1 00:00:02,480 --> 00:00:14,040 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:18,040 --> 00:00:21,320 Speaker 2: Hello and welcome to another episode of the All Thoughts podcast. 3 00:00:21,480 --> 00:00:22,840 Speaker 2: I'm Tracy Allaway and. 4 00:00:22,760 --> 00:00:23,799 Speaker 3: I'm Joe Wisenthal. 5 00:00:24,120 --> 00:00:28,200 Speaker 2: So, Joe, we recently recorded an episode with Kevin Muhror 6 00:00:28,320 --> 00:00:32,600 Speaker 2: where we were talking about concentration risk in stock indices, 7 00:00:33,000 --> 00:00:36,520 Speaker 2: and I guess historical analogies with the dot com bubble 8 00:00:36,600 --> 00:00:39,000 Speaker 2: of the two thousands, and I know that this is 9 00:00:39,040 --> 00:00:41,800 Speaker 2: one of your favorite subjects. I think I said it 10 00:00:41,840 --> 00:00:44,680 Speaker 2: was like your own personal catnip. That's right, And so 11 00:00:44,800 --> 00:00:48,400 Speaker 2: I thought, you know what, I did not get Joe 12 00:00:48,520 --> 00:00:51,000 Speaker 2: a Christmas present this year. In fact, I don't think 13 00:00:51,000 --> 00:00:53,320 Speaker 2: I've ever gotten you a Christmas present, But wouldn't it 14 00:00:53,400 --> 00:00:56,080 Speaker 2: be nice if I got him a whole episode where 15 00:00:56,120 --> 00:00:58,720 Speaker 2: we're talking to one of the world's most famous investors 16 00:00:58,880 --> 00:01:01,280 Speaker 2: who correctly call the Internet bubble. 17 00:01:01,680 --> 00:01:04,120 Speaker 3: Let's do it. Let's jump right into it. No more intro. 18 00:01:04,240 --> 00:01:07,200 Speaker 3: I'm so thrilled about this conversation. Let's just get it started, 19 00:01:07,280 --> 00:01:07,640 Speaker 3: all right. 20 00:01:07,880 --> 00:01:10,280 Speaker 2: I will also admit this is a belated Christmas present 21 00:01:10,319 --> 00:01:12,440 Speaker 2: to myself as well. So we are going to be 22 00:01:12,480 --> 00:01:15,560 Speaker 2: speaking with Howard Marx. He is, of course the co 23 00:01:15,640 --> 00:01:19,560 Speaker 2: founder and co chair of oak Tree Capital Management. He's 24 00:01:20,040 --> 00:01:24,800 Speaker 2: famously a credit investor, but he did call, as I said, 25 00:01:25,480 --> 00:01:28,959 Speaker 2: the dot com bubble correctly. So Howard, thank you so 26 00:01:29,040 --> 00:01:30,360 Speaker 2: much for coming on the show. 27 00:01:31,240 --> 00:01:34,360 Speaker 4: It's a pleasure to be with you. Tracy, and also Joe. 28 00:01:35,000 --> 00:01:39,080 Speaker 2: Maybe just to begin with give us some context around 29 00:01:39,280 --> 00:01:42,800 Speaker 2: what the early two thousand's late nineteen nineties were like 30 00:01:42,920 --> 00:01:44,720 Speaker 2: for you. What were you doing and what were you 31 00:01:44,840 --> 00:01:45,919 Speaker 2: observing at that time? 32 00:01:46,840 --> 00:01:52,960 Speaker 4: Well, the nineteen nineties were a slow time for credit investors. 33 00:01:53,240 --> 00:01:58,960 Speaker 4: We're kind of opportunistic and bargain hunters, and bargains come 34 00:01:59,000 --> 00:02:02,600 Speaker 4: from dislocation and you know, people feeling urgency to get 35 00:02:02,640 --> 00:02:07,040 Speaker 4: out of positions. And the nineties were generally a placid period, 36 00:02:07,560 --> 00:02:12,840 Speaker 4: except for the around ninety eight we had the evaluation of 37 00:02:12,840 --> 00:02:18,760 Speaker 4: the Russian ruble and a Southeast Asian crisis, and we 38 00:02:18,840 --> 00:02:22,240 Speaker 4: had the meltdown of a highly levered hedge fund called 39 00:02:22,320 --> 00:02:24,919 Speaker 4: Long Term Capital Management. But those were all kind of 40 00:02:25,000 --> 00:02:31,280 Speaker 4: vidiosyncratic events, not macro and not broad based. Other than that, 41 00:02:31,360 --> 00:02:35,320 Speaker 4: the investment environment was placid. Importantly, it was the best 42 00:02:35,360 --> 00:02:38,440 Speaker 4: decade in history I think for stocks and the S 43 00:02:38,480 --> 00:02:41,440 Speaker 4: and P five hundred rows an average of twenty percent 44 00:02:41,480 --> 00:02:44,320 Speaker 4: a year for ten years, which is an astronomical an 45 00:02:44,320 --> 00:02:47,840 Speaker 4: astronomical accomplishment. If you rise twenty percent a year for 46 00:02:47,880 --> 00:02:51,600 Speaker 4: ten years, I would guess that something goes up roughly 47 00:02:51,680 --> 00:02:55,000 Speaker 4: eight times in ten years, which is incredible. And of 48 00:02:55,040 --> 00:02:57,360 Speaker 4: course this was all powered by the what we call 49 00:02:57,440 --> 00:03:01,760 Speaker 4: the TMT bubble, tech media and telecom bubble, some people 50 00:03:01,840 --> 00:03:04,959 Speaker 4: call it the Internet bubble, which prevailed in ninety eight, 51 00:03:05,040 --> 00:03:08,600 Speaker 4: ninety nine and into two thousand. So it was hot times, 52 00:03:09,080 --> 00:03:12,840 Speaker 4: not for credit investors, hot times for equity investors. 53 00:03:13,120 --> 00:03:16,680 Speaker 3: You know, you recently wrote a memo that called back 54 00:03:16,760 --> 00:03:19,799 Speaker 3: to a memo that you had written basically exactly twenty 55 00:03:19,800 --> 00:03:22,440 Speaker 3: five years ago. So right at the start of two thousand, 56 00:03:22,600 --> 00:03:26,640 Speaker 3: of course, the dot com bubble or the TMT bubble peaked, 57 00:03:26,680 --> 00:03:30,000 Speaker 3: I think it was in March of that year. You 58 00:03:30,120 --> 00:03:32,800 Speaker 3: got the timing right. And that's sort of extraordinary because 59 00:03:32,800 --> 00:03:35,840 Speaker 3: there were a lot of people probably starting in nineteen 60 00:03:35,960 --> 00:03:39,720 Speaker 3: ninety eight, the nineteen ninety nine, maybe even earlier, like 61 00:03:39,760 --> 00:03:43,240 Speaker 3: this is ridiculous. There's all these companies they literally don't 62 00:03:43,280 --> 00:03:45,560 Speaker 3: have a penny in earnings, or perhaps don't even have 63 00:03:45,600 --> 00:03:48,080 Speaker 3: a penny in revenue, they just have the name dot 64 00:03:48,120 --> 00:03:51,600 Speaker 3: com in their name. They ipo at crazy prices. What 65 00:03:51,840 --> 00:03:55,480 Speaker 3: is the experience like? I mean, that was very fortunate 66 00:03:55,640 --> 00:03:57,440 Speaker 3: timing on your part, But there were a lot of 67 00:03:57,480 --> 00:04:01,040 Speaker 3: people who you know, were famously correct in early and 68 00:04:01,440 --> 00:04:04,320 Speaker 3: they had clients abandoned them and so forth, and they 69 00:04:04,560 --> 00:04:06,800 Speaker 3: thought it was like, oh, you don't understand the new paradigm, 70 00:04:06,800 --> 00:04:09,920 Speaker 3: et cetera. What's that like in the years before that, 71 00:04:10,560 --> 00:04:14,680 Speaker 3: as it feels like the market is becoming increasingly untethered 72 00:04:14,720 --> 00:04:19,440 Speaker 3: from any sort of reality and yet there's no payoff 73 00:04:19,640 --> 00:04:21,760 Speaker 3: in being correct, right. 74 00:04:21,640 --> 00:04:24,840 Speaker 4: Well, there's so much to say in response to your question. 75 00:04:25,320 --> 00:04:27,760 Speaker 4: You know, I use a lot of quotes and adages 76 00:04:27,839 --> 00:04:30,359 Speaker 4: and when I write, because you know, other people have 77 00:04:30,480 --> 00:04:34,880 Speaker 4: said things so much better than we can. And one 78 00:04:34,880 --> 00:04:37,440 Speaker 4: of the first adages I learned in the early seventies 79 00:04:37,800 --> 00:04:39,800 Speaker 4: was that being too far ahead of your time is 80 00:04:39,839 --> 00:04:45,599 Speaker 4: indistinguishable from being wrong. So yeah, it's painful to say 81 00:04:45,600 --> 00:04:48,960 Speaker 4: something and predict something and then have to wait years 82 00:04:48,960 --> 00:04:52,839 Speaker 4: and years for it to come true. Alan Greenspand famously 83 00:04:52,920 --> 00:04:57,080 Speaker 4: said I think it was in ninety six that we're 84 00:04:57,120 --> 00:05:01,000 Speaker 4: beginning to see signs of irrational exuberance in this, and 85 00:05:01,040 --> 00:05:04,240 Speaker 4: of course the market went straight up for the next 86 00:05:04,240 --> 00:05:07,680 Speaker 4: four years. And you know, there are people who pronounced 87 00:05:07,720 --> 00:05:10,320 Speaker 4: that we were in a stock market bubble. I think 88 00:05:11,440 --> 00:05:14,480 Speaker 4: I can think of one in June of twenty twenty, 89 00:05:15,400 --> 00:05:18,000 Speaker 4: and here we are almost five years later. And of 90 00:05:18,040 --> 00:05:21,160 Speaker 4: course we did stall out in twenty two. But if 91 00:05:21,200 --> 00:05:23,560 Speaker 4: you went out in twenty and weren't smart enough to 92 00:05:23,560 --> 00:05:26,839 Speaker 4: come back in in twenty two, you've missed a big ride. 93 00:05:27,279 --> 00:05:31,360 Speaker 4: So I think, well, you know, one thing I argue 94 00:05:31,400 --> 00:05:34,599 Speaker 4: strenuously Joe, is that in the investment business there's no 95 00:05:34,680 --> 00:05:38,680 Speaker 4: place for certainty. And Mark Twain said, it ain't what 96 00:05:38,760 --> 00:05:40,640 Speaker 4: you don't know that gets you into trouble. It's what 97 00:05:40,680 --> 00:05:43,640 Speaker 4: you know for certain that just ain't true. And so 98 00:05:44,520 --> 00:05:49,280 Speaker 4: you can have opinions, but you should never be certain 99 00:05:49,440 --> 00:05:53,400 Speaker 4: that you're right, and you should never arrange your financial 100 00:05:53,400 --> 00:05:57,599 Speaker 4: affairs on the assumption that your forecast is right, because 101 00:05:57,640 --> 00:06:02,440 Speaker 4: it can be right intellectually or factually irrationally, but just 102 00:06:02,560 --> 00:06:05,920 Speaker 4: take a long time to materialize. And if you can't 103 00:06:05,960 --> 00:06:10,440 Speaker 4: survive between when you take your position and when it 104 00:06:10,880 --> 00:06:15,760 Speaker 4: when your expectation comes true, then obviously it's not something 105 00:06:15,760 --> 00:06:18,679 Speaker 4: you should do. And one of my colleagues once wrote 106 00:06:18,680 --> 00:06:20,400 Speaker 4: a note to his clients. He says, if you name 107 00:06:20,440 --> 00:06:22,480 Speaker 4: a price, don't name a date. And if you name 108 00:06:22,480 --> 00:06:23,679 Speaker 4: a date, don't name a price. 