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Speaker 1: Bloomberg Audio Studios, podcasts, radio news seeing a market gut

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Speaker 1: check some of the enthusiasm post FED meeting yesterday after

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Speaker 1: Oracle came out throwing some cold water on at some

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Speaker 1: of the risk appetite down four tenser percent on s

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Speaker 1: and b futures, the bitten de bonds actually gaining as

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Speaker 1: the morning grows older after jobless claims came into slightly

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Speaker 1: elevated ten year yields at four point one three percent.

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Speaker 1: Turning to the economy, FED chair J Powell saying AI

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Speaker 1: may be at least partially responsible for the cooling labor market,

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Speaker 1: but the future remains uncertain. Howard Mark's co founder and

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Speaker 1: co chairman of oak Tree Capital Market, issuing a warning

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Speaker 1: at his latest memo, I find the resulting outlook for

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Speaker 1: employment terrifying. I am enormously concerned about what will happen

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Speaker 1: to the people whose job's AI renders unnecessary or who

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Speaker 1: can't find jobs because of it at this moment of transformation,

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Speaker 1: joins us. Now after writing a memo that I really

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Speaker 1: recommend everybody read.

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Speaker 2: It really was one of the absolute best that you've

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Speaker 2: ever written. Thank you for being here with.

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Speaker 3: Us, so I can stop now.

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Speaker 2: No please don't. I want to keep reading your memos.

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Speaker 2: I want to start with this idea of different types

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Speaker 2: of bubbles.

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Speaker 1: And you talk about there are productive bubbles and unproductive bubbles.

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Speaker 1: What's the difference and how does that make it either

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Speaker 1: something you want to invest in or not.

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Speaker 3: Well.

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Speaker 4: I think that the unproductive bubbles I would describe.

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Speaker 3: As financial fans.

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Speaker 4: Portfolio insurance was one, subprime mortgage was another. Financial activities

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Speaker 4: that become fashionable, zoom into popularity, get over hyped, and

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Speaker 4: then receide.

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Speaker 3: But then there are.

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Speaker 4: Bubbles which are based on technological progress, starting with the

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Speaker 4: steam engine, the railroad, the radio, the automobile, computers, internet, etc.

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Speaker 4: And these actually push society ahead and change it irreversibly.

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Speaker 4: But in the process there's a bubble surrounding their implementation,

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Speaker 4: which is overly accelerated and overly financed and goes to

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Speaker 4: excess and end up destroying a lot of capital, but

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Speaker 4: leave society greatly changed. And I'm sure that AI is

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Speaker 4: in the latter category in terms of effect on society.

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Speaker 4: And the question is will the implementation prove to have

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Speaker 4: been excessive in scope and in the way it's financed.

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Speaker 1: Just because something is excessive doesn't mean that you can't

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Speaker 1: invest in it.

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Speaker 3: No, But.

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Speaker 4: You know, when investors hate everything and won't touch it

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Speaker 4: with the ten foot poll, chances are it's going to

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Speaker 4: be on sale because nobody has pushed up the price.

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Speaker 4: In fact, their disinterest has pushed down the price. But

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Speaker 4: when everybody likes something, you're excited about something, chances are

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Speaker 4: it may be overhyped and overpriced.

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Speaker 3: So you just have to be careful.

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Speaker 2: So that's where we are right now.

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Speaker 1: You said you can invest and you can participate, but

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Speaker 1: you just have to be careful.

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Speaker 2: What does being careful look like?

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Speaker 1: Does it mean focusing more on debt versus equities, more

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Speaker 1: on equities versus debt, more on small companies versus big ones.

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Speaker 2: What does that look like?

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Speaker 4: Well, what I say in the memo is that it's

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Speaker 4: okay to lend for activities even if they're uncertain, but

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Speaker 4: not if they are if the outcomes are purely conjectural.

