us in markets, and Bill, let me turn it back to you, is of course, what should investors do in stagflation when you at the same time have downside pressure on earnings and at the same time upside pressure on interest rates. And one answer to that question is, you must be up in quality in debt, up in quality in equity to protect yourself against the risk of both the slowdown in earnings and GDP, and at the same time, interest rates staying more elevated. [00:13:32] Bill: So with that, Bill, let me pass it back to you. Thank you, Torsten. What you just saw was a masterful display of why Torsten is so famous. From his days at Deutsche Bank until now, his days at Apollo, one of the largest private equity funds around, he just gave you an example of why economics is called the dismal science. After that presentation, you want to slit your wrist and say, my God, the world is going to come to an end, right? Well, not quite, right? I'm exaggerating, of course. And, Torsten, let me push back for you a couple of things. Especially, you have been very, very outspoken about the risks of stagflation. But if you look at the United States, it's relatively closed, and most of that was because of tariffs, you say. But U.S. states is pretty much a closed economy. Imports are about 15%, 16% of GDP. When you look at consumer baskets, you know, the people spend about 70% of their basket, of their dollar, on services, domestically produced services. They spend about 30% on goods. Of the goods, maybe 25% are imported. How is it that a 15% tariff, which is the base level that President Trump has put in place, and there are some exceptionally high numbers that are associated with fentanyl trade and wanting to China and specific countries to take actions, and some specific tariffs that are on steel and other strategic materials. But overall, the tariff level, right, has gone up from a very low level, yes, from 2%, to about 15%, 20%, call it, maybe even 25%. How can that little bit of tariff cause such dramatic changes to your outlook, and have you worry about stagflation to the extent you do, apart from uncertainty? [00:15:19] Torsten Sloke: Yeah, this is a very, very important question. So let's compare Korea with the United States. What is the main difference between Korea and the United States? It is that exports as a share of GDP, exports as a share of the economy, is much, much higher in Korea than it is in the United States. Likewise, imports as a share of the economy is also much, much higher than what it is in the United States. So you're absolutely right to ask, so why is it that the United States is expected to be impacted in a significant way? Well, because the issue is, as we have seen in Korea in the last few quarters, GDP growth in the last six months has been slowing down. Unfortunately, there's a broad range of macroeconomic indicators, a fairly sharp negative impact on the Korean economy as a result of Trump's trade war. That is not the same impact we're seeing on the U.S., but the direction of travel is the same. But it's just milder in the U.S. than what it is in Korea. And what's particularly important is, of course, the inflation impact. Because the U.S. has decided to have a trade war with everyone. This is very important. Korea is not in a trade war with everyone. Korea is not in a trade war with China, with Japan, with Singapore, with Europe. But the U.S. decided to have a trade war with everyone at the same time. So therefore, the impact on inflation in the U.S. is much bigger than it is in Korea. Simply because Korea only has one country and one country only. It is an important country, namely the U.S., that Korea is having a trade war with. Whereas the U.S., and this was Trump's decision, had decided to have a trade war with everyone at the same time. Remember on Liberation Day, he took out those big phone boards that said, we want to have a trade war with 100 countries at the same time. So the answer to your question is, why is there more of a stagflation scenario in the U.S.? It's simply because Korea is not in a trade war with basically any other country than the U.S., whereas the U.S. decided to be in a trade war with everyone. And as a result, price increases and inflation to the upside is a much bigger risk in the U.S., simply because of the choice that Trump made to start a trade war with everyone. Whereas in Korea, Korea trades with Japan, Korea trades with China, with Singapore, Indonesia, Thailand, Europe. And that trade, importantly, is happening without any price increases. So the answer to your question is, there's a slowdown in growth everywhere. But the unique thing is, because the U.S. is in a trade war with everyone, the upward pressure on inflation I showed you in the Bloomberg screenshot is very unique to the United States. And that's why the U.S. is in stagflation and Korea is not in stagflation. [00:18:05] Bill: Right. And the type of inflation we're talking about from tariffs is a one-time adjustment of the price level so that when the prices go up, during the time it's