109 00:06:24,360 --> 00:06:26,320 Speaker 2: That's anybody advice or journalist too. 110 00:06:26,800 --> 00:06:30,200 Speaker 4: But anybody who names a price and a date is 111 00:06:30,400 --> 00:06:33,800 Speaker 4: probably going to get carried out of there sooner or later. 112 00:06:35,440 --> 00:06:38,000 Speaker 2: So what was it like then when you hit the 113 00:06:38,240 --> 00:06:41,240 Speaker 2: published button on the note? I think it was called 114 00:06:41,279 --> 00:06:45,040 Speaker 2: bubble dot com and you published it. I think it 115 00:06:45,080 --> 00:06:48,800 Speaker 2: was right at the start of January first. Still, what 116 00:06:48,920 --> 00:06:51,000 Speaker 2: was it, Yeah. 117 00:06:50,880 --> 00:06:53,320 Speaker 4: January, It was January second, two thousand. It was the 118 00:06:53,360 --> 00:06:55,120 Speaker 4: first business day of two thousand. 119 00:06:54,960 --> 00:06:57,360 Speaker 2: And then start later that month. 120 00:06:57,200 --> 00:06:59,960 Speaker 4: Right, yeah, No, I think a little later that year. 121 00:07:00,240 --> 00:07:02,960 Speaker 4: Joe said it was in March. I don't remember exactly. 122 00:07:03,000 --> 00:07:04,360 Speaker 4: I thought it was a little later than that. But 123 00:07:05,480 --> 00:07:08,080 Speaker 4: you know, i'd started writing these memos in nineteen ninety 124 00:07:08,320 --> 00:07:10,240 Speaker 4: I've been writing for ten years. Of course, in those 125 00:07:10,320 --> 00:07:13,560 Speaker 4: days they went out in the mail and to a 126 00:07:13,600 --> 00:07:17,520 Speaker 4: limited audience, just my clients, and you know, for ten 127 00:07:17,600 --> 00:07:20,280 Speaker 4: years I never had a response. And then I spent 128 00:07:20,880 --> 00:07:24,200 Speaker 4: the fall of ninety nine working on this memo bubble 129 00:07:24,200 --> 00:07:27,560 Speaker 4: dot com and was ready to push the button. I 130 00:07:27,600 --> 00:07:30,720 Speaker 4: guess I polished it over Christmas probably and sent it 131 00:07:30,760 --> 00:07:33,720 Speaker 4: out the first day. And you know, let me just 132 00:07:33,840 --> 00:07:36,760 Speaker 4: clarify one thing for the record and for the benefit 133 00:07:36,800 --> 00:07:40,240 Speaker 4: of the listeners. If you read that memo, it does 134 00:07:40,280 --> 00:07:45,280 Speaker 4: not predict the bubble, and it does not say you know, 135 00:07:45,480 --> 00:07:50,320 Speaker 4: the market's going to collapse. All it did is describe 136 00:07:50,360 --> 00:07:56,000 Speaker 4: the current conditions. And that's two different things. Now. I 137 00:07:56,080 --> 00:08:01,960 Speaker 4: don't make predictions. I only describe current conditions. And my 138 00:08:02,080 --> 00:08:04,880 Speaker 4: motto is we never know where we're going, but we're 139 00:08:04,920 --> 00:08:07,440 Speaker 4: sure as help or to know where we are. And 140 00:08:07,520 --> 00:08:10,240 Speaker 4: I believe, you know, this is a little bit of 141 00:08:10,280 --> 00:08:13,400 Speaker 4: a matter of semantics. I believe that where we are, 142 00:08:13,760 --> 00:08:19,040 Speaker 4: if we properly assess it, informs where we're going. But 143 00:08:20,280 --> 00:08:24,760 Speaker 4: I think people who waste their time figuring out making predictions, 144 00:08:25,120 --> 00:08:30,200 Speaker 4: which I'm strongly against, are wasting their time. I think 145 00:08:30,240 --> 00:08:36,160 Speaker 4: that describing current conditions can be done accurately and obviously 146 00:08:36,200 --> 00:08:41,520 Speaker 4: has an impact on what the future holds. So as 147 00:08:41,559 --> 00:08:45,920 Speaker 4: I say, read the memo, I think it reads well 148 00:08:46,000 --> 00:08:49,880 Speaker 4: in retrospect, but don't expect to find a place where 149 00:08:49,880 --> 00:08:51,840 Speaker 4: I say, get out of the market or the market's 150 00:08:51,840 --> 00:08:54,000 Speaker 4: going to collapse or there or in a bubble that's 151 00:08:54,160 --> 00:08:56,640 Speaker 4: going to pop. What I say there is I just 152 00:08:56,720 --> 00:09:01,200 Speaker 4: want to call your attention to all these forms of 153 00:09:01,920 --> 00:09:06,960 Speaker 4: excessive or overheated behavior and let you know what I 154 00:09:07,000 --> 00:09:09,400 Speaker 4: think is going on. That's all it says. 155 00:09:09,760 --> 00:09:13,400 Speaker 3: So in the art of just identifying where we are, 156 00:09:13,440 --> 00:09:16,520 Speaker 3: and when we're talking about financial markets, obviously we can 157 00:09:16,600 --> 00:09:20,720 Speaker 3: use all kinds of ratios, etc. You know, price to earnings, 158 00:09:20,720 --> 00:09:23,880 Speaker 3: price to forward earnings valuations, a million different ratios that 159 00:09:23,920 --> 00:09:26,319 Speaker 3: you can come up with. And then you know there 160 00:09:26,320 --> 00:09:30,280 Speaker 3: are sort of cultural markers. And I remember in summer 161 00:09:30,520 --> 00:09:33,240 Speaker 3: ninety nine, I would get lunch every day at the 162 00:09:33,280 --> 00:09:36,760 Speaker 3: same pizza shop with the pizza shop owner head CNBC 163 00:09:36,920 --> 00:09:39,600 Speaker 3: on and he was trading tech stocs at the time, 164 00:09:39,640 --> 00:09:43,280 Speaker 3: and these other sort of indicators that people are just 165 00:09:43,480 --> 00:09:46,880 Speaker 3: excited about the prospect of making money and making money fast. 166 00:09:47,240 --> 00:09:49,760 Speaker 3: And when you do an assessment and you say, okay, 167 00:09:50,080 --> 00:09:52,320 Speaker 3: here's where we are, how much do you sort of 168 00:09:52,400 --> 00:09:55,960 Speaker 3: hew strictly to the math, so to speak, and how 169 00:09:56,000 --> 00:10:01,640 Speaker 3: do you systematically incorporate other indicators of exuberant which perhaps 170 00:10:01,640 --> 00:10:05,559 Speaker 3: can't always be captured on a Bloomberg terminal for example. 171 00:10:06,440 --> 00:10:10,240 Speaker 4: No, look, I think you're absolutely on the right track, Joe. 172 00:10:10,720 --> 00:10:14,400 Speaker 4: You read the memo. My observations are, I would say 173 00:10:14,480 --> 00:10:19,120 Speaker 4: ninety nine percent what you call cultural markers, which I 174 00:10:19,120 --> 00:10:24,000 Speaker 4: think is great, or behavioral indicators, and one percent math. 175 00:10:24,559 --> 00:10:29,960 Speaker 4: And to me, it's the behavior that is so indicative. 176 00:10:30,360 --> 00:10:33,920 Speaker 4: And in my first book, which is called The Most 177 00:10:33,920 --> 00:10:37,520 Speaker 4: Important Thing, I have something in there called the poor 178 00:10:37,559 --> 00:10:43,760 Speaker 4: Man's Guide to Market Assessment, and it really takes culture, 179 00:10:45,160 --> 00:10:50,800 Speaker 4: mostly cultural markers, and puts them on in two columns 180 00:10:50,880 --> 00:10:56,400 Speaker 4: left and right, and whichever column is prevailing, it tells 181 00:10:56,400 --> 00:10:59,080 Speaker 4: you something. And for example, I say in there that 182 00:10:59,559 --> 00:11:02,559 Speaker 4: if people like me are being invited to cocktail parties 183 00:11:03,040 --> 00:11:06,240 Speaker 4: and are the center of attention and so forth, then 184 00:11:06,640 --> 00:11:09,679 Speaker 4: it probably means that investing is has been doing well 185 00:11:09,920 --> 00:11:14,000 Speaker 4: and everybody's optimistic about it. And it indicates that maybe 186 00:11:14,160 --> 00:11:17,520 Speaker 4: things are too hot, and if people like me are shut, 187 00:11:17,960 --> 00:11:22,079 Speaker 4: not invited, or shunt it off to the corner, maybe 188 00:11:22,200 --> 00:11:25,520 Speaker 4: the markets are too cold, too cheap, and it's time 189 00:11:25,559 --> 00:11:30,480 Speaker 4: to strike. So I think that these behavioral indicators are 190 00:11:30,520 --> 00:11:34,600 Speaker 4: extremely important. And I wrote a memo in I think 191 00:11:34,640 --> 00:11:38,679 Speaker 4: it was the summer of twenty three called taking the Temperature, 192 00:11:39,200 --> 00:11:42,360 Speaker 4: and I describe what I do in this regard as 193 00:11:42,400 --> 00:11:44,720 Speaker 4: taking the temperature of the market to figure out if 194 00:11:44,760 --> 00:11:47,679 Speaker 4: it's hot or cold. And when I was working on 195 00:11:47,720 --> 00:11:50,640 Speaker 4: my second book, which is called Mastering the Market Cycle, 196 00:11:50,679 --> 00:11:52,880 Speaker 4: and I was speaking with my son Andrew, who is 197 00:11:52,920 --> 00:11:55,640 Speaker 4: a venture capitalist, I said to him, you know, I 198 00:11:55,679 --> 00:11:57,719 Speaker 4: think my forecasts over the course of my career have 199 00:11:57,800 --> 00:12:01,720 Speaker 4: been about right. And he says to me, yeah, that's 200 00:12:01,760 --> 00:12:05,240 Speaker 4: because you did it five times in fifty years. Five 201 00:12:05,320 --> 00:12:09,440 Speaker 4: times in fifty years, I found the market either so 202 00:12:09,640 --> 00:12:14,000 Speaker 4: crazy high or crazy low that you could make a 203 00:12:14,040 --> 00:12:19,800 Speaker 4: logical case that was either overextended or too cheap, and 204 00:12:20,280 --> 00:12:22,520 Speaker 4: you could do so with a high degree of confidence. 