Speaker 1: Bloomberg Audio Studios, podcasts, radio news seeing a market gut
Speaker 1: check some of the enthusiasm post FED meeting yesterday after
Speaker 1: Oracle came out throwing some cold water on at some
Speaker 1: of the risk appetite down four tenser percent on s
Speaker 1: and b futures, the bitten de bonds actually gaining as
Speaker 1: the morning grows older after jobless claims came into slightly
Speaker 1: elevated ten year yields at four point one three percent.
Speaker 1: Turning to the economy, FED chair J Powell saying AI
Speaker 1: may be at least partially responsible for the cooling labor market,
Speaker 1: but the future remains uncertain. Howard Mark's co founder and
Speaker 1: co chairman of oak Tree Capital Market, issuing a warning
Speaker 1: at his latest memo, I find the resulting outlook for
Speaker 1: employment terrifying. I am enormously concerned about what will happen
Speaker 1: to the people whose job's AI renders unnecessary or who
Speaker 1: can't find jobs because of it at this moment of transformation,
Speaker 1: joins us. Now after writing a memo that I really
Speaker 1: recommend everybody read.
Speaker 2: It really was one of the absolute best that you've
Speaker 2: ever written. Thank you for being here with.
Speaker 3: Us, so I can stop now.
Speaker 2: No please don't. I want to keep reading your memos.
Speaker 2: I want to start with this idea of different types
Speaker 2: of bubbles.
Speaker 1: And you talk about there are productive bubbles and unproductive bubbles.
Speaker 1: What's the difference and how does that make it either
Speaker 1: something you want to invest in or not.
Speaker 3: Well.
Speaker 4: I think that the unproductive bubbles I would describe.
Speaker 3: As financial fans.
Speaker 4: Portfolio insurance was one, subprime mortgage was another. Financial activities
Speaker 4: that become fashionable, zoom into popularity, get over hyped, and
Speaker 4: then receide.
Speaker 3: But then there are.
Speaker 4: Bubbles which are based on technological progress, starting with the
Speaker 4: steam engine, the railroad, the radio, the automobile, computers, internet, etc.
Speaker 4: And these actually push society ahead and change it irreversibly.
Speaker 4: But in the process there's a bubble surrounding their implementation,
Speaker 4: which is overly accelerated and overly financed and goes to
Speaker 4: excess and end up destroying a lot of capital, but
Speaker 4: leave society greatly changed. And I'm sure that AI is
Speaker 4: in the latter category in terms of effect on society.
Speaker 4: And the question is will the implementation prove to have
Speaker 4: been excessive in scope and in the way it's financed.
Speaker 1: Just because something is excessive doesn't mean that you can't
Speaker 1: invest in it.
Speaker 3: No, But.
Speaker 4: You know, when investors hate everything and won't touch it
Speaker 4: with the ten foot poll, chances are it's going to
Speaker 4: be on sale because nobody has pushed up the price.
Speaker 4: In fact, their disinterest has pushed down the price. But
Speaker 4: when everybody likes something, you're excited about something, chances are
Speaker 4: it may be overhyped and overpriced.
Speaker 3: So you just have to be careful.
Speaker 2: So that's where we are right now.
Speaker 1: You said you can invest and you can participate, but
Speaker 1: you just have to be careful.
Speaker 2: What does being careful look like?
Speaker 1: Does it mean focusing more on debt versus equities, more
Speaker 1: on equities versus debt, more on small companies versus big ones.
Speaker 2: What does that look like?
Speaker 4: Well, what I say in the memo is that it's
Speaker 4: okay to lend for activities even if they're uncertain, but
Speaker 4: not if they are if the outcomes are purely conjectural.