going up, we have that higher inflation rate. But once it achieves that equilibrium, it should stay there and the inflation, in principle, should subside, although it may be second or third rounds. But I also want to point out to everyone, remember when Torsten showed you that chart, he said, look at the right-hand side where growth slows down. It slowed down to a level that was still above the potential growth of the United States. And that I think is very important, that right now we're growing at faster than potential, which means a lot of pressure, upward pressure on prices and on inflation, that is not just a one-time pressure, but rather a long-standing pressure. The other thing I wanted to, I guess, characterize, and since you characterize tariff policies in such a classic textbook way, I can't help but push back and say, look, the tariff policy that was announced on Liberation Day is not the textbook policy, because Trump didn't not just announce, hey, these are some humongous tariffs I'm putting on everybody. He said in his speech in the World Economic Forum in January, U.S. is open for business. I want the world to invest in the United States. These tariffs are a way for him to say, come invest in the United States and produce here, because if you want to be a competitor to the United States rather than a partner, I'm going to charge you a lot of tariffs. But if you come here and produce stuff, invest in the United States, bring capital to the United States, bring technology to the United States, create jobs in the United States, and sell to your marketplace by producing in your marketplace, you will have no tariffs, or just very low tariffs or exemptions. So to me, it's not the Trump tariff policy, but the Trump investment policy that includes tariffs as one instrument in that overall package. The package is he got elected on lower government, smaller government, lower tax rates, and fewer regulations. That was the principle agenda. And then he said, I'm going to put a tariff barrier around and protect you from unfair competition if you decide to be a partner with the United States. So I guess my question to you, Thorsten, is the extent to which you think the investment policies can increase supply side enough to offset a lot of the drop in GDP and also enough supply response to be able to moderate, if not eliminate, the inflation response that you just talked about in the forecast? [00:20:35] Torsten Sloke: Yeah, this is also a very important discussion. The issue is if, as we all know, look at ISM for the manufacturing sectors, that's a very important indicator that looks at, is the manufacturing sector growing? Is the manufacturing sector shrinking? And if you look at last Friday, the employment report, what has happened to manufacturing jobs since Trump came into office? And the answer is, manufacturing jobs are now negative, meaning we are not seeing, at least up to this point, that significant growth in the manufacturing sector in the U.S. It may be that that's coming, but at this point, we have both weakness in the ISM manufacturing, which is the number one indicator for asking the question, is goods production coming back to the U.S.? And likewise, we're also seeing weakness in job growth in the manufacturing sector. In fact, it was negative in the numbers that came out last Friday, also suggesting that the manufacturing sector, at least not quite yet, has not grown to the areas and in the direction that Trump has been talking about and asking for. That doesn't mean that it cannot happen. There's a lot of trade deals, including with Korea, with Japan, with Europe, that was signed where there was commitments by foreigners to invest in the U.S. The only observation today for us as investors is it has just not quite happened yet. It may happen going forward, but at this point, I worry more about a slowdown while at the same time, the upward pressure on inflation. So yes, you're right. If we do have a major boom in the manufacturing sector, then we can sit down again and talk about that that supply might begin to lower inflation. But at this point, the high forecast for inflation that Consentus has is making me more worried that inflation will be at least more sticky. If not, we'll find out there's new inflation data coming out on Thursday this week in 8.30 a.m. East Coast time in the U.S. And that's when we will figure out if inflation is actually beginning to stabilize or if it's at risk of continuously moving higher. [00:22:29] Bill: And one other thing that Torsten was very diplomatic enough and nice enough not to say was that where there was an effort to have an investment boom, like South Korea investing in the United States, messing up the immigration laws and having such strict interpretation of what is a legal and illegal worker has also not helped the Trump administration at all. So certainly there's a lot of difference between what he wanted in theory and what is being put in practice. And getting the legal rights of investors and how you produce in the United States