205 00:12:23,360 --> 00:12:26,760 Speaker 4: And I recount the five times I did it and why. 206 00:12:27,400 --> 00:12:29,680 Speaker 4: But you know, if I had tried to do it 207 00:12:29,720 --> 00:12:32,880 Speaker 4: five hundred times or five thousand times in my career, 208 00:12:33,080 --> 00:12:34,880 Speaker 4: I mean I've probably been in an investment business for 209 00:12:34,920 --> 00:12:38,000 Speaker 4: about almost twenty thousand days. If I tried to do 210 00:12:38,080 --> 00:12:43,000 Speaker 4: it five thousand times every fourth day, you know, I'd 211 00:12:43,040 --> 00:12:47,840 Speaker 4: probably be fifty to fifty at best. So to me, 212 00:12:48,559 --> 00:12:55,800 Speaker 4: it's noting extremes of behavior. And that's what I was 213 00:12:55,840 --> 00:12:58,360 Speaker 4: doing with bubble dot com. And that's what I did 214 00:12:58,400 --> 00:13:13,840 Speaker 4: in the five other observations. 215 00:13:17,280 --> 00:13:22,640 Speaker 2: So you've emphasized that you're describing current conditions, not necessarily 216 00:13:22,800 --> 00:13:29,480 Speaker 2: making predictions. I'm curious how you translate those, you know, 217 00:13:29,679 --> 00:13:36,200 Speaker 2: let's say, accurate assessments of the current environment into actionable 218 00:13:36,920 --> 00:13:40,120 Speaker 2: investments or I guess another way of asking this is, 219 00:13:40,200 --> 00:13:43,880 Speaker 2: you know, if you're looking at stocks and thinking they're 220 00:13:43,920 --> 00:13:48,280 Speaker 2: overvalued or there might be signs of overvaluation, how does 221 00:13:48,320 --> 00:13:51,480 Speaker 2: that translate into the credit space? 222 00:13:52,360 --> 00:14:01,360 Speaker 4: Good question, Tracy. To me, the main access along which 223 00:14:01,559 --> 00:14:08,520 Speaker 4: one establishes one's behavior as an investor is the access 224 00:14:08,520 --> 00:14:14,360 Speaker 4: that runs from aggressive to defensive. Each of us should 225 00:14:14,360 --> 00:14:19,480 Speaker 4: figure out based on our personal conditions, our wealth, our income, 226 00:14:19,560 --> 00:14:25,600 Speaker 4: our needs are dependents, our age plans, et cetera, and 227 00:14:25,720 --> 00:14:29,880 Speaker 4: also ability to withstand fluctuations. Each of us should figure 228 00:14:29,880 --> 00:14:33,360 Speaker 4: out what our normal risk posture should be. Normally, should 229 00:14:33,360 --> 00:14:36,160 Speaker 4: I be a low risk person normal or a high 230 00:14:36,240 --> 00:14:42,680 Speaker 4: risk person? And then you should build the portfolio that 231 00:14:43,360 --> 00:14:49,280 Speaker 4: responds to that decision. But then you might try to 232 00:14:49,440 --> 00:14:53,360 Speaker 4: vary your position from time to time as conditions in 233 00:14:53,400 --> 00:14:57,000 Speaker 4: the markets change. And I believe that as I said 234 00:14:57,040 --> 00:15:01,360 Speaker 4: that the main access along which one should should think 235 00:15:01,360 --> 00:15:07,600 Speaker 4: about varying one's position is between offense and defense. So 236 00:15:08,000 --> 00:15:10,920 Speaker 4: you know, you establish a position which is your normal position, 237 00:15:10,960 --> 00:15:13,080 Speaker 4: which has a certain amount of aggressiveness, is a certain 238 00:15:13,120 --> 00:15:16,240 Speaker 4: amount of defensiveness. But then are there times when you 239 00:15:16,240 --> 00:15:19,000 Speaker 4: should become more aggressive and are times when you should 240 00:15:19,000 --> 00:15:21,720 Speaker 4: become more defensive. And that's what I did on those 241 00:15:21,720 --> 00:15:25,720 Speaker 4: five occasions. And I'll give you an example. And by 242 00:15:25,760 --> 00:15:28,640 Speaker 4: the way, these are all described in Taking the Temperature. 243 00:15:29,200 --> 00:15:33,120 Speaker 4: And I've mentioned or you've mentioned the memos from time 244 00:15:33,160 --> 00:15:35,480 Speaker 4: to time, and I just want to note for the 245 00:15:35,760 --> 00:15:40,480 Speaker 4: listeners that they're all available at Oaktreecapital dot com under 246 00:15:40,520 --> 00:15:43,600 Speaker 4: the heading of Insights. There's thirty five years at worth 247 00:15:43,640 --> 00:15:47,520 Speaker 4: of memos. There about two hundred and there's no price 248 00:15:47,560 --> 00:15:50,080 Speaker 4: of admission. They're all free and anybody wants to sign 249 00:15:50,160 --> 00:15:53,160 Speaker 4: up for a subscription can do so. But you know, 250 00:15:53,360 --> 00:15:56,720 Speaker 4: in Taking the Temperature, I described the way in nine 251 00:15:56,760 --> 00:16:01,760 Speaker 4: in five oh six, I was getting really leary of 252 00:16:01,800 --> 00:16:07,520 Speaker 4: the markets. What was my indicator, my indicator, or as 253 00:16:07,600 --> 00:16:13,040 Speaker 4: Joe would say, my cultural marker. My indicator was that 254 00:16:13,120 --> 00:16:16,320 Speaker 4: I'm reading in the in the paper about new deals 255 00:16:16,320 --> 00:16:21,360 Speaker 4: that are getting done, and the deals were crazy deals, 256 00:16:22,280 --> 00:16:26,120 Speaker 4: deals that in my opinion, should not get done. They 257 00:16:26,120 --> 00:16:29,920 Speaker 4: were too good for the issuer and in my opinion, 258 00:16:29,960 --> 00:16:33,960 Speaker 4: too bad for the investor. And the deals were getting 259 00:16:33,960 --> 00:16:38,400 Speaker 4: done anyway. And you know, one of the investor's main 260 00:16:38,520 --> 00:16:45,880 Speaker 4: jobs is to decline to engage in stupid deals. And 261 00:16:46,280 --> 00:16:48,440 Speaker 4: you know, if somebody comes and says, you know, I'm 262 00:16:48,480 --> 00:16:50,680 Speaker 4: going to sell you a gold mine and if you 263 00:16:50,720 --> 00:16:53,240 Speaker 4: can put up a million dollars, you're going to make 264 00:16:53,480 --> 00:16:55,960 Speaker 4: one hundred thousand dollars a month for the rest of 265 00:16:56,000 --> 00:16:58,960 Speaker 4: your life. Your job is to say no, that's too 266 00:16:59,000 --> 00:17:03,400 Speaker 4: good to be true. Or you know, if I say, 267 00:17:03,600 --> 00:17:06,680 Speaker 4: I think there's a gold mine in Australia and if 268 00:17:06,680 --> 00:17:09,000 Speaker 4: you put up a million dollars, it'll probably give you 269 00:17:10,080 --> 00:17:11,960 Speaker 4: tay you a million dollars a year the rest of 270 00:17:12,000 --> 00:17:14,159 Speaker 4: your life. If we find gold, you should say no, 271 00:17:14,280 --> 00:17:16,679 Speaker 4: that sounds too risky. You know, I just think that 272 00:17:17,160 --> 00:17:21,359 Speaker 4: we're unlikely to find gold. But if you see those 273 00:17:21,400 --> 00:17:25,439 Speaker 4: deals getting done, it tells you that investors are not 274 00:17:25,560 --> 00:17:31,760 Speaker 4: applying vigilance. They're not doing their job of resisting deals 275 00:17:31,760 --> 00:17:35,080 Speaker 4: that are too risky or structured not in their favor, 276 00:17:36,440 --> 00:17:39,439 Speaker 4: and in five oh six, I was seeing these deals 277 00:17:39,440 --> 00:17:43,600 Speaker 4: done that made absolutely no sense. And I describe myself 278 00:17:43,640 --> 00:17:47,560 Speaker 4: as wearing out the carpet between my office and my partner, 279 00:17:47,600 --> 00:17:49,919 Speaker 4: Bruce carsh And you know, every day I would go 280 00:17:49,960 --> 00:17:51,919 Speaker 4: and say, look at this piece of crap that you 281 00:17:51,920 --> 00:17:55,320 Speaker 4: got issued yesterday. A deal like this shouldn't get done, 282 00:17:55,480 --> 00:17:58,560 Speaker 4: and if a deal like this can get done, there's 283 00:17:58,600 --> 00:18:02,800 Speaker 4: something wrong. Ninety nine percent of my observation at that 284 00:18:02,880 --> 00:18:11,199 Speaker 4: time that investors were not being suitably skeptical, cautious, demanding, 285 00:18:12,480 --> 00:18:16,359 Speaker 4: and risk averse. And you know, Buffett has a great 286 00:18:16,400 --> 00:18:19,440 Speaker 4: saying which feeds right into this. He says, the less 287 00:18:19,480 --> 00:18:23,439 Speaker 4: prudence with which others conduct their affairs, the greater the 288 00:18:23,440 --> 00:18:27,399 Speaker 4: prudence with which we must conduct our own affairs. And 289 00:18:27,440 --> 00:18:31,919 Speaker 4: when others are wacky, we should head to the sidelines. 