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Speaker 4: I mean, in order to be a smart lender, you

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Speaker 4: have to have good visibility on the extent to which

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Speaker 4: the thing is likely to repay interest. In principle, if

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Speaker 4: it's just purely conjectural, it's not you shouldn't be a lender,

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Speaker 4: And in fact, I think the memo says that where

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Speaker 4: that's the case, you should actually, if you want to participate,

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Speaker 4: you should be in the equity, so at least you

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Speaker 4: get the ups The lender has no upside. You make

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Speaker 4: it a nine percent loan, all you're going to get

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Speaker 4: is nine percent, no matter how well the thing does.

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Speaker 3: You certainly shouldn't do that in.

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Speaker 4: Activities that have a high probability of not paying off

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Speaker 4: at all, because then you have unlimited downside and limited upside.

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Speaker 3: That's absolutely the wrong combination.

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Speaker 1: So you think right now, in some circumstances, the equity

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Speaker 1: might actually be a better option than the debt because

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Speaker 1: of that potential levels.

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Speaker 4: Exactly, because the point is that if you go into

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Speaker 4: some startup which has the possibility, you know, let's say

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Speaker 4: a small possibility of a raging success, you know you

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Speaker 4: wouldn't lend to it because you have a high probability

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Speaker 4: of losing all your money and no probability of participating

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Speaker 4: in the success.

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Speaker 3: That's a bad trade.

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Speaker 1: So you always talk about this risk reward pendulum, the

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Speaker 1: risk and fear, this sort of fear and greed pendulum.

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Speaker 2: Right now, and yesterday we saw.

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Speaker 1: Oracle come out and talk about having to borrow more money,

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Speaker 1: having to spend more, and people are selling off the shares.

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Speaker 2: Does this make you feel good?

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Speaker 1: Does this make you feel like there actually is some discretion?

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Speaker 3: Well, well, yeah, well I think that I think that

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Speaker 3: it's it's.

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Speaker 4: You know, Buffett says, the less prudence with which others

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Speaker 4: conduct their affairs, the greater the prudence with which we

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Speaker 4: must conduct our own affairs. So when other people are

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Speaker 4: acting imprudently and mindlessly and care free, we should be worried.

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Speaker 4: When other people are showing appropriate concern, that's a positive

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Speaker 4: sign that the market is applying some discipline. The greatest

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Speaker 4: some of the greatest moments that I've seen, some of

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Speaker 4: the greatest signals of danger in the markets have been

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Speaker 4: when people were not applying any.

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Speaker 3: Prudence at all, like in six for example.

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Speaker 4: So if people are reacting harshly to aggressive, possibly risk

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Speaker 4: indicating activities, yes, that's a healthy sign. And this market

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Speaker 4: seems healthier than the two thousand.

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Speaker 3: Market to me.

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Speaker 1: How concerned are you that we get a federal reserve

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Speaker 1: that's more accommodative for a variety of reasons that leads

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Speaker 1: to even more risk taking. This idea that not only

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Speaker 1: did the FED cut rates, indicated more rate cuts, but

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Speaker 1: also is adding to its balance sheet in a way

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Speaker 1: that could potentially prop up demand.

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Speaker 4: Well, you know, I was thinking about this when I

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Speaker 4: was waiting to see you today. You know, most of

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Speaker 4: the people listening to this program, including me and you,

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Speaker 4: are interested in the free markets. And we think free

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Speaker 4: markets just set the prices of things, and the FED

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Speaker 4: manipulations are a form of price controls. You know, they

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Speaker 4: control the price of money. And if the FED puts

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Speaker 4: money artificially cheap, then it induces behavior like risk taking.

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Speaker 4: It forces people into risky or activities because the returns

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Speaker 4: on safe.

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Speaker 3: Activities are so low.

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Speaker 4: It tends to reinforce the view that there's a FED

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Speaker 4: put that if there's a problem, the FED will solve it,

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Speaker 4: and that contributes to risky behavior.

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Speaker 3: These are all bad things.

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Speaker 4: And you know, I believe that the FED should be

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Speaker 4: passive most of the time and only come to the

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Speaker 4: rescue if the market is if the economy is seriously

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Speaker 4: overheated and tending towards hyperinflation, or seriously under active and

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Speaker 4: not creating jobs. I don't think that's the case right now.

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Speaker 4: I don't think there's a and you can see in

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Speaker 4: the divided Open Market Committee that there's a difference of opinion.