is a question that hasn't been resolved by the administration. We have, of course, Larry Hathaway here. I don't want to leave Larry out of this discussion. Larry is strategic advisor to Franklin Templeton, but before that he spent so many years being a regular dismal science economist at UBS and in other places. I want, Larry, I want you to run in here and comment on what you heard from Torsten and some of the questions I asked him about the pushback as to maybe his dismal science view is a little bit too dismal. [00:23:33] Speaker 3: Okay, certainly, and thank you, everyone, for having me here today. And, Torsten, great to see you, if only here on screen. Yeah, it's a great place to pick up on. I'll make a few brief observations, and I'll try to paint my pictures with words, since I don't have slides to accompany it. Broadly, to begin with, I agree with Torsten's cyclical assessment of what's going on, that there is going to be headwinds from the factors that he mentioned, so I won't repeat those. What I might do is just augment it with a few other points. One of the areas that, at least I didn't hear Torsten mention in his remarks, but I think is also a restraint on growth, is uncertainty. The Trump policies in many dimensions, but in particular, the back and forth on tariffs, have unleashed a great deal of uncertainty. Those who are more hopeful, perhaps, than the two of us about the U.S. economy would probably point toward a revival or some pickup of capital expenditures, and for which there are some good reasons. We've talked about maybe money coming in from abroad. I'll address that in a moment. There is, of course, an AI boom in capital spending that is well-known and underway, and there are some very, very meaningful, I think, very strong incentives in the one big, beautiful bill that will also incentivize certain forms of capital expenditures. However, I think first principles of economics teach us that when people are making decisions about investing in the future, certainty or uncertainty about that future is a key parameter, and therefore, it's lamentable alongside the tariffs that the Trump administration has introduced as much uncertainty in the economy, including the areas that may affect capital expenditures. So, in summary, I think that the economic outlook, the cyclical outlook, if you like, that Torsten has painted is broadly accurate, and I would broadly agree with it, including his observations, by the way, around inflation. Let me then just make one further point, which addresses one part of the question, Bill, that you had asked a moment ago, which is capital inflows from abroad. It is the first principle of economics that the gap between savings and investment in the economy plus the trade gap must equal the fiscal gap, that is, in the case of the United States, the large fiscal deficits to which Torsten alluded. We will probably have to take as given, now that the legislation has passed, that U.S. will be in a position of large budget deficits for as far as the eye can see. We have, as I said before, some preconditions for healthy increases in investment, and the tariffs have perhaps many objectives. Even the Trump administration, to your question, had alluded to a number of them. They could be about fentanyl sort of flowing across the border to geostrategic reasons, but certainly one has been Trump's aversion, personal as well as, I would say, policy, to trade deficits. Well, if that is the aim, and if we can envision a scenario, which, by the way, I struggle too, where the U.S. reduces its trade deficits, well, in that particular case, there isn't really going to be a massive flow of capital from abroad because the flip side of a trade deficit is naturally a capital inflow. So, there is a degree of, let's say, challenge in that picture that I've just portrayed. And among other things, it suggests that if, in fact, the effort is to reduce the U.S. trade deficit, to maintain large budget deficits, and to have an investment boom, then domestic savings in the United States must boom in order for that to find an equilibrium, which suggests that there is perhaps some downside risk over time to Torsten's view about the direction of the U.S. economy, in particular, domestic demand. In other words, the implication of that is that real interest rates must rise, and that may be a segue for something that we'll talk about a bit later in terms of investment implications, implications for capital markets, and broader for investment strategy. So, I'll conclude those opening remarks there. [00:27:40] Bill: That's a great place to jump off from because, let me repeat what he just said, right? In order for investment to boom, you've got to have a boom of savings, right? That's the identity. You can't get away from that. That is true under any economic theory on earth. So, where are the savings coming from? Unfortunately, Larry slipped in the word, domestic savings have to boom. Well, there's also foreign savings that have to boom, and that's exactly what the Trump speech in January