WEBVTT - Howard Marks Talks Interest Rate Cuts 0:00:02.520 --> 0:00:13.840 Bloomberg Audio Studios, podcasts, radio news seeing a market gut 0:00:13.880 --> 0:00:16.960 check some of the enthusiasm post FED meeting yesterday after 0:00:17.040 --> 0:00:19.800 Oracle came out throwing some cold water on at some 0:00:19.840 --> 0:00:22.279 of the risk appetite down four tenser percent on s 0:00:22.320 --> 0:00:25.200 and b futures, the bitten de bonds actually gaining as 0:00:25.239 --> 0:00:28.360 the morning grows older after jobless claims came into slightly 0:00:28.400 --> 0:00:31.920 elevated ten year yields at four point one three percent. 0:00:32.040 --> 0:00:35.000 Turning to the economy, FED chair J Powell saying AI 0:00:35.320 --> 0:00:38.800 may be at least partially responsible for the cooling labor market, 0:00:39.000 --> 0:00:42.760 but the future remains uncertain. Howard Mark's co founder and 0:00:42.800 --> 0:00:46.000 co chairman of oak Tree Capital Market, issuing a warning 0:00:46.040 --> 0:00:48.720 at his latest memo, I find the resulting outlook for 0:00:48.760 --> 0:00:52.520 employment terrifying. I am enormously concerned about what will happen 0:00:52.560 --> 0:00:56.160 to the people whose job's AI renders unnecessary or who 0:00:56.200 --> 0:00:59.720 can't find jobs because of it at this moment of transformation, 0:01:00.200 --> 0:01:02.280 joins us. Now after writing a memo that I really 0:01:02.320 --> 0:01:03.319 recommend everybody read. 0:01:03.360 --> 0:01:05.640 It really was one of the absolute best that you've 0:01:05.680 --> 0:01:07.280 ever written. Thank you for being here with. 0:01:07.240 --> 0:01:08.360 Us, so I can stop now. 0:01:09.160 --> 0:01:11.240 No please don't. I want to keep reading your memos. 0:01:11.280 --> 0:01:14.360 I want to start with this idea of different types 0:01:14.400 --> 0:01:15.080 of bubbles. 0:01:15.280 --> 0:01:19.120 And you talk about there are productive bubbles and unproductive bubbles. 0:01:19.480 --> 0:01:21.920 What's the difference and how does that make it either 0:01:21.959 --> 0:01:23.480 something you want to invest in or not. 0:01:23.840 --> 0:01:24.040 Well. 0:01:24.080 --> 0:01:28.840 I think that the unproductive bubbles I would describe. 0:01:28.360 --> 0:01:29.920 As financial fans. 0:01:31.080 --> 0:01:38.240 Portfolio insurance was one, subprime mortgage was another. Financial activities 0:01:38.240 --> 0:01:43.720 that become fashionable, zoom into popularity, get over hyped, and 0:01:43.800 --> 0:01:45.480 then receide. 0:01:46.959 --> 0:01:47.919 But then there are. 0:01:49.760 --> 0:01:53.800 Bubbles which are based on technological progress, starting with the 0:01:53.840 --> 0:01:59.400 steam engine, the railroad, the radio, the automobile, computers, internet, etc. 0:02:00.080 --> 0:02:06.080 And these actually push society ahead and change it irreversibly. 0:02:07.040 --> 0:02:10.760 But in the process there's a bubble surrounding their implementation, 0:02:11.240 --> 0:02:17.200 which is overly accelerated and overly financed and goes to 0:02:18.000 --> 0:02:23.040 excess and end up destroying a lot of capital, but 0:02:23.240 --> 0:02:27.560 leave society greatly changed. And I'm sure that AI is 0:02:27.600 --> 0:02:30.840 in the latter category in terms of effect on society. 0:02:31.080 --> 0:02:34.680 And the question is will the implementation prove to have 0:02:34.720 --> 0:02:39.200 been excessive in scope and in the way it's financed. 0:02:38.840 --> 0:02:40.920 Just because something is excessive doesn't mean that you can't 0:02:40.919 --> 0:02:41.520 invest in it. 0:02:41.960 --> 0:02:42.440 No, But. 0:02:45.520 --> 0:02:52.040 You know, when investors hate everything and won't touch it 0:02:52.080 --> 0:02:55.200 with the ten foot poll, chances are it's going to 0:02:55.280 --> 0:02:57.600 be on sale because nobody has pushed up the price. 