290 00:18:32,960 --> 00:18:37,880 Speaker 4: That was the foundation of that conclusion. Now what happened 291 00:18:38,320 --> 00:18:40,719 Speaker 4: was it turned out we were in a housing bubble, 292 00:18:41,160 --> 00:18:43,919 Speaker 4: and the housing bubble gave rise to a mortgage bubble, 293 00:18:44,359 --> 00:18:49,160 Speaker 4: and the mortgages, the subprime mortgages issued to people who 294 00:18:49,600 --> 00:18:52,160 Speaker 4: could not or would not document their income of their 295 00:18:52,200 --> 00:18:56,879 Speaker 4: assets were packaged into mortgage backed securities, and the people 296 00:18:56,880 --> 00:19:00,879 Speaker 4: who bought the riskier tranches of those securities, lost all 297 00:19:00,880 --> 00:19:05,040 Speaker 4: their money, which the rating agencies rated very highly, because 298 00:19:05,040 --> 00:19:08,680 Speaker 4: they didn't understand it. And this was going on en mass, 299 00:19:09,040 --> 00:19:11,320 Speaker 4: and it was the collapse of the mortgage backed securities, 300 00:19:11,600 --> 00:19:15,560 Speaker 4: of which the banks had in many cases retained the 301 00:19:15,640 --> 00:19:19,520 Speaker 4: risky portions when they structured them. It was the collapse 302 00:19:19,560 --> 00:19:23,760 Speaker 4: that took you know, bear Stearns and Merrill Lynch and 303 00:19:24,240 --> 00:19:29,720 Speaker 4: Lehman Brothers and other AIG, etc. Out of business as 304 00:19:29,840 --> 00:19:34,000 Speaker 4: independent endings. I hastened to point out I didn't know 305 00:19:34,040 --> 00:19:38,760 Speaker 4: anything about mortgage backed securities. I didn't understand subprime. I 306 00:19:38,800 --> 00:19:40,679 Speaker 4: didn't know what was going on. It was going on 307 00:19:40,760 --> 00:19:44,720 Speaker 4: in a distant corner of the investment world which I 308 00:19:44,840 --> 00:19:48,520 Speaker 4: was not in on. I just knew that the climate 309 00:19:49,160 --> 00:19:55,560 Speaker 4: was too permissive and the mortgage backed developments were a 310 00:19:55,680 --> 00:20:00,320 Speaker 4: manifestation of that. But your question, I always try to 311 00:20:00,359 --> 00:20:03,240 Speaker 4: come back to the question. Your question was what do 312 00:20:03,280 --> 00:20:08,639 Speaker 4: you do about? So what did we do? We sold 313 00:20:09,040 --> 00:20:13,439 Speaker 4: most of our real estate holdings, We reduced holdings in 314 00:20:13,520 --> 00:20:20,640 Speaker 4: many areas. We liquidated holdings in large funds, our opportunistic 315 00:20:20,680 --> 00:20:27,399 Speaker 4: debt funds that we had formed in two four ET cetera. 316 00:20:27,880 --> 00:20:33,159 Speaker 4: We sold those holdings. We raised either small funds or 317 00:20:33,200 --> 00:20:40,159 Speaker 4: no funds, and we waited for this behavior to produce opportunities. 318 00:20:40,440 --> 00:20:46,720 Speaker 4: After it passed. On the first day of seven, Bruce 319 00:20:46,760 --> 00:20:49,960 Speaker 4: and I sent the memo to our clients saying we'd 320 00:20:50,000 --> 00:20:52,720 Speaker 4: like to have three and a half billion dollars for 321 00:20:52,920 --> 00:20:56,879 Speaker 4: distress debt fund. The largest distress fund in history had 322 00:20:56,920 --> 00:21:02,159 Speaker 4: been two billion. It was our one fund. We wanted 323 00:21:02,200 --> 00:21:04,440 Speaker 4: three and a half because we thought there was something 324 00:21:04,480 --> 00:21:08,600 Speaker 4: big coming, and within a month we had eight billion. 325 00:21:09,480 --> 00:21:12,600 Speaker 4: We went to our investors, we said we can't use 326 00:21:12,600 --> 00:21:14,840 Speaker 4: eight billion, we'll take three and a half. We closed 327 00:21:14,840 --> 00:21:19,160 Speaker 4: that fund in March of seven, but we said we'd 328 00:21:19,240 --> 00:21:21,600 Speaker 4: like to have the rest of your appetite for a 329 00:21:21,640 --> 00:21:26,119 Speaker 4: stand by fund, and we continued for a year to 330 00:21:26,200 --> 00:21:29,640 Speaker 4: raise a stand by fund again in an area where 331 00:21:29,640 --> 00:21:31,720 Speaker 4: the biggest fund in history was two billion. We raised 332 00:21:31,720 --> 00:21:36,479 Speaker 4: eleven billion and that was our fund seven B and 333 00:21:36,520 --> 00:21:39,360 Speaker 4: we put it on the shelf and we said this 334 00:21:39,400 --> 00:21:42,880 Speaker 4: is for when the stuff hits the fan, and we're 335 00:21:42,880 --> 00:21:45,280 Speaker 4: not going to invest it until that time, and we're 336 00:21:45,280 --> 00:21:48,840 Speaker 4: not going to charge any fees, and it's just commitments 337 00:21:48,840 --> 00:21:50,760 Speaker 4: on the shelf. Because we'd like to have capital we 338 00:21:50,760 --> 00:21:57,080 Speaker 4: can draw. And when Lehman went bankrupt on September fifteenth 339 00:21:57,119 --> 00:22:02,120 Speaker 4: of eight, we had that eleven billion dollars. We had 340 00:22:02,119 --> 00:22:05,359 Speaker 4: only invested about ten one billion. We had ten billion 341 00:22:05,800 --> 00:22:09,000 Speaker 4: that we could call on, and so unlike most people, 342 00:22:09,040 --> 00:22:10,719 Speaker 4: we didn't have to worry about where are we going 343 00:22:10,760 --> 00:22:16,280 Speaker 4: to get money, or can we invest or our client's 344 00:22:16,320 --> 00:22:19,720 Speaker 4: going to withdraw their money. Rather than we had commitments, 345 00:22:19,760 --> 00:22:23,160 Speaker 4: we were sure we could draw and so we could 346 00:22:23,800 --> 00:22:29,600 Speaker 4: plunge in and we started to invest Bruce. Bruce does 347 00:22:29,600 --> 00:22:32,879 Speaker 4: the investing, and we developed our position jointly and we 348 00:22:33,040 --> 00:22:37,040 Speaker 4: decided to get down to work. So the next week 349 00:22:37,560 --> 00:22:42,160 Speaker 4: after the Lehman bankruptcy was Friday fifteenth. We started investing 350 00:22:42,240 --> 00:22:46,240 Speaker 4: and he invested for that fund a loan four hundred 351 00:22:46,240 --> 00:22:48,240 Speaker 4: and fifty million dollars a week on average for the 352 00:22:48,280 --> 00:22:52,960 Speaker 4: next fifteen weeks, that seven billion in one quarter. Remember 353 00:22:53,040 --> 00:22:54,960 Speaker 4: in an area where the biggest fund in history was 354 00:22:55,000 --> 00:23:00,520 Speaker 4: two billions. Why because we had prepared mentally, we had 355 00:23:00,600 --> 00:23:08,520 Speaker 4: noted the bad climate. We had prepared for a denoument, 356 00:23:09,480 --> 00:23:15,800 Speaker 4: and we swung into action when it arrived. And I 357 00:23:15,840 --> 00:23:18,160 Speaker 4: was very proud of him for taking that position, and 358 00:23:18,320 --> 00:23:21,040 Speaker 4: people on the street have told me that in that 359 00:23:21,160 --> 00:23:24,639 Speaker 4: quarter we were the only buyer. Well, that's how you 360 00:23:24,680 --> 00:23:27,600 Speaker 4: get good deals. If you can buy where nobody else 361 00:23:27,680 --> 00:23:30,000 Speaker 4: is buying, you get your pick of the litter at 362 00:23:30,040 --> 00:23:34,000 Speaker 4: low prices. So that's I just gave you a four 363 00:23:34,080 --> 00:23:37,679 Speaker 4: or five year I guess four year description of a process. 364 00:23:38,040 --> 00:23:42,160 Speaker 4: But man, you have to be patient because in five 365 00:23:42,160 --> 00:23:45,480 Speaker 4: to six we were doing nothing, just selling, and we 366 00:23:45,480 --> 00:23:49,639 Speaker 4: were not rewarded in five or six for that behavior. 367 00:23:50,080 --> 00:23:54,280 Speaker 4: The reward came at the end of eight. But you know, 368 00:23:54,560 --> 00:23:57,879 Speaker 4: I think it's not everybody's in a position to apply 369 00:23:58,000 --> 00:24:01,680 Speaker 4: that process to that extent, but I think it describes 370 00:24:01,720 --> 00:24:03,840 Speaker 4: the process, and of course I use it as an 371 00:24:03,880 --> 00:24:07,000 Speaker 4: example for one simple reason. It was successful. 372 00:24:08,359 --> 00:24:11,159 Speaker 3: Always a good always a good outcome when you have 373 00:24:11,240 --> 00:24:15,159 Speaker 3: a success from it. Obviously, fantastic story your latest memo 374 00:24:15,440 --> 00:24:17,960 Speaker 3: which inspired us to reach out and want to chat 375 00:24:18,000 --> 00:24:20,800 Speaker 3: with you on Bubble Watch, And as you mentioned, is 376 00:24:20,840 --> 00:24:24,119 Speaker 3: the twenty fifth anniversary of the bubble dot com memo, 377 00:24:24,200 --> 00:24:27,720 Speaker 3: and so twenty five year anniversaries are just probably a 378 00:24:27,760 --> 00:24:30,040 Speaker 3: good time to go back. But on the other hand, 379 00:24:30,480 --> 00:24:34,080 Speaker 3: there is also this moment that we alluded to in 380 00:24:34,119 --> 00:24:37,760 Speaker 3: the intro of incredible enthusiasm really for like a handful 381 00:24:37,800 --> 00:24:42,800 Speaker 3: of tech ai related names that's lifting the entire market up. 382 00:24:43,440 --> 00:24:45,080 Speaker 3: Is this one of the moments? I mean, what is 383 00:24:45,080 --> 00:24:47,879 Speaker 3: the temperature right now as you see it? You've mentioned 384 00:24:47,880 --> 00:24:51,119 Speaker 3: you've had five moments sort of maybe five calls in 385 00:24:51,160 --> 00:24:53,280 Speaker 3: your career. Is this a sixth right now? 386 00:24:54,800 --> 00:24:59,960 Speaker 4: No, it's not okay because you asked before. Behavioral or numerical. 