said. I want the world to invest in the United States. That means I want to use your savings. Now, here in Korea, you have to say to yourself, this guy is nuts, right? U.S. is a capital-rich economy. U.S. has more capital than anybody else in the world, right? And he's asking emerging markets to Korea and other, send your savings to the United States. That's nuts. Well, you know, one of the works that people talk about was by Robert Lucas, the Nobel Prize winner from the University of Chicago. It's called the Lucas Paradox. When Robert Lucas looked at capital flows, net capital flows around the world, he found that capital flowed from the less capital-abundant countries to the more capital-abundant countries. And that was something that happened all over and all through history. Why is that? Well, the explanation, one explanation is because capital goes to the places where the returns are highest, not where the returns, not where capital is scarce. Because you think if capital is scarce, that must be where the return is highest. But the United States has been the place of greatest innovation and where capital has been the highest levels of return. So in that sense, Larry, you want to change your mind? [00:29:19] Speaker 3: No, not at all. It's far be it for me in this forum to be a critic of the Trump administration. But I think what I'm laying out is that there is serious inconsistency here in the Trump policy. They want that money to flow in, as you correctly suggested. But what it is really financing, at least in large part, is that budget deficit, not those superior returns. But the second, I think, point here is that we should guard against, let's say, continuing ongoing large capital flows in the United States because they imply large trade deficits. And the question that raises is, how happy is the Trump administration going to be if year after year after year over the coming, let's say, remainder of this term, the trade deficit doesn't shrink? That's, after all, a policy objective of theirs. It seems to me it's entirely inconsistent with the remaining policies, but it introduces more risk that more actions will be taken that are detrimental to both the U.S. and the world economy. [00:30:22] Bill: By the way, I am not here to be a supporter or an apologist for the Trump administration, but I feel as my role as a moderator, I really have to present the other side. Because here, the standard economist's view is, Trump is destroying the world, Trump is destroying the U.S., and the policies are something that he should have learned in textbook economics when he was at Wharton. And the fact that he didn't learn them means something's terrible. So I'm trying to address a lot of this. So in terms of the overall deficit, there's no question that you have to have more savings in order to get rid of that kind of a deficit. But, you know, the role of tariffs is not to reduce the overall deficit, but it's to switch where you have your deficits. You switch the countries from which you have deficits. In other words, you want to import from your partners, and you don't want to import from those countries who are your competitors. So the purpose of tariffs, in some ways, is called expenditure switching, not expenditure reducing. So the overall deficit, yes, could be very large, and that would require, as Torsten pointed out, a reduction in the overall size of the fiscal deficit. But if you want to carry out the strategy of help your friends and hurt your enemies, tariffs are a good way of switching those deficits. Now, Torsten, I want to turn to you, because Larry brought up the issue of interest rates and exchange rates, and how you really have to have higher real rates in the United States in order to attract capital into the United States. Can you talk a little bit about the Apollo view as to where interest rates are going, where exchange rates might be going, and also how people here in Korea and investors in Asia are supposed to take into account these changes? Because, as you were saying, the dollar has been coming down, but it's still higher than where it was three, four years ago. It is more, perhaps, normalizing. So where should the planners here, especially the longer-term investors and people who carry on trade on a longer-term basis, how should they be planning their strategies? [00:32:24] Torsten Sloke: Yeah, so we at Apollo think a lot about long-term assets versus long-term liabilities. We have in our insurance company, Athene, some liabilities that run over the next 20, 30 years. So the exact question is, as you are asking, what types of assets, what types of investments are being made and can be made in the US that can be matched with those 30-year liabilities, and where can I buy 30-year assets that pay me some cash flows over the next several decades? And it is very clear that there are a number of areas that require significant investment in the US, in particular, of course, in energy transition, in data centers, in climate, in infrastructure. Some of this came already from the CHIPS