0:02:57.639 --> 0:03:00.240 In fact, their disinterest has pushed down the price. But 0:03:00.280 --> 0:03:03.440 when everybody likes something, you're excited about something, chances are 0:03:03.639 --> 0:03:05.600 it may be overhyped and overpriced. 0:03:05.960 --> 0:03:07.359 So you just have to be careful. 0:03:07.960 --> 0:03:09.079 So that's where we are right now. 0:03:09.160 --> 0:03:11.160 You said you can invest and you can participate, but 0:03:11.200 --> 0:03:12.240 you just have to be careful. 0:03:12.760 --> 0:03:14.440 What does being careful look like? 0:03:14.480 --> 0:03:17.160 Does it mean focusing more on debt versus equities, more 0:03:17.160 --> 0:03:19.919 on equities versus debt, more on small companies versus big ones. 0:03:19.960 --> 0:03:20.680 What does that look like? 0:03:21.080 --> 0:03:25.600 Well, what I say in the memo is that it's 0:03:25.639 --> 0:03:30.280 okay to lend for activities even if they're uncertain, but 0:03:30.440 --> 0:03:33.799 not if they are if the outcomes are purely conjectural. 0:03:34.160 --> 0:03:36.280 I mean, in order to be a smart lender, you 0:03:36.360 --> 0:03:41.120 have to have good visibility on the extent to which 0:03:41.160 --> 0:03:45.360 the thing is likely to repay interest. In principle, if 0:03:45.360 --> 0:03:49.840 it's just purely conjectural, it's not you shouldn't be a lender, 0:03:50.320 --> 0:03:54.960 And in fact, I think the memo says that where 0:03:55.000 --> 0:03:58.120 that's the case, you should actually, if you want to participate, 0:03:58.160 --> 0:03:59.560 you should be in the equity, so at least you 0:03:59.560 --> 0:04:03.960 get the ups The lender has no upside. You make 0:04:04.000 --> 0:04:06.120 it a nine percent loan, all you're going to get 0:04:06.160 --> 0:04:08.120 is nine percent, no matter how well the thing does. 0:04:08.400 --> 0:04:09.840 You certainly shouldn't do that in. 0:04:12.960 --> 0:04:15.560 Activities that have a high probability of not paying off 0:04:15.600 --> 0:04:19.320 at all, because then you have unlimited downside and limited upside. 0:04:19.320 --> 0:04:20.920 That's absolutely the wrong combination. 0:04:21.279 --> 0:04:23.880 So you think right now, in some circumstances, the equity 0:04:24.360 --> 0:04:27.880 might actually be a better option than the debt because 0:04:27.920 --> 0:04:28.880 of that potential levels. 0:04:28.880 --> 0:04:32.120 Exactly, because the point is that if you go into 0:04:32.160 --> 0:04:36.599 some startup which has the possibility, you know, let's say 0:04:36.600 --> 0:04:43.120 a small possibility of a raging success, you know you 0:04:43.160 --> 0:04:45.320 wouldn't lend to it because you have a high probability 0:04:45.360 --> 0:04:48.520 of losing all your money and no probability of participating 0:04:48.520 --> 0:04:49.400 in the success. 0:04:49.680 --> 0:04:51.520 That's a bad trade. 0:04:51.800 --> 0:04:54.720 So you always talk about this risk reward pendulum, the 0:04:54.839 --> 0:04:58.080 risk and fear, this sort of fear and greed pendulum. 0:04:58.120 --> 0:05:00.120 Right now, and yesterday we saw. 0:05:00.040 --> 0:05:02.679 Oracle come out and talk about having to borrow more money, 0:05:02.760 --> 0:05:05.479 having to spend more, and people are selling off the shares. 0:05:06.160 --> 0:05:07.320 Does this make you feel good? 0:05:07.560 --> 0:05:09.960 Does this make you feel like there actually is some discretion? 0:05:10.480 --> 0:05:13.359 Well, well, yeah, well I think that I think that 0:05:14.000 --> 0:05:14.679 it's it's. 0:05:16.000 --> 0:05:18.719 You know, Buffett says, the less prudence with which others 0:05:18.760 --> 0:05:20.920 conduct their affairs, the greater the prudence with which we 0:05:21.000 --> 0:05:23.200 must conduct our own affairs. So when other people are 0:05:23.240 --> 0:05:28.640 acting imprudently and mindlessly and care free, we should be worried. 