387 00:25:00,400 --> 00:25:04,520 Speaker 4: The main observations today are numerical. The peaking ratio on 388 00:25:04,600 --> 00:25:08,280 Speaker 4: the S and P five hundred is elevated relative to 389 00:25:08,640 --> 00:25:13,880 Speaker 4: historic norms, and the so called Magnificent seven, the biggest 390 00:25:13,920 --> 00:25:18,280 Speaker 4: companies in the S and P dominate its behavior. Are 391 00:25:19,240 --> 00:25:23,760 Speaker 4: you going up or have been going up rapidly? And 392 00:25:24,320 --> 00:25:29,080 Speaker 4: they're hot stocks, And when you see one group perform 393 00:25:29,160 --> 00:25:31,280 Speaker 4: especially well, you have to ask whether it's a bubble. 394 00:25:31,359 --> 00:25:34,800 Speaker 4: And the S and P, of course, has gone up 395 00:25:35,000 --> 00:25:38,200 Speaker 4: more than twenty percent a year for the last two years, 396 00:25:38,560 --> 00:25:42,240 Speaker 4: and it's only the I think the fifth time according 397 00:25:42,280 --> 00:25:45,560 Speaker 4: to JP Morgan, the fifth time in history. So you 398 00:25:45,680 --> 00:25:50,840 Speaker 4: have to ask these questions. But the troubling aspects those 399 00:25:52,119 --> 00:25:56,680 Speaker 4: are numerical and what I say in the memo is that, 400 00:25:57,080 --> 00:26:03,439 Speaker 4: in my opinion, it lacks the behavioral aspects. 401 00:26:02,880 --> 00:26:03,520 Speaker 2: Of a bubble. 402 00:26:03,760 --> 00:26:05,480 Speaker 4: And I talk about some of them, and I say 403 00:26:05,520 --> 00:26:10,440 Speaker 4: that a bubble is not just a numerical it is behavioral. 404 00:26:10,840 --> 00:26:15,280 Speaker 4: And a bubble is really it's not a rise. It's 405 00:26:15,400 --> 00:26:19,440 Speaker 4: that's a bull market. It's not high prices. A bubble 406 00:26:19,600 --> 00:26:24,040 Speaker 4: is a temporary MEMI in which people are so agog 407 00:26:24,160 --> 00:26:28,600 Speaker 4: at things that they throw over all discipline, all caution, 408 00:26:28,960 --> 00:26:31,080 Speaker 4: and I just don't. It just doesn't feel to me 409 00:26:31,200 --> 00:26:34,840 Speaker 4: like we're there. We're high priced, I say, lofty, but 410 00:26:34,920 --> 00:26:39,800 Speaker 4: not nutty. And the bubbles I've seen and I've lived through, 411 00:26:39,960 --> 00:26:44,480 Speaker 4: starting with the day I joined this business in sixty nine, 412 00:26:45,400 --> 00:26:47,480 Speaker 4: we had what we call was called the nifty to fifty. 413 00:26:48,720 --> 00:26:50,560 Speaker 4: What you see going on is what they call in 414 00:26:51,000 --> 00:26:55,760 Speaker 4: literature the willing suspension of this belief. You know, I 415 00:26:55,880 --> 00:26:59,240 Speaker 4: know it's high, but if I don't go in, I 416 00:26:59,280 --> 00:27:06,480 Speaker 4: could miss something. Or I know it's high, but I 417 00:27:06,480 --> 00:27:08,800 Speaker 4: don't think it's going to end tomorrow. And by the way, 418 00:27:08,920 --> 00:27:12,600 Speaker 4: it's if it ends, I'll just get out. And of course, 419 00:27:12,880 --> 00:27:15,040 Speaker 4: as I mentioned in the memo, the real hole mark 420 00:27:15,760 --> 00:27:18,800 Speaker 4: of a bubble is when people say it's so great 421 00:27:19,560 --> 00:27:21,879 Speaker 4: this thing we're talking about, whether it's the nifty to 422 00:27:21,920 --> 00:27:26,480 Speaker 4: fifty stocks in sixty nine or Nvidia today or TMT 423 00:27:27,000 --> 00:27:31,960 Speaker 4: in ninety nine, they say it's so great that there's 424 00:27:31,960 --> 00:27:36,360 Speaker 4: no price too high. And that was the official dictum 425 00:27:37,040 --> 00:27:41,400 Speaker 4: in the money center banks in sixty nine. With God 426 00:27:41,440 --> 00:27:43,560 Speaker 4: to the nicety fifty. It was the official victim. With 427 00:27:43,760 --> 00:27:47,520 Speaker 4: regard to the Internet in ninety nine, what do people say? 428 00:27:47,840 --> 00:27:51,880 Speaker 4: The Internet will change the world, and so for the stocks, 429 00:27:51,920 --> 00:27:55,720 Speaker 4: there's no price too high. Well, guess what. The Internet 430 00:27:55,720 --> 00:27:59,240 Speaker 4: did change the world. But because they bid up the 431 00:27:59,280 --> 00:28:02,280 Speaker 4: stock so high, the people who invested in them lost 432 00:28:02,440 --> 00:28:09,480 Speaker 4: almost all their money. So, you know, people become psychologically 433 00:28:09,560 --> 00:28:16,520 Speaker 4: unhinged and not tethered to reality, and their portfolios slipped 434 00:28:16,520 --> 00:28:20,520 Speaker 4: their moorings, and they think that they found the perpetual 435 00:28:20,560 --> 00:28:23,080 Speaker 4: motion machine or a tree that'll grow to the sky. 436 00:28:24,040 --> 00:28:28,240 Speaker 4: And I just don't see those psychological or behavioral aspects today. 437 00:28:30,359 --> 00:28:33,680 Speaker 2: So one of the things that Joe likes to emphasize 438 00:28:33,720 --> 00:28:36,919 Speaker 2: when it comes to well the tech bubble specifically, is 439 00:28:36,960 --> 00:28:41,040 Speaker 2: the importance of stories or narratives. So one of the 440 00:28:41,080 --> 00:28:43,880 Speaker 2: things that will drive this kind of behavior is you'll 441 00:28:43,880 --> 00:28:47,800 Speaker 2: see a company come out with like this huge ambition. 442 00:28:48,760 --> 00:28:51,720 Speaker 2: I think Joe's favorite example wasn't there like a car 443 00:28:51,760 --> 00:28:55,320 Speaker 2: company that claimed to have found the cure to AIDS. 444 00:28:55,520 --> 00:28:57,960 Speaker 3: That's right, this is a good story. This was nineteen 445 00:28:58,040 --> 00:29:00,640 Speaker 3: ninety nine, and people were just so up mystic that 446 00:29:00,720 --> 00:29:03,800 Speaker 3: they thought he used car dealership in Nevada head in 447 00:29:03,920 --> 00:29:07,160 Speaker 3: their back office founding cure for AIDS. 448 00:29:07,320 --> 00:29:08,880 Speaker 2: That never sees a story story. 449 00:29:09,040 --> 00:29:10,880 Speaker 3: Yeah, well, I'll tweet out a link when this episode 450 00:29:10,960 --> 00:29:11,320 Speaker 3: comes out. 451 00:29:11,600 --> 00:29:15,280 Speaker 2: So nowadays, there's an argument that some people make that 452 00:29:15,360 --> 00:29:18,840 Speaker 2: we have a faster tech cycle than ever, and that 453 00:29:18,960 --> 00:29:23,840 Speaker 2: means more stories can be generated more quickly. And given 454 00:29:23,880 --> 00:29:26,880 Speaker 2: that you're a veteran in the space, can you maybe 455 00:29:26,880 --> 00:29:31,800 Speaker 2: compare and contrast the tech cycle now to previous history. 456 00:29:32,680 --> 00:29:36,640 Speaker 4: Well, listen, Tracy number one, I'm not an equity guy. 457 00:29:36,800 --> 00:29:39,280 Speaker 4: Number two, I'm not a tech person. I have no 458 00:29:40,120 --> 00:29:44,520 Speaker 4: personal knowledge of the tech companies of today. I have 459 00:29:44,600 --> 00:29:49,400 Speaker 4: an idea about AI. I've seen it do wonderful things. 460 00:29:49,960 --> 00:29:53,600 Speaker 4: So far. Most of my direct experience is with what 461 00:29:53,680 --> 00:29:56,440 Speaker 4: I would call parlor games. You know, I did an 462 00:29:56,440 --> 00:30:01,840 Speaker 4: interview like this one with a Korean media company that 463 00:30:01,880 --> 00:30:06,080 Speaker 4: I've worked with over the over the years. They sent 464 00:30:06,160 --> 00:30:09,520 Speaker 4: me a video clip of it, and in the video clip, 465 00:30:09,800 --> 00:30:16,800 Speaker 4: I'm sitting there speaking Korean. It wasn't titles, it wasn't dabbed. 466 00:30:17,560 --> 00:30:21,920 Speaker 4: I'm speaking Korean, and not only it, and it's it's 467 00:30:21,960 --> 00:30:24,400 Speaker 4: not somebody else's voice coming out of my mouth. It's 468 00:30:24,520 --> 00:30:28,280 Speaker 4: my voice coming out of my mouth in Korean, and 469 00:30:28,360 --> 00:30:33,840 Speaker 4: my lips are moving correctly. Now that's an incredible accomplishment. 470 00:30:34,240 --> 00:30:37,040 Speaker 4: I don't know if it's a money maker, but so 471 00:30:37,480 --> 00:30:40,040 Speaker 4: I guess what I'm saying is, I don't know exactly 472 00:30:40,080 --> 00:30:43,000 Speaker 4: how AI is going to be used in the future, 473 00:30:43,520 --> 00:30:47,520 Speaker 4: but I can imagine that it's going to have a 474 00:30:47,560 --> 00:30:53,920 Speaker 4: significant impact when when computers can start thinking and doing 475 00:30:53,960 --> 00:30:58,720 Speaker 4: things like that, it will change the world and jobs 476 00:30:58,760 --> 00:31:00,800 Speaker 4: are going to be created, jobs are going to be lost, 477 00:31:01,360 --> 00:31:05,360 Speaker 4: efficiencies are going to be created, maybe whole new products. 