Speaker 4: I mean, in order to be a smart lender, you
Speaker 4: have to have good visibility on the extent to which
Speaker 4: the thing is likely to repay interest. In principle, if
Speaker 4: it's just purely conjectural, it's not you shouldn't be a lender,
Speaker 4: And in fact, I think the memo says that where
Speaker 4: that's the case, you should actually, if you want to participate,
Speaker 4: you should be in the equity, so at least you
Speaker 4: get the ups The lender has no upside. You make
Speaker 4: it a nine percent loan, all you're going to get
Speaker 4: is nine percent, no matter how well the thing does.
Speaker 3: You certainly shouldn't do that in.
Speaker 4: Activities that have a high probability of not paying off
Speaker 4: at all, because then you have unlimited downside and limited upside.
Speaker 3: That's absolutely the wrong combination.
Speaker 1: So you think right now, in some circumstances, the equity
Speaker 1: might actually be a better option than the debt because
Speaker 1: of that potential levels.
Speaker 4: Exactly, because the point is that if you go into
Speaker 4: some startup which has the possibility, you know, let's say
Speaker 4: a small possibility of a raging success, you know you
Speaker 4: wouldn't lend to it because you have a high probability
Speaker 4: of losing all your money and no probability of participating
Speaker 4: in the success.
Speaker 3: That's a bad trade.
Speaker 1: So you always talk about this risk reward pendulum, the
Speaker 1: risk and fear, this sort of fear and greed pendulum.
Speaker 2: Right now, and yesterday we saw.
Speaker 1: Oracle come out and talk about having to borrow more money,
Speaker 1: having to spend more, and people are selling off the shares.
Speaker 2: Does this make you feel good?
Speaker 1: Does this make you feel like there actually is some discretion?
Speaker 3: Well, well, yeah, well I think that I think that
Speaker 3: it's it's.
Speaker 4: You know, Buffett says, the less prudence with which others
Speaker 4: conduct their affairs, the greater the prudence with which we
Speaker 4: must conduct our own affairs. So when other people are
Speaker 4: acting imprudently and mindlessly and care free, we should be worried.
Speaker 4: When other people are showing appropriate concern, that's a positive
Speaker 4: sign that the market is applying some discipline. The greatest
Speaker 4: some of the greatest moments that I've seen, some of
Speaker 4: the greatest signals of danger in the markets have been
Speaker 4: when people were not applying any.
Speaker 3: Prudence at all, like in six for example.
Speaker 4: So if people are reacting harshly to aggressive, possibly risk
Speaker 4: indicating activities, yes, that's a healthy sign. And this market
Speaker 4: seems healthier than the two thousand.
Speaker 3: Market to me.
Speaker 1: How concerned are you that we get a federal reserve
Speaker 1: that's more accommodative for a variety of reasons that leads
Speaker 1: to even more risk taking. This idea that not only
Speaker 1: did the FED cut rates, indicated more rate cuts, but
Speaker 1: also is adding to its balance sheet in a way
Speaker 1: that could potentially prop up demand.
Speaker 4: Well, you know, I was thinking about this when I
Speaker 4: was waiting to see you today. You know, most of
Speaker 4: the people listening to this program, including me and you,
Speaker 4: are interested in the free markets. And we think free
Speaker 4: markets just set the prices of things, and the FED
Speaker 4: manipulations are a form of price controls. You know, they
Speaker 4: control the price of money. And if the FED puts
Speaker 4: money artificially cheap, then it induces behavior like risk taking.
Speaker 4: It forces people into risky or activities because the returns
Speaker 4: on safe.
Speaker 3: Activities are so low.
Speaker 4: It tends to reinforce the view that there's a FED
Speaker 4: put that if there's a problem, the FED will solve it,
Speaker 4: and that contributes to risky behavior.
Speaker 3: These are all bad things.
Speaker 4: And you know, I believe that the FED should be
Speaker 4: passive most of the time and only come to the
Speaker 4: rescue if the market is if the economy is seriously
Speaker 4: overheated and tending towards hyperinflation, or seriously under active and
Speaker 4: not creating jobs. I don't think that's the case right now.
Speaker 4: I don't think there's a and you can see in
Speaker 4: the divided Open Market Committee that there's a difference of opinion.