Act that came under Biden, but we have also had more recently a lot of investment both in equity and in debt on the data center side. And that growth in AI, growth in data center production, growth in energy that is needed to service the data centers is exactly requiring a lot more capital, including from the rest of the world. And those assets that are created, including by us at Apollo, are exactly very helpful for matching the 30-year or 20-year liability stream that I'm looking at with a 20- or 30-year asset that is being produced. So one area, to your question, where there is definitely a lot of tailwinds in the very longer term for the US economic outlook is the investment we're seeing these years in energy transition, in data centers, and in AI. And that will generate higher returns, and that will generate ultimately also assets that are and can be matched for anyone who has long-term liabilities in their portfolios. [00:34:12] Bill: Yeah, I think it's very important to remember what Torsten is talking about, right? It's not one real interest rate that characterizes the United States for investment opportunities. It's sectoral investment real rates of return and company real rates of return that really have to be looked into. And Larry, on the issue of currencies, there's a lot of talk now about digital currencies, a lot of alternatives to the dollar, many aspiring currencies are out there to replace the dollar. Where do you think this takes us in terms of the role of the dollar going forward? And how should investors react to that? Should they get out of dollar assets and more digital currencies? Or how do they hedge this trend? [00:34:54] Speaker ?: Right. [00:34:55] Speaker 3: So one of the unusual developments in the course of 2025 has been that the dollar has depreciated. I say unusual because if we look back to the first Trump administration, the imposition of tariffs, we saw dollar appreciation, which I think in sort of, again, textbook economic terms is probably more the variant of explanations that people would expect. So this year, it has been the opposite. As I said, I think it's caught some observers by surprise. We've both noted, obviously, some weakness, a soft patch either present or emerging in the U.S. economy, a change in Fed rate expectations with cuts, the first cut coming this month in all probability, and some others to follow it. That can fit the narrative of dollar weakness. I don't think this is about a wholesale shift out of dollars, which may be implied in your question and into alternatives, and I'll return to that in just a moment. But I do suspect that if we look out over some cyclical horizon, which could be perhaps the next half year, maybe a bit longer, this tendency for the dollar to depreciate seems to me to be the right way to think about things. In a longer-term sense, which I think is also embedded in your question, there are, of course, some trends underway. We've seen the, let's say, holdings of reserve managers, central banks that hold their reserves across a plethora of assets, that their holdings of dollars has been generally subsiding over now, actually, decades. But there's nothing there that seems to be particularly rapid or untoward. That might surprise some people. Well, after all, we are seeing what seems to be as an absolute paradigm shift in terms of U.S. economic policy, U.S. global leadership in so many other dimensions, including geostrategic and so forth, that one could imagine that that would erode the dollar's, let's say, standing as the world's chief reserve currency. But there is a problem, right? And you allude to it in your question, which is that if you do want to lighten up on the dollar, where do you go, right? The dollar and the United States offers by far and away the deepest, most liquid capital markets with greater homogeneity, let's say, in fixed income, particularly in the treasury market then. For example, Europe does with its sort of disparate group of sovereign bonds or, frankly, any other country. Capital control controls and so forth preclude some countries from consideration, at least as a major substitute like China. And so therefore, there is some discussion about digital currencies, but digital currencies in the sense of private digital currencies, as opposed to central bank digital currencies, have a number of different challenges for investors, not least of which are platforms, liquidity itself, as well as obviously some concerns about their use for illicit activities. So it seems to me that, in a sense, we're probably in a continuing phase and maybe at the margin of a slightly accelerating phase of the dollar's role diminishing, but it probably doesn't go much beyond that kind of a profile simply because of the absence of viable substitutes. [00:38:07] Bill: Now, we have about eight minutes left in the session. I want to leave some time for Q&A, but I cannot let these two gentlemen who represent the largest public investment organization and one of the largest private equity investment organizations go