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Speaker 4: So I don't think that action on the part of

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Speaker 4: the Fed is compelling right now. And you know there

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Speaker 4: are people who think that rates should be a lot

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Speaker 4: lower than they are today.

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Speaker 3: I just don't see that the.

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Speaker 2: Merit in that right now. Going forward.

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Speaker 1: I remember back in two thousand and fifteen, sixteen seventeen,

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Speaker 1: more rates were incredibly low. You were saying people just

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Speaker 1: need to lower their expectations for returns because ultimately you

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Speaker 1: have to look at the risk free rate. You don't

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Speaker 1: want to reach too much at a time where people

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Speaker 1: are greedy. Where are we right now in terms of

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Speaker 1: what types of returns people ought to expect based on

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Speaker 1: the current income rates?

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Speaker 4: Well, the lower base interest rates are everything scales off that,

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Speaker 4: so you know, I mean, the FED funds rate at

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Speaker 4: three and a half is below history. It's these are

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Speaker 4: not high rates, they're only high relatives the last fifteen years.

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Speaker 4: But this is a low rate. So everything scales off that.

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Speaker 4: Most things will give moderate returns in the dead area.

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Speaker 4: I think prospective returns are moderate, Okay, not lush, but

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Speaker 4: not inadequate. The trouble is that the S and P,

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Speaker 4: based on its PE ratio relative to history, appears to

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Speaker 4: be priced to provide a very.

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Speaker 3: Low prospective return.

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Speaker 4: Historically, if you bought it this PE ratio, your return

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Speaker 4: over the next ten years averaged in the very.

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Speaker 3: Low single digits.

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Speaker 4: So I think we're in a moderate return scenario. The

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Speaker 4: problem is that how do you get a high return

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Speaker 4: in a moderate return scenario? And most people's resort is

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Speaker 4: to take a lot more risk, and that's something I

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Speaker 4: don't like to do, other than when it's compelling.

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Speaker 1: You had a personal note in a dentum at the end,

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Speaker 1: and we let off with that idea of what artificial

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Speaker 1: intelligence and machine learning will do to the labor market.

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Speaker 1: It's something clearly on the fed's mind, clearly on investor's mind,

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Speaker 1: talking about concerns that there is going to be cannibalization

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Speaker 1: from human jobs.

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Speaker 2: How do you see this playing out?

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Speaker 1: How are you kind of grappling with this when you

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Speaker 1: look at investments, when you look at fiscal deficit, when

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Speaker 1: you look at the backdrop for the financial system.

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Speaker 4: Well, look, Lisa, here, I'm not talking about investing or economics,

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Speaker 4: so I'm talking about society and it's very worrying to me.

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Speaker 4: And you know, I've gotten some very nice response from

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Speaker 4: people I respect to the memo, and one of them

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Speaker 4: said he thinks we've seen this in response to the

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Speaker 4: Internet over the last twenty five years, but it has

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Speaker 4: not raised unemployment because the Internet eliminated white collar jobs

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Speaker 4: that were replaced by blue collar jobs, like you know,

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Speaker 4: people who pick stuff in warehouses and send it out

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Speaker 4: in e commerce. So the job count is not down,

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Speaker 4: but job quality is down. And I think that this

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Speaker 4: is very, very worrisome. And as I said in the uhudendum,

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Speaker 4: w when we lost jobs to automation and offshoring, I

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Speaker 4: think that that coincided with the opiate UH epidemic and

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Speaker 4: UH not only in the amount, but also in location.

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Speaker 4: And I think it's a natural consequence of people sitting

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Speaker 4: around all day. And even if we I we've can

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Speaker 4: find a replay, a way to replace their income, I

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Speaker 4: worry about UH purposelessness. And you know, we we get

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Speaker 4: so much job, so much from our jobs other than

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Speaker 4: a paycheck, and you can't.

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Speaker 3: Replace that stuff. So I I worry for society.

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Speaker 1: Howard Marks, you are absolutely one of the best, for

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Speaker 1: my favorite to talk to Howard Marks of Oakby Capital Management.

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Speaker 3: It's great.

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Speaker 2: Thank you so much for being with us.