Speaker 4: So I don't think that action on the part of
Speaker 4: the Fed is compelling right now. And you know there
Speaker 4: are people who think that rates should be a lot
Speaker 4: lower than they are today.
Speaker 3: I just don't see that the.
Speaker 2: Merit in that right now. Going forward.
Speaker 1: I remember back in two thousand and fifteen, sixteen seventeen,
Speaker 1: more rates were incredibly low. You were saying people just
Speaker 1: need to lower their expectations for returns because ultimately you
Speaker 1: have to look at the risk free rate. You don't
Speaker 1: want to reach too much at a time where people
Speaker 1: are greedy. Where are we right now in terms of
Speaker 1: what types of returns people ought to expect based on
Speaker 1: the current income rates?
Speaker 4: Well, the lower base interest rates are everything scales off that,
Speaker 4: so you know, I mean, the FED funds rate at
Speaker 4: three and a half is below history. It's these are
Speaker 4: not high rates, they're only high relatives the last fifteen years.
Speaker 4: But this is a low rate. So everything scales off that.
Speaker 4: Most things will give moderate returns in the dead area.
Speaker 4: I think prospective returns are moderate, Okay, not lush, but
Speaker 4: not inadequate. The trouble is that the S and P,
Speaker 4: based on its PE ratio relative to history, appears to
Speaker 4: be priced to provide a very.
Speaker 3: Low prospective return.
Speaker 4: Historically, if you bought it this PE ratio, your return
Speaker 4: over the next ten years averaged in the very.
Speaker 3: Low single digits.
Speaker 4: So I think we're in a moderate return scenario. The
Speaker 4: problem is that how do you get a high return
Speaker 4: in a moderate return scenario? And most people's resort is
Speaker 4: to take a lot more risk, and that's something I
Speaker 4: don't like to do, other than when it's compelling.
Speaker 1: You had a personal note in a dentum at the end,
Speaker 1: and we let off with that idea of what artificial
Speaker 1: intelligence and machine learning will do to the labor market.
Speaker 1: It's something clearly on the fed's mind, clearly on investor's mind,
Speaker 1: talking about concerns that there is going to be cannibalization
Speaker 1: from human jobs.
Speaker 2: How do you see this playing out?
Speaker 1: How are you kind of grappling with this when you
Speaker 1: look at investments, when you look at fiscal deficit, when
Speaker 1: you look at the backdrop for the financial system.
Speaker 4: Well, look, Lisa, here, I'm not talking about investing or economics,
Speaker 4: so I'm talking about society and it's very worrying to me.
Speaker 4: And you know, I've gotten some very nice response from
Speaker 4: people I respect to the memo, and one of them
Speaker 4: said he thinks we've seen this in response to the
Speaker 4: Internet over the last twenty five years, but it has
Speaker 4: not raised unemployment because the Internet eliminated white collar jobs
Speaker 4: that were replaced by blue collar jobs, like you know,
Speaker 4: people who pick stuff in warehouses and send it out
Speaker 4: in e commerce. So the job count is not down,
Speaker 4: but job quality is down. And I think that this
Speaker 4: is very, very worrisome. And as I said in the uhudendum,
Speaker 4: w when we lost jobs to automation and offshoring, I
Speaker 4: think that that coincided with the opiate UH epidemic and
Speaker 4: UH not only in the amount, but also in location.
Speaker 4: And I think it's a natural consequence of people sitting
Speaker 4: around all day. And even if we I we've can
Speaker 4: find a replay, a way to replace their income, I
Speaker 4: worry about UH purposelessness. And you know, we we get
Speaker 4: so much job, so much from our jobs other than
Speaker 4: a paycheck, and you can't.
Speaker 3: Replace that stuff. So I I worry for society.
Speaker 1: Howard Marks, you are absolutely one of the best, for
Speaker 1: my favorite to talk to Howard Marks of Oakby Capital Management.
Speaker 3: It's great.
Speaker 2: Thank you so much for being with us.