without asking them about how the changing market structure is going to influence investment strategies around the world, and especially here in Korea. So, Torsten, I'm going to turn to you, but if you want to comment on this, what Larry just said about digital currencies and other alternatives to the dollar, please do so, but tell us, we see so many investment houses and pension funds, endowments, and long-term investors turn to private equity and private credit in their portfolios, becoming a larger and larger share. But an interesting chart was shown just recently showing for the Ivy League universities, Columbia, Harvard, and Yale, and so on, their rates of return have been dropping like a rock over the last five years as they increase the allocation toward private equity. Now, I'm not claiming it's causal, but how do investment managers handle the question from their trustees about liquidity and lack of transparency and sort of lack of control once they commit their money to private equity or private capital? [00:39:25] Torsten Sloke: Yeah, this is a very, very important discussion, and in particular for pension funds and insurance companies with a long horizon. In private markets, you can get something that's risky, something that's safe. In public markets, you can get something that's risky, you can get something that's safe. And what's very important to remember is that there are many private companies in the U.S. and in Europe. 90% of businesses with revenues of more than $100 million in the U.S. are private. So that means that we have a significant share of the economy that is taking place in the private space. So that's why from a pension fund perspective, the modern way of thinking about private versus public is that it is now possible to do fixed income replacement. It's possible to take parts of your portfolio and say, I don't need daily liquidity in this part of my portfolio, but it would be good if I can get a higher return in private markets if I do invest in the opportunities that come along in exactly, in particular U.S., but also in Europe, where you have many more private companies. The number of public companies in the U.S. have shrunk from 8,000 to now around 4,000. There are many companies that are delisted because there's a lot of burdens that come along with being public. So the short answer to your question, Bill, is that there's a lot of excitement and there is a lot of possibilities and opportunities in private markets, especially in private credit where you can get deals that are 100 to 200 basis points higher historically than what you can get in public markets. And that is exactly because managers, including such as Apollo, they can decide how much risk do we want to take. Apollo mainly is investment-grade credit risk, and we can also exactly give the loans to the companies out there that you cannot get access to in public markets. So there are so many different dimensions to your question that are important. The opportunities set and the possibilities for investing in private credit especially are much bigger, of course, in U.S. and European markets. And lastly, you asked also about private equity. It's absolutely correct that the endowment model has, of course, been struggling because when interest rates went up, the endowments were significantly overweight in private equity and higher interest rates, of course, means higher bar for returns in private equity, and that has meant less exits and less distributions. That's why at the moment, with interest rates still staying higher because inflation is higher, that still means that private credit with a higher level of yields still is where a lot of money is flowing at the moment. [00:41:57] Bill: Thank you, Torsten. Now, by the way, on the Milken website three years ago, I wrote a paper on the rush to go private, and you might want to read that because it talks a lot about the trend that Torsten just talked about in terms of number of public companies that are turning private. Now, one piece that Torsten just wrote and was published, I think it was yesterday, how public markets no longer have alpha. He was nice enough not to say that in front of Larry, so I'm going to say it in front of Larry. What do you say to this guy when he tells everybody there's no more alpha to be had in public markets? [00:42:27] Speaker 3: Yeah. Well, on some levels, he's not wrong, right? We've obviously seen a big shift in over decades away from active management and equities towards passive management, understandable on a number of levels, including obviously at the industry-wide level, some of the challenges around performance. I do see the big numbers here ticking down, so I want to address something that I think, frankly, is more important than alpha in public equity markets, as important as that topic is, Bill. And that is what I think is probably, it certainly is a passion of mine. It's also simultaneously the both, perhaps the most important decision in investing and the least appreciated, which is the building and maintenance of