0:05:29.240 --> 0:05:32.840 When other people are showing appropriate concern, that's a positive 0:05:32.880 --> 0:05:35.479 sign that the market is applying some discipline. The greatest 0:05:35.720 --> 0:05:39.600 some of the greatest moments that I've seen, some of 0:05:39.640 --> 0:05:43.000 the greatest signals of danger in the markets have been 0:05:43.040 --> 0:05:45.839 when people were not applying any. 0:05:45.640 --> 0:05:48.640 Prudence at all, like in six for example. 0:05:49.320 --> 0:05:56.200 So if people are reacting harshly to aggressive, possibly risk 0:05:58.279 --> 0:06:02.760 indicating activities, yes, that's a healthy sign. And this market 0:06:04.200 --> 0:06:07.440 seems healthier than the two thousand. 0:06:07.200 --> 0:06:08.080 Market to me. 0:06:08.640 --> 0:06:11.080 How concerned are you that we get a federal reserve 0:06:11.080 --> 0:06:14.719 that's more accommodative for a variety of reasons that leads 0:06:14.760 --> 0:06:17.560 to even more risk taking. This idea that not only 0:06:17.600 --> 0:06:20.200 did the FED cut rates, indicated more rate cuts, but 0:06:20.320 --> 0:06:22.480 also is adding to its balance sheet in a way 0:06:22.480 --> 0:06:24.080 that could potentially prop up demand. 0:06:24.960 --> 0:06:27.720 Well, you know, I was thinking about this when I 0:06:27.760 --> 0:06:32.560 was waiting to see you today. You know, most of 0:06:32.600 --> 0:06:36.880 the people listening to this program, including me and you, 0:06:37.760 --> 0:06:40.160 are interested in the free markets. And we think free 0:06:40.160 --> 0:06:45.360 markets just set the prices of things, and the FED 0:06:45.440 --> 0:06:49.160 manipulations are a form of price controls. You know, they 0:06:49.200 --> 0:06:54.080 control the price of money. And if the FED puts 0:06:54.160 --> 0:06:59.640 money artificially cheap, then it induces behavior like risk taking. 0:07:00.200 --> 0:07:04.799 It forces people into risky or activities because the returns 0:07:04.839 --> 0:07:05.560 on safe. 0:07:05.320 --> 0:07:06.440 Activities are so low. 0:07:07.360 --> 0:07:11.160 It tends to reinforce the view that there's a FED 0:07:11.240 --> 0:07:14.360 put that if there's a problem, the FED will solve it, 0:07:14.760 --> 0:07:17.040 and that contributes to risky behavior. 0:07:17.080 --> 0:07:19.040 These are all bad things. 0:07:19.480 --> 0:07:22.280 And you know, I believe that the FED should be 0:07:23.000 --> 0:07:26.560 passive most of the time and only come to the 0:07:26.600 --> 0:07:31.280 rescue if the market is if the economy is seriously 0:07:31.320 --> 0:07:40.360 overheated and tending towards hyperinflation, or seriously under active and 0:07:40.400 --> 0:07:44.720 not creating jobs. I don't think that's the case right now. 0:07:44.760 --> 0:07:46.400 I don't think there's a and you can see in 0:07:46.440 --> 0:07:50.360 the divided Open Market Committee that there's a difference of opinion. 0:07:50.960 --> 0:07:52.840 So I don't think that action on the part of 0:07:52.840 --> 0:07:56.680 the Fed is compelling right now. And you know there 0:07:56.720 --> 0:07:58.640 are people who think that rates should be a lot 0:07:58.680 --> 0:08:00.560 lower than they are today. 0:08:01.440 --> 0:08:02.680 I just don't see that the. 0:08:02.640 --> 0:08:04.720 Merit in that right now. Going forward. 0:08:04.720 --> 0:08:09.240 I remember back in two thousand and fifteen, sixteen seventeen, 0:08:09.240 --> 0:08:11.800 more rates were incredibly low. You were saying people just 0:08:11.840 --> 0:08:15.320 need to lower their expectations for returns because ultimately you 0:08:15.360 --> 0:08:16.880 have to look at the risk free rate. You don't 0:08:16.920 --> 0:08:18.880 want to reach too much at a time where people 0:08:18.880 --> 0:08:21.560 are greedy. Where are we right now in terms of 0:08:21.600 --> 0:08:24.600 what types of returns people ought to expect based on 0:08:24.880 --> 0:08:26.280 the current income rates? 0:08:27.720 --> 0:08:33.920 Well, the lower base interest rates are everything scales off that, 0:08:34.520 --> 0:08:39.839 so you know, I mean, the FED funds rate at 0:08:39.880 --> 0:08:43.240 three and a half is below history. It's these are 0:08:43.240 --> 0:08:46.439 not high rates, they're only high relatives the last fifteen years. 