Prof G Markets – "You Think You're Diversified, AI Disagrees"

Date: March 13, 2026
Guests: Torsten Slok (Partner & Chief Economist, Apollo)
Hosts: Scott Galloway & Ed Elson

Episode Overview

This episode dives into the seismic shifts transforming markets in 2026—oil price shocks after Middle East conflict, the lingering specter of inflation, and the growing influence of artificial intelligence (AI) on the real economy and financial portfolios. Scott Galloway and Ed Elson are joined by Torsten Slok, Apollo’s Chief Economist, to scrutinize how AI-centric risk now pervades once-diversified investment strategies, and to debate the persistence of inflation, labor market fears, and the sharp divide between Wall Street winners and Main Street strugglers.

Key Discussion Points & Insights

1. Impact of Middle East Conflict on Oil Prices & Inflation

• Backdrop: Oil prices spiked above $100, peaking at $118, after Iranian strikes and turmoil in the region ([06:53]-[09:28]).
• Economic Context: Torsten stresses the US economy is fundamentally strong due to AI/data center spending, "industrial renaissance," and government stimulus ("the one big beautiful bill").
• Inflation Calculation:

  "When you increase oil prices by $35 and you stuff that into the Fed's model of the US economy, that is going to lift headline inflation by 0.7% and it's going to lift core inflation by 0.1%." – Torsten Slok ([07:54])

• Stubborn Inflation Risk: The rise in oil may keep inflation “higher for longer,” pressuring the Federal Reserve to hold rates up.

2. Stagflation & the Federal Reserve’s Dilemma

• Scenario Explained: Elevated inflation + slowing labor market = stagflation risk.
• Fed Policy Outlook:

  "The FOMC themselves in the latest dot plot... only expect one cut in 2026. Our view is that we'll get zero cuts in 2026." – Torsten Slok ([10:14])

• Investor Impact: Growth companies with profits far in the future (like software/AI) suffer most from “higher for longer” rates.
• Prematurity of Panic: Torsten argues it's too soon for panic as labor market fluctuations may reflect temporary factors (e.g. strikes, weather).

3. Global Ripple Effects: US vs. Asia & Europe

• US Energy Position:

  "The US has become less energy intensive and is now an energy exporter... So when oil prices go up, the US actually benefits, compared to Europe and Asia, who are hit much harder." – Torsten Slok ([15:46])

• Geopolitical Calculus: Scott suggests US could "declare victory and leave," as relative US resilience (energy, food, geography) puts America in a superior position—even if global chaos ensues ([17:23]).

4. AI: Deflationary Promise or Labor Market Nightmare?

• The Macro Case for AI:
  • Startups proliferate—“dramatic increase in business formation” ([22:42]).
  • Productivity gains anticipated, but not yet evident in data.
  • Dramatic AI adoption not yet reflected in S&P 493 (excluding the “Magnificent Seven”).
• Labor Market Fears:
  • Anecdotal layoffs (Block, Amazon) blamed on AI—possibly “AI washing” ([26:33]).
  • "The whole notion that the unemployment rate is going to go to 20% or 10% because of this, I really view that as science fiction." – Torsten Slok ([22:42])
  • Even if mass unemployment, government response (reskilling, UBI) is likely because “no government will allow” high, persistent unemployment.
• Policy Worries:
  • Current US administration's reluctance to regulate AI may shake confidence:

    "...the policy that they have proposed is we want to make sure that we actually don't regulate AI... So for a lot of Americans... can we really rely on government to figure this all out?" – Ed ([28:27])

5. Viral Research, Market Overreaction & The Framework Vacuum

• Citrini Research Incident: A viral blog post sparked a major selloff in software; Torsten says this was an overreaction stemming from the lack of analytic frameworks for AI risk ([30:19]-[33:50]).

  "There is no Fed model... And with the vacuum, then suddenly, of course, things are thrown into the vacuum where people say, wow, it could be this, it could also be that." – Torsten Slok ([30:34])

• Tail Risk Awareness:

  "The probability of tail risk has gone up... So there's a 70% chance we stay on the fairway and [a 30% chance] we hit the rough." – Torsten Slok ([33:50])

6. Bull Case & Persistent Growth Tailwinds

• Scott’s Challenge: “Is there a scenario where things go right?” ([36:58])
• Torsten’s Bull Case: Growth drivers—AI, industrial renaissance, government policy—are largely independent of Fed policy and should keep the economy strong ([37:48]).
• But: “Instead of worrying about a recession, maybe we should begin to worry about overheating.”