478 00:31:05,600 --> 00:31:09,800 Speaker 4: But I listed the memo a couple of the mistakes 479 00:31:09,840 --> 00:31:12,160 Speaker 4: people make, and I saw it with the nifty fifty 480 00:31:12,160 --> 00:31:14,720 Speaker 4: by the way, so that in nineteen sixty nine, this 481 00:31:14,880 --> 00:31:16,960 Speaker 4: was a list of roughly fifty companies the best and 482 00:31:17,040 --> 00:31:21,240 Speaker 4: fastest growing companies in America, Companies that were so great 483 00:31:21,320 --> 00:31:23,800 Speaker 4: that number one nothing bad could ever happen A number two. 484 00:31:23,800 --> 00:31:26,160 Speaker 4: As I said, there was no price too high. And 485 00:31:26,520 --> 00:31:28,560 Speaker 4: if you bought those docks in sixty nine, you held 486 00:31:28,600 --> 00:31:31,040 Speaker 4: them for five years. As I recall, you lost about 487 00:31:31,080 --> 00:31:34,600 Speaker 4: ninety five percent of money because the price turned out 488 00:31:34,640 --> 00:31:36,560 Speaker 4: to have been to I, and it came down by 489 00:31:36,920 --> 00:31:39,800 Speaker 4: ninety percent the pe ratio. And some of them ran 490 00:31:39,840 --> 00:31:43,440 Speaker 4: into fundamental problems and had to be rescued, or went 491 00:31:43,440 --> 00:31:49,560 Speaker 4: through bankruptcy or disappeared from existence. So people assume that 492 00:31:49,720 --> 00:31:54,080 Speaker 4: the trends that are underway will continue. One is the 493 00:31:54,120 --> 00:31:56,840 Speaker 4: trend toward the internet in ninety nine, another is the 494 00:31:56,840 --> 00:31:59,760 Speaker 4: trend toward AI today, and that it will be of 495 00:31:59,800 --> 00:32:05,200 Speaker 4: great consequence, and I'm sure it will. They also believe, however, 496 00:32:05,320 --> 00:32:08,480 Speaker 4: that the companies that are successful today will continue to 497 00:32:08,520 --> 00:32:13,800 Speaker 4: be successful, that they won't be challenged or disrupted or displaced. 498 00:32:14,480 --> 00:32:18,040 Speaker 4: When the thinking really gets optimistic, they conclude that every 499 00:32:18,080 --> 00:32:22,080 Speaker 4: company can succeed, and we know that that's highly unlikely. 500 00:32:22,160 --> 00:32:24,080 Speaker 4: There are going to be winners and losers. We can't 501 00:32:24,080 --> 00:32:27,120 Speaker 4: always predict which is which. If we find a company 502 00:32:27,200 --> 00:32:30,360 Speaker 4: that's that's a leader today and dominant, and we pay 503 00:32:30,360 --> 00:32:35,240 Speaker 4: a price consistent with that dominance, and they turn out 504 00:32:35,320 --> 00:32:38,320 Speaker 4: not to be dominant. Price may turn out to have 505 00:32:38,320 --> 00:32:44,160 Speaker 4: been excessive, and then ultimately people engage in what's called 506 00:32:44,200 --> 00:32:48,280 Speaker 4: lottery thinking, or what I call lottery, which is, well, 507 00:32:49,120 --> 00:32:53,240 Speaker 4: it's nowhere as a competitor in this new thing, but 508 00:32:54,240 --> 00:32:57,840 Speaker 4: you know, maybe it has a two percent chance of 509 00:32:58,760 --> 00:33:00,920 Speaker 4: being becoming a big one. Are in going up a 510 00:33:00,960 --> 00:33:04,720 Speaker 4: thousand times? And if it could go up a thousand times, 511 00:33:05,040 --> 00:33:07,960 Speaker 4: then I can pay a pe ratio of one hundred 512 00:33:08,240 --> 00:33:15,760 Speaker 4: x because I'll still make money. So they will buy 513 00:33:15,840 --> 00:33:20,120 Speaker 4: into things that have a very low probability of producing 514 00:33:20,160 --> 00:33:23,760 Speaker 4: a very good outcome. And that's like buying a ticket 515 00:33:23,800 --> 00:33:27,640 Speaker 4: in the lottery, and most lottery tickets are losers. But 516 00:33:27,760 --> 00:33:30,239 Speaker 4: this is what happens in bubbles. Now. You asked me 517 00:33:30,280 --> 00:33:33,240 Speaker 4: to differentiate. Since I'm not an expert on AI, I 518 00:33:33,280 --> 00:33:36,760 Speaker 4: can't differentiate. But I think there's a very good comparison 519 00:33:36,840 --> 00:33:40,320 Speaker 4: to the Internet. We expected the Internet to change the world. 520 00:33:41,240 --> 00:33:46,160 Speaker 4: We can't imagine today living in the pre ninety five 521 00:33:46,200 --> 00:33:50,920 Speaker 4: world without all the tech we have today. And yet 522 00:33:52,040 --> 00:33:56,920 Speaker 4: the vast majority of internet and e commerce companies that 523 00:33:56,960 --> 00:34:00,560 Speaker 4: were minted in ninety eight, ninety nine, two thousand are 524 00:34:00,560 --> 00:34:03,800 Speaker 4: out of business and worthless. I'm not sure it's going 525 00:34:03,840 --> 00:34:06,960 Speaker 4: to be the case with AI, but it has to 526 00:34:06,960 --> 00:34:09,719 Speaker 4: give you a caution. That's all I'm saying. Just keep 527 00:34:09,760 --> 00:34:14,759 Speaker 4: your eyes open and don't drop all reason in a 528 00:34:14,840 --> 00:34:16,640 Speaker 4: rush to get in. And by the way, one of 529 00:34:16,640 --> 00:34:20,080 Speaker 4: the great differences in a bubble is that usually people 530 00:34:20,120 --> 00:34:23,440 Speaker 4: are afraid of losing money. But one of the hallmarks 531 00:34:23,480 --> 00:34:27,359 Speaker 4: of the bubble is that people forget to worry about 532 00:34:27,400 --> 00:34:32,040 Speaker 4: losing money and only worry about missing out FOMO. When 533 00:34:32,080 --> 00:34:35,840 Speaker 4: Fomo takes over it, people say, you know, yeah, well, 534 00:34:36,200 --> 00:34:40,880 Speaker 4: you know, the price seems high. But if my competitor 535 00:34:41,040 --> 00:34:44,120 Speaker 4: or my golf buddy or my brother in law buys 536 00:34:44,120 --> 00:34:47,000 Speaker 4: it and I don't buy it and it triples, I'm 537 00:34:47,000 --> 00:34:51,880 Speaker 4: going to kill myself. So I got to buy it regardless. 538 00:34:52,280 --> 00:34:55,520 Speaker 4: And you know, so, I think, I guess, maybe to 539 00:34:55,560 --> 00:34:58,320 Speaker 4: sum up on bubbles, a great way to characterize that 540 00:34:58,760 --> 00:35:02,880 Speaker 4: is that it's when say I gotta buy it regardless, 541 00:35:02,920 --> 00:35:07,359 Speaker 4: and I would argue prudently that nobody should ever do 542 00:35:07,480 --> 00:35:20,360 Speaker 4: something regardless. 543 00:35:24,800 --> 00:35:27,839 Speaker 3: I guess I'm interested a little bit more in why 544 00:35:27,880 --> 00:35:33,640 Speaker 3: you don't see those characteristics today, because all people talk 545 00:35:33,680 --> 00:35:36,719 Speaker 3: about is AI we just had the president, you know, 546 00:35:36,760 --> 00:35:39,480 Speaker 3: make this big announcement We're gonna spend half a trillion 547 00:35:39,560 --> 00:35:42,759 Speaker 3: on data centers and so forth. It's, you know, just 548 00:35:42,800 --> 00:35:46,200 Speaker 3: this dominant mode of conversation. You know, I'm sort of 549 00:35:46,320 --> 00:35:50,400 Speaker 3: two minds of this, because you know, I've been hearing people, 550 00:35:50,440 --> 00:35:52,839 Speaker 3: you know, regular people on the street talk about their 551 00:35:52,880 --> 00:35:56,080 Speaker 3: speculations or their Robinhood accounts or their crypto accounts whatever 552 00:35:56,520 --> 00:35:59,880 Speaker 3: for years now, and mostly the prices have been going up. 553 00:36:00,360 --> 00:36:04,520 Speaker 3: It certainly feels to me like some of the indicators 554 00:36:04,520 --> 00:36:07,680 Speaker 3: that you describe of fear of missing out and so 555 00:36:07,719 --> 00:36:12,080 Speaker 3: forth currently exists in this incredible this incredible hype. I'd 556 00:36:12,080 --> 00:36:14,280 Speaker 3: like to hear you talk a little bit more about 557 00:36:14,680 --> 00:36:19,239 Speaker 3: why right now, Mostly you just see, yes, the math 558 00:36:19,360 --> 00:36:22,440 Speaker 3: is expensive, the numbers are expensive, but you don't feel 559 00:36:22,440 --> 00:36:25,719 Speaker 3: that sort of that sort of euphoria that has characterized 560 00:36:25,800 --> 00:36:26,520 Speaker 3: past bubbles. 561 00:36:27,560 --> 00:36:30,040 Speaker 4: Well, you know, I guess, Joe, part of it is 562 00:36:30,040 --> 00:36:34,080 Speaker 4: that I don't I don't live in that world. You know, 563 00:36:34,440 --> 00:36:37,160 Speaker 4: since I'm a credit guy and not a tech person, 564 00:36:38,040 --> 00:36:40,879 Speaker 4: I don't spend much time talking to people who who 565 00:36:41,280 --> 00:36:45,120 Speaker 4: are interested in AI stocks okay, or who are doing 566 00:36:45,200 --> 00:36:48,480 Speaker 4: AI businesses. So it might just be that I'm missing that. 567 00:36:49,120 --> 00:36:54,000 Speaker 4: So you know, some of the conditions, some are all 568 00:36:54,040 --> 00:36:56,719 Speaker 4: of the conditions of a bubble might be present in 569 00:36:57,880 --> 00:37:02,080 Speaker 4: a few stocks or in the AI and related niche. 570 00:37:02,600 --> 00:37:06,800 Speaker 4: I'm just saying that I don't feel it across the world. 