0:08:46.800 --> 0:08:52.480 But this is a low rate. So everything scales off that. 0:08:52.640 --> 0:08:56.360 Most things will give moderate returns in the dead area. 0:08:57.640 --> 0:09:04.319 I think prospective returns are moderate, Okay, not lush, but 0:09:04.720 --> 0:09:08.800 not inadequate. The trouble is that the S and P, 0:09:10.000 --> 0:09:12.800 based on its PE ratio relative to history, appears to 0:09:12.840 --> 0:09:17.319 be priced to provide a very. 0:09:17.160 --> 0:09:19.160 Low prospective return. 0:09:20.240 --> 0:09:25.320 Historically, if you bought it this PE ratio, your return 0:09:25.360 --> 0:09:27.679 over the next ten years averaged in the very. 0:09:27.480 --> 0:09:28.480 Low single digits. 0:09:29.000 --> 0:09:34.280 So I think we're in a moderate return scenario. The 0:09:34.360 --> 0:09:37.439 problem is that how do you get a high return 0:09:37.600 --> 0:09:43.000 in a moderate return scenario? And most people's resort is 0:09:43.040 --> 0:09:46.640 to take a lot more risk, and that's something I 0:09:46.679 --> 0:09:50.199 don't like to do, other than when it's compelling. 0:09:50.880 --> 0:09:53.800 You had a personal note in a dentum at the end, 0:09:53.840 --> 0:09:57.840 and we let off with that idea of what artificial 0:09:57.840 --> 0:10:00.240 intelligence and machine learning will do to the labor market. 0:10:00.080 --> 0:10:03.360 It's something clearly on the fed's mind, clearly on investor's mind, 0:10:03.480 --> 0:10:06.480 talking about concerns that there is going to be cannibalization 0:10:06.520 --> 0:10:07.480 from human jobs. 0:10:08.280 --> 0:10:09.480 How do you see this playing out? 0:10:09.520 --> 0:10:11.480 How are you kind of grappling with this when you 0:10:11.520 --> 0:10:14.000 look at investments, when you look at fiscal deficit, when 0:10:14.000 --> 0:10:16.240 you look at the backdrop for the financial system. 0:10:16.440 --> 0:10:20.320 Well, look, Lisa, here, I'm not talking about investing or economics, 0:10:20.360 --> 0:10:23.920 so I'm talking about society and it's very worrying to me. 0:10:24.400 --> 0:10:27.400 And you know, I've gotten some very nice response from 0:10:27.480 --> 0:10:30.600 people I respect to the memo, and one of them 0:10:31.120 --> 0:10:34.640 said he thinks we've seen this in response to the 0:10:34.679 --> 0:10:40.280 Internet over the last twenty five years, but it has 0:10:40.320 --> 0:10:45.280 not raised unemployment because the Internet eliminated white collar jobs 0:10:45.360 --> 0:10:48.160 that were replaced by blue collar jobs, like you know, 0:10:48.240 --> 0:10:51.960 people who pick stuff in warehouses and send it out 0:10:52.040 --> 0:10:56.320 in e commerce. So the job count is not down, 0:10:56.520 --> 0:11:01.720 but job quality is down. And I think that this 0:11:01.840 --> 0:11:06.240 is very, very worrisome. And as I said in the uhudendum, 0:11:09.640 --> 0:11:15.080 w when we lost jobs to automation and offshoring, I 0:11:15.120 --> 0:11:21.319 think that that coincided with the opiate UH epidemic and 0:11:22.120 --> 0:11:24.920 UH not only in the amount, but also in location. 0:11:26.080 --> 0:11:30.400 And I think it's a natural consequence of people sitting 0:11:30.480 --> 0:11:35.240 around all day. And even if we I we've can 0:11:35.280 --> 0:11:38.320 find a replay, a way to replace their income, I 0:11:38.400 --> 0:11:42.640 worry about UH purposelessness. And you know, we we get 0:11:42.720 --> 0:11:47.679 so much job, so much from our jobs other than 0:11:47.720 --> 0:11:50.239 a paycheck, and you can't. 0:11:49.960 --> 0:11:53.960 Replace that stuff. So I I worry for society. 0:11:54.640 --> 0:11:57.440 Howard Marks, you are absolutely one of the best, for 0:11:57.480 --> 0:12:00.000 my favorite to talk to Howard Marks of Oakby Capital Management. 0:12:00.040 --> 0:12:00.440 It's great. 0:12:00.480 --> 0:12:02.040 Thank you so much for being with us.