7. Private Credit & Portfolio Risks

• Private Credit Sector:
  • Sector share prices hit after the AI selloff; concern that private credit holds too much software/AI risk ([39:51]).
  • "It's all about the underwriting standards... companies that have cash flows far out in the future are much more sensitive to the discount rate..." – Torsten Slok ([40:40])

8. Stock Market vs. Real Economy: Inequality Widens

• K-Shaped Recovery:
  • Wealth/savings, wage growth, and inflation exposure all favor high-income Americans ([45:40]).
  • Low-income households face higher inflation from basics (housing, food), lower wage growth, and have seen almost no wealth gains since 2019.

  “There is a K shaped situation, unfortunately for US consumers in three different dimensions…” – Torsten Slok ([45:40])

• Data Point: Top 20% generate 40% of consumer spending; bottom 20% just 8% ([48:43]).
• Market Relevance: The “tailwind” from policies/AI often accrues mainly to the affluent.

9. Risk Prioritization & Persistent Shocks

• Greatest Risk:

  “For investors it’s about identifying those shocks that will last the longest and then trying to ride those waves… It is all about the persistence and the strength of this theme.” – Torsten Slok ([50:40])

• AI’s Importance: Geopolitical or market shocks may fade, but the economic effect of AI (positive or negative) could persist longer and must be a core focus for investors.

10. Diversification—But AI Is Everywhere

• Key Takeaway:
  • The “60/40” portfolio (stocks and bonds) is less diversified than ever, as both have become heavily exposed to AI ([53:46]).
  • Even IG credit and venture capital now rely on “AI factor.”
  • The surprising advice?

    “The main recommendation is everyone should today invest in non-AI... Gold is not AI. Brazilian stocks is not AI. European credit is not AI. Australian equities is not AI... If we go back to thinking about finance over the last 10, 15 years is that we have learned that we gotta invest in different factors. And suddenly we have one factor staring us right in our face, namely AI is everywhere in people's portfolios. Then the key recommendation today is to diversify and make sure that you also have things in your portfolio that are not AI.” – Torsten Slok ([53:46])

Notable Quotes & Memorable Moments

• On Fed and Models:
  “There is no Fed model, there is no model I can take out. And suddenly there is a vacuum.” – Torsten Slok ([30:34])

• On Tail Risk & Frameworks:
  “Anyone who comes up with something that just looks a little bit like a framework, they will immediately get a lot of attention. And... if that's a very anxiety-inducing framework... everyone will say, 'Gee, maybe we'll all lose our jobs because of this.'” – Torsten Slok ([30:34])

• On Real Diversification:
  “Buying the S&P is essentially buying AI and the seven dwarves. And 30, 40% is these 10 companies... Even if the majority of their revenues are non AI, you're buying AI because that's what's going to determine if these things continue their run or if they get cut in half.” – Scott Galloway ([58:04])

• The Persistent Theme:
  “For investors, it’s about identifying those shocks that will last the longest and then trying to ride those waves...” – Torsten Slok ([50:40])

Timestamps for Important Segments

• Oil, Iran, & Inflation: [06:48]–[09:28]
• On Fed Policy & Stagflation: [10:14]–[11:55]
• Global Oil Impacts: [15:46]–[18:26]
• AI’s Labor Impact, Misconceptions: [22:42]–[28:27]
• Markets & the "Framework Vacuum" in AI: [30:19]–[33:50]
• Bull Case & What Could Go Right: [36:58]–[39:51]
• Private Credit Exposure Risks: [39:51]–[42:30]
• Wall Street vs. Main Street, K-Shaped Economy: [45:40]–[50:23]
• Long-Lasting Shocks & Themes: [50:40]–[53:46]
• 'AI is Everywhere' and Real Diversification: [53:46]–[56:28]

Summary of Actionable Advice

• Don’t fool yourself: Your “diversified” portfolio is heavily tied to AI, even outside pure tech.
• Seek genuine diversity: Allocate to sectors, regions, and asset classes with low AI exposure (e.g., gold, Brazilian equities, non-AI-focused credit).
• Focus on persistent shocks: Don’t overreact to transient headlines; instead, identify mega-trends (AI, industrial policy, energy) that will shape returns.
• Watch inequality: Market wins may not help all Americans—macro indicators can mask Main Street pain.
• Be wary of analytics vacuums: When models don’t exist (as with AI today), narratives and tail risks drive volatility.

Hosts' Final Thoughts

Ed Elson:
“AI is literally everywhere. All of the paradigms, all the frameworks that we used to use in terms of diversification, they just don't make sense anymore... That not-AI investment thesis was bang on.” ([57:12])

Scott Galloway:
“I love insights that are hiding in plain sight. Buying the S&P is essentially buying AI and the seven dwarves... At the end of the day, their stocks are up and totally susceptible to AI. So even if the majority of their revenues are non AI, you're buying AI...” ([58:04])

Bottom Line:
Today’s risk is not that you’re underexposed to AI, but that AI has permeated every corner of your portfolio. Real diversification in 2026 means deliberately seeking out what isn’t AI-driven—if you can still find it.