571 00:37:08,040 --> 00:37:11,320 Speaker 4: And if you take the magnificent seven out of the equation, 572 00:37:12,040 --> 00:37:14,839 Speaker 4: I think things are rich, but not crazy. I did 573 00:37:14,880 --> 00:37:17,680 Speaker 4: read an article on that subject. I did read an 574 00:37:17,719 --> 00:37:20,080 Speaker 4: article about a month or two ago which said that 575 00:37:20,120 --> 00:37:24,279 Speaker 4: if you look at the S and P and leave 576 00:37:24,320 --> 00:37:28,080 Speaker 4: out the magnificent seven, and you compare the S and 577 00:37:28,120 --> 00:37:33,680 Speaker 4: P companies with their non US equivalent in something like 578 00:37:33,760 --> 00:37:38,839 Speaker 4: the MSCI Index of Non US equities, you'll find that 579 00:37:38,880 --> 00:37:44,000 Speaker 4: the US equities in every industry just about sell at 580 00:37:44,080 --> 00:37:49,040 Speaker 4: higher PE ratios than their counterparts outside the US. So 581 00:37:49,719 --> 00:37:51,759 Speaker 4: I think the US is more expensive than the rest 582 00:37:51,760 --> 00:37:54,680 Speaker 4: of the world. Again, not crazy. And by the way, 583 00:37:54,920 --> 00:37:57,320 Speaker 4: I'm convinced that the US has the best economy in 584 00:37:57,360 --> 00:38:02,480 Speaker 4: the world. And you know all these questions, especially in 585 00:38:02,520 --> 00:38:05,520 Speaker 4: the stock market, in the bond market where I mostly work, 586 00:38:05,840 --> 00:38:09,000 Speaker 4: the credit market, you have an indicator of value, which 587 00:38:09,040 --> 00:38:12,360 Speaker 4: is the yield, and you look at the promised return 588 00:38:12,840 --> 00:38:17,680 Speaker 4: from a given investment, and you say, well, you know, 589 00:38:17,800 --> 00:38:20,719 Speaker 4: I think that's sufficient to reward for the risk or not. 590 00:38:21,040 --> 00:38:23,319 Speaker 4: In otherwords, I think the price is fair or it's 591 00:38:23,360 --> 00:38:26,520 Speaker 4: not fair, or it's too cheap or too high. In 592 00:38:26,560 --> 00:38:29,040 Speaker 4: the stock market, it's hard to do that because in 593 00:38:29,080 --> 00:38:33,799 Speaker 4: the stock market you can enumerate the pluses and minuses 594 00:38:33,840 --> 00:38:38,040 Speaker 4: of a given company or industry or a phenomenon like AI. 595 00:38:39,520 --> 00:38:44,480 Speaker 4: But it's hard to say, you know, but the current 596 00:38:44,520 --> 00:38:50,759 Speaker 4: price is fair or too high or too low. It's 597 00:38:50,800 --> 00:38:56,240 Speaker 4: hard to turn the recitation of merit into the fairness 598 00:38:56,280 --> 00:39:01,600 Speaker 4: of value. And so yeah, people may be too excited 599 00:39:01,640 --> 00:39:05,160 Speaker 4: about AI, and that may result in prices that are 600 00:39:05,640 --> 00:39:08,799 Speaker 4: too high for their stocks. And you know, I spent 601 00:39:09,320 --> 00:39:11,400 Speaker 4: in twenty twenty during the pandemic. I spent a lot 602 00:39:11,440 --> 00:39:13,680 Speaker 4: of time living with my son and his family. And 603 00:39:13,800 --> 00:39:15,880 Speaker 4: one thing he talked me out of he says, Dad, Yoda, 604 00:39:15,960 --> 00:39:19,640 Speaker 4: stop talking about things you don't know anything about. Only 605 00:39:19,680 --> 00:39:21,960 Speaker 4: a son can say that to his father. But I 606 00:39:22,000 --> 00:39:24,600 Speaker 4: think it's good advice. As we get more specific in 607 00:39:24,680 --> 00:39:28,960 Speaker 4: this conversation and it goes from stock market to SMP 608 00:39:29,520 --> 00:39:34,359 Speaker 4: to AI, you know, I become more reticent to say 609 00:39:34,400 --> 00:39:38,359 Speaker 4: anything concrete, because I really don't have superior knowledge. And 610 00:39:38,520 --> 00:39:41,560 Speaker 4: my hero John Kenneth Galbraith said that one of the 611 00:39:41,800 --> 00:39:47,840 Speaker 4: shortcomings of the market is the species relationship between money 612 00:39:47,840 --> 00:39:51,640 Speaker 4: and intelligence, and most people tend to look at somebody 613 00:39:51,680 --> 00:39:54,800 Speaker 4: who's made money, and especially who's made money in the markets, 614 00:39:54,840 --> 00:39:59,120 Speaker 4: and credit them with general intelligence, which is usually a mistake. 615 00:40:00,000 --> 00:40:02,520 Speaker 2: Well, I just have one more question, and I guess 616 00:40:02,520 --> 00:40:06,520 Speaker 2: it's about the aftermath of bubbles, and it's based on 617 00:40:06,920 --> 00:40:11,200 Speaker 2: a conversation that you had with Mike Milkin at the 618 00:40:11,200 --> 00:40:14,680 Speaker 2: Milking Conference, and both of you were on stage and 619 00:40:14,800 --> 00:40:18,279 Speaker 2: reminiscing about your time in the markets, and one of 620 00:40:18,320 --> 00:40:21,560 Speaker 2: the stories you were telling was about the bursting of 621 00:40:21,600 --> 00:40:25,120 Speaker 2: the nifty fifty bubble and its impact on the development 622 00:40:25,280 --> 00:40:28,279 Speaker 2: of the financial industry. And I think the idea was 623 00:40:28,320 --> 00:40:32,280 Speaker 2: that all these people had put their money into things 624 00:40:32,320 --> 00:40:36,760 Speaker 2: that were, you know, expected to be quite reliable, reliable stocks, 625 00:40:36,840 --> 00:40:40,799 Speaker 2: stalwarts of corporate America, and then they lost virtually all 626 00:40:40,840 --> 00:40:45,920 Speaker 2: their money. And that development ended up catalyzing the money 627 00:40:45,960 --> 00:40:50,080 Speaker 2: management industry because if you could lose money on boring 628 00:40:50,120 --> 00:40:54,000 Speaker 2: stuff like blue chip stocks, then why not you know, 629 00:40:54,200 --> 00:41:00,279 Speaker 2: try high yield or some alternative credit instead. And I 630 00:41:00,280 --> 00:41:04,640 Speaker 2: guess I'm curious, do you see any interesting developments in 631 00:41:04,719 --> 00:41:09,200 Speaker 2: the finance industry right now? Perhaps not in the immediate 632 00:41:09,280 --> 00:41:12,840 Speaker 2: aftermath of a bubble, but you know, maybe related to 633 00:41:13,080 --> 00:41:16,680 Speaker 2: a paradigm shift like higher interest rates. 634 00:41:17,760 --> 00:41:19,920 Speaker 4: First of all, I have been writing something about something 635 00:41:19,920 --> 00:41:22,919 Speaker 4: called the sea change. I met Mike in seventy eight. 636 00:41:23,200 --> 00:41:25,880 Speaker 4: That's when Citybank asked me to look into hio bonds, 637 00:41:25,880 --> 00:41:28,320 Speaker 4: and I was very fortunate. It was maybe the luckiest 638 00:41:28,360 --> 00:41:30,920 Speaker 4: day in my life that I got that called, because 639 00:41:30,960 --> 00:41:32,800 Speaker 4: you know, that put me at the front of the line. 640 00:41:32,920 --> 00:41:35,160 Speaker 4: That that's kind of the year that the hio bond 641 00:41:35,200 --> 00:41:38,400 Speaker 4: market began and became very important. And here I was 642 00:41:38,920 --> 00:41:42,000 Speaker 4: no fault of my own, you know, working there, And 643 00:41:42,120 --> 00:41:44,960 Speaker 4: the higo bond fund that I started at City in 644 00:41:45,000 --> 00:41:46,840 Speaker 4: seventy eight might have been the first one from a 645 00:41:46,880 --> 00:41:50,719 Speaker 4: mainstream financial institution. And as Malcolm Gladwell said in his 646 00:41:50,800 --> 00:41:55,040 Speaker 4: book Outliers, you know, it's great to be demographically lucky. 647 00:41:56,320 --> 00:42:00,600 Speaker 4: So in nineteen eighty, the FED funds rate each twenty. Vulcar, 648 00:42:00,640 --> 00:42:03,640 Speaker 4: as head of the FED, put the FED funds there 649 00:42:04,400 --> 00:42:07,920 Speaker 4: to battle the inflation that was rampant at the time, 650 00:42:08,440 --> 00:42:11,960 Speaker 4: and it worked, and I had a loan from the 651 00:42:11,960 --> 00:42:14,040 Speaker 4: bank and I got a slip in the mail saying 652 00:42:14,080 --> 00:42:15,759 Speaker 4: that the rate on your loan is now twenty two 653 00:42:15,800 --> 00:42:19,880 Speaker 4: and a quarter, And that was eighty and in twenty 654 00:42:19,880 --> 00:42:22,000 Speaker 4: twenty I was able to borrow at two and a quarter. 655 00:42:22,880 --> 00:42:26,560 Speaker 4: So rates came down by two thousand basis points over 656 00:42:26,600 --> 00:42:29,719 Speaker 4: forty years. I believe that was a paradigm shift and 657 00:42:29,800 --> 00:42:32,840 Speaker 4: that it changed the whole world, and it made a 658 00:42:32,880 --> 00:42:35,960 Speaker 4: lot of people a lot of money. But I published 659 00:42:35,960 --> 00:42:38,080 Speaker 4: a memo in December of twenty two called seat Change, 660 00:42:38,160 --> 00:42:41,560 Speaker 4: saying that it's over. We're no longer in an environment 661 00:42:41,640 --> 00:42:44,719 Speaker 4: where declining rates and ultra low rates are going to 662 00:42:44,760 --> 00:42:46,759 Speaker 4: be the rule. We're going to have higher rates and 663 00:42:46,800 --> 00:42:50,000 Speaker 4: they're going to be essentially stable, not downward trending all 664 00:42:50,040 --> 00:42:54,560 Speaker 4: the time. The other thing that you know is that 665 00:42:55,440 --> 00:42:58,840 Speaker 4: prior to the meltdown of the nifty to fifty, the 666 00:42:58,920 --> 00:43:03,600 Speaker 4: simplistic thought in investing was that it's responsible to buy 667 00:43:03,600 --> 00:43:07,440 Speaker 4: a high quality assets and it's irresponsible to buy low 668 00:43:07,520 --> 00:43:11,560 Speaker 4: quality assets, and the job of the fiduciary was to 669 00:43:11,560 --> 00:43:15,000 Speaker 4: buy high quality assets. Well, here the best companies in 670 00:43:15,040 --> 00:43:20,000 Speaker 4: America is lost almost all your money, and then I 671 00:43:20,040 --> 00:43:23,440 Speaker 4: shifted to hijo bonds. Now I'm investing in arguably the 672 00:43:23,440 --> 00:43:27,560 Speaker 4: worst public companies in America and making money steadily and safely. 