a portfolio, of a strategic asset allocation. And I want to make a comment about that in the context of the inclusion now of alternatives. As Torsten rightly points out, as we all know, large institutions, and now increasingly a number of other investors, including individuals, are shifting their allocations toward these alternatives, many of which still have constrained liquidity, although there are ways in which one can now extract liquidity. It wasn't present, say, five or ten years ago. Within that, however, and there's great logic in doing that, it has changed, and I hate to be a little bit classroom-y here, but it has changed the way that we think about portfolio construction and portfolio analysis. It used to be a two-dimensional problem, risk and return, where risk was measured by volatility, or at least approximated by volatility. It is now a three-dimensional problem over which investors must now optimize. Yes, risk and return are still important, but so too is liquidity. In those periods of market setbacks, drawdowns, and so forth, any investor, be it a pension fund with their assumed liability structure, an endowment with their assumed liability structure, an insurance company with their potential liability structure, they all must ask themselves, am I liquid enough in those moments? And so we are seeing a transition in the industry towards essentially a total portfolio approach, a TPA, that tries to think about how to do these things simultaneously. It's a big body of my work, of my upcoming work personally, but it is, I think, a point that needs to be underscored. As you move into markets until such time as they become much more liquid than they are now, you must begin to think about how you establish your portfolio, how you manage your portfolio, how you consider risk, not in the traditional ways alone, but also in this third dimension. [00:45:10] Bill: Thank you, Larry. I'm going to leave it to the last minute and 20 seconds to you guys. What ultimate message do you want to leave our audience here in Korea? Are they going to worry, as you just told them to do, Torsten, about stagflation and the Trump tariff policy, bringing the world to the edge of disaster? Or is there some saving grace? And Larry, I guess for you, in this world of pending doom and gloom, what is the portfolio construction that we should learn from this? Torsten? [00:45:43] Torsten Sloke: Yeah. So the conclusion for me is that it is a complicated economic environment, but that does not mean that we should go home and hide under our beds. It actually means that we should begin to think about exactly as Larry is saying, what do our portfolios look like? Where are the opportunities if growth is slowing down? Where are the opportunities if inflation is higher and interest rates are higher? In our view, the main conclusion is you have to be up in quality, up in quality in credit, up in quality in private credit, public credit, up in quality in equity. So therefore, this is a very opportune moment to begin to think about exactly as Larry was saying, liquidity, do I need liquidity? Do I not need liquidity? When do I need the money? Am I matching liabilities that are long duration? Do I want some assets that are long duration that don't necessarily need a lot of liquidity? So I would say the main thing to do here is to take it easy and take a deep breath and say, yes, it's complicated, but what does it mean for my portfolio? What are the opportunities that I can lean into at the moment given the things that we have talked about for the last 45 minutes? Larry, let's go to 45 seconds of overtime. [00:46:51] Speaker 3: Okay, briefly. Yes, we are in the middle of a paradigm shift. Nothing like this has ever happened in my lifetime before and I have a few gray hairs to show for how long I've been doing this kind of thing. A paradigm shift does not necessarily mean that it's going to be negative, but I do think that the way we evaluate risk is different. We cannot take sort of the old, sort of, let's say, customary assumptions about things like fiscal prudence and monetary policy independence, low inflation, high growth, necessarily as what the future will deliver. But within that new paradigm, as complicated as it is, and we're still trying to figure it out, there's always opportunity for investors. What I would simply add as a final closing statement is that unlike the world in which we might just be chasing returns, and in my lifetime, many times, that has been sort of the investment philosophy, we do need to be cognizant of risk and how we're going to manage it, as both of us have recently alluded. [00:47:50] Bill: I want to thank both you guys for being such great supports and letting me needle you guys. I know you're going to be sending me some terrible emails, but keep that private. So again, thank you both for participating. Thank you, audience, for attending. I hope you got something out of this presentation. Thank you for coming. - Thank you. [00:48:05] Speaker 3: - Please give a round of applause for our speakers.