673 00:43:28,000 --> 00:43:34,080 Speaker 4: So it did occasion a sea change in how investing 674 00:43:34,160 --> 00:43:37,279 Speaker 4: is done, and it was a very important lesson that 675 00:43:37,360 --> 00:43:39,920 Speaker 4: I was happy to learn at the very beginning of 676 00:43:39,960 --> 00:43:43,000 Speaker 4: my career. You know, I was twenty three years old 677 00:43:43,080 --> 00:43:45,919 Speaker 4: when I started working sixty nine, and I lived through 678 00:43:46,320 --> 00:43:49,720 Speaker 4: this whole collapse in my twenty and it's very important 679 00:43:49,760 --> 00:43:52,680 Speaker 4: to learn your lessons early. And the lesson I learned 680 00:43:53,160 --> 00:43:57,120 Speaker 4: was that successful investing doesn't come from buying good things, 681 00:43:57,160 --> 00:43:59,840 Speaker 4: but from buying things well and if you don't know, 682 00:44:00,200 --> 00:44:05,719 Speaker 4: and the difference, it's more than dramatical, and that it's 683 00:44:05,800 --> 00:44:09,120 Speaker 4: not what you buy that matters, it's what you pay. 684 00:44:09,600 --> 00:44:13,080 Speaker 4: The price has to be fair. And there is no 685 00:44:13,200 --> 00:44:16,040 Speaker 4: asset which is so good that it can't become overvalued 686 00:44:16,080 --> 00:44:19,479 Speaker 4: and dangerous, and there are very few assets that are 687 00:44:20,040 --> 00:44:25,279 Speaker 4: so bad that they can't become cheap enough to be attractive. 688 00:44:26,320 --> 00:44:28,960 Speaker 4: It was an epiphany for me, and I think it 689 00:44:29,400 --> 00:44:33,200 Speaker 4: changed the whole world, and we no longer say is 690 00:44:33,239 --> 00:44:35,080 Speaker 4: it a good asset or a bad asset or a 691 00:44:35,120 --> 00:44:39,200 Speaker 4: good company or a bad asset. We say, is it risky? 692 00:44:39,400 --> 00:44:44,640 Speaker 4: How risky is it? What return do we expect? Is 693 00:44:44,680 --> 00:44:48,640 Speaker 4: the return sufficient to compensate for the risk? And that 694 00:44:48,800 --> 00:44:52,200 Speaker 4: is the change that has dominated the investment world to 695 00:44:52,280 --> 00:44:56,680 Speaker 4: the last I would say, forty seven years since seventy eight. 696 00:44:57,120 --> 00:45:00,680 Speaker 4: And you know, we do so many things today like 697 00:45:00,960 --> 00:45:08,520 Speaker 4: venture capital and private equity and transecurities which entail conscious 698 00:45:08,719 --> 00:45:14,640 Speaker 4: risk bearing that couldn't have been done in the old 699 00:45:14,680 --> 00:45:18,680 Speaker 4: world of good and bad or safe and risky. 700 00:45:20,000 --> 00:45:21,680 Speaker 3: I just have one last question. I was gonna let 701 00:45:21,680 --> 00:45:23,480 Speaker 3: Tracy have the last question, but you said one thing 702 00:45:23,520 --> 00:45:26,520 Speaker 3: that's that hit something that's been on my mind. And 703 00:45:26,560 --> 00:45:29,120 Speaker 3: you mentioned in the summer of twenty twenty being able 704 00:45:29,160 --> 00:45:32,920 Speaker 3: to borrow money for two percent. One of the questions 705 00:45:33,000 --> 00:45:36,800 Speaker 3: that's been debated the last several years is why haven't 706 00:45:36,920 --> 00:45:40,160 Speaker 3: the interest rate increases that we've seen across the curve 707 00:45:40,640 --> 00:45:43,680 Speaker 3: had a more dampening effect on the strength of the 708 00:45:43,800 --> 00:45:46,840 Speaker 3: US economy. And one story that gets put out is 709 00:45:46,880 --> 00:45:50,080 Speaker 3: that a lot of borrowing entities, whether their households like 710 00:45:50,120 --> 00:45:54,120 Speaker 3: yourselves or various firms, locked in very low borrowing in 711 00:45:54,320 --> 00:45:56,280 Speaker 3: those couple of years, and that the effect of higher 712 00:45:56,320 --> 00:46:01,239 Speaker 3: rates therefore has been muted, hasn't transmitted to the real economy. 713 00:46:01,719 --> 00:46:04,680 Speaker 3: Have we felt that adjustment yet? Is there something coming 714 00:46:04,760 --> 00:46:08,440 Speaker 3: because those rates can't stay locked in forever, especially for 715 00:46:08,520 --> 00:46:11,920 Speaker 3: shorter term borrowing. Have we felt the impact of this 716 00:46:12,080 --> 00:46:14,960 Speaker 3: seed change yet on the economy or is there more 717 00:46:15,000 --> 00:46:18,920 Speaker 3: to come downstream from this reversal of what may be 718 00:46:19,040 --> 00:46:20,400 Speaker 3: a forty plus year trend. 719 00:46:21,120 --> 00:46:23,879 Speaker 4: No, I think it clearly hasn't worked a twelve way 720 00:46:23,920 --> 00:46:27,480 Speaker 4: through because when you borrow money, you borrow for a 721 00:46:27,480 --> 00:46:30,319 Speaker 4: period of time, and if you borrow at a fixed rate, 722 00:46:30,360 --> 00:46:32,399 Speaker 4: there's also a flooding rate borrowing. But if you borrow 723 00:46:32,440 --> 00:46:35,200 Speaker 4: at a fixed rate, you fix your rate for a 724 00:46:35,239 --> 00:46:38,040 Speaker 4: maturity of five or seven years, then even if rates 725 00:46:38,120 --> 00:46:40,920 Speaker 4: go up, you're immune to it. You don't feel the 726 00:46:40,960 --> 00:46:44,359 Speaker 4: impact until your debt matures and has to be rolled over. 727 00:46:45,080 --> 00:46:48,600 Speaker 4: You know, people in this business are in the business 728 00:46:48,600 --> 00:46:51,359 Speaker 4: world in general, are not brain dead. And many of them, 729 00:46:51,400 --> 00:46:56,120 Speaker 4: as you say, rolled over their debts in twenty twenty 730 00:46:56,280 --> 00:47:01,239 Speaker 4: or twenty one, and you know, locked up costs debt 731 00:47:01,480 --> 00:47:07,200 Speaker 4: until twenty six or twenty seven, so they're fine. But 732 00:47:07,920 --> 00:47:11,680 Speaker 4: you know, maybe they took on too much debt when 733 00:47:11,920 --> 00:47:15,879 Speaker 4: debt was cheap and readily available, and maybe they won't 734 00:47:15,920 --> 00:47:18,680 Speaker 4: be able to refinance all of it, or some of 735 00:47:18,719 --> 00:47:21,359 Speaker 4: them may not be able to refinance all of it 736 00:47:21,800 --> 00:47:24,320 Speaker 4: when it rolls over in twenty six or twenty seven. 737 00:47:24,480 --> 00:47:26,839 Speaker 4: That's what we call a credit crunch, when you can't 738 00:47:26,920 --> 00:47:29,759 Speaker 4: roll over your debts. Nobody ever repays their debts. They 739 00:47:29,800 --> 00:47:33,239 Speaker 4: just roll them over, and sometimes you can't. You know, 740 00:47:33,280 --> 00:47:36,319 Speaker 4: we believe that they're I mean, look there there are 741 00:47:36,400 --> 00:47:41,960 Speaker 4: already some defaults, not many compared to the crises in 742 00:47:42,000 --> 00:47:46,239 Speaker 4: the past, but you know, when maturities start coming due 743 00:47:46,280 --> 00:47:50,000 Speaker 4: in twenty six, twenty seven, and if Wall Street or 744 00:47:50,080 --> 00:47:54,240 Speaker 4: the banks are a little less generous and optimistic, maybe 745 00:47:54,239 --> 00:47:57,400 Speaker 4: there'll be some difficulty rolling it over. And then you know, 746 00:47:57,520 --> 00:48:00,440 Speaker 4: and it's just the cost of money. So you know, 747 00:48:00,840 --> 00:48:04,239 Speaker 4: the federal government has a portfolio of debt. They don't 748 00:48:04,280 --> 00:48:09,200 Speaker 4: own a portfolio. They owe a portfolio of debt, some 749 00:48:09,320 --> 00:48:11,080 Speaker 4: of which is long and some of which is short. 750 00:48:11,600 --> 00:48:14,360 Speaker 4: And you know, so they're paying the low rates on 751 00:48:14,440 --> 00:48:17,919 Speaker 4: the long debts. But you know when that when again, 752 00:48:18,000 --> 00:48:20,600 Speaker 4: when that comes due, they'll have to roll that over 753 00:48:20,640 --> 00:48:22,880 Speaker 4: at higher rates, and it'll cost the money. And so 754 00:48:23,600 --> 00:48:26,400 Speaker 4: if the interest rate merely stays where it is, the 755 00:48:26,480 --> 00:48:29,919 Speaker 4: cost of capital to the US government will rise over 756 00:48:30,000 --> 00:48:33,200 Speaker 4: time as they replace low rate, low cost debt with 757 00:48:33,280 --> 00:48:36,520 Speaker 4: high cost debt. So this has not fully worked itself 758 00:48:36,560 --> 00:48:39,759 Speaker 4: through through the economy yet, and there's more of it to. 759 00:48:39,719 --> 00:48:43,560 Speaker 2: Come, all right, Howard marks, We could easily keep going 760 00:48:43,760 --> 00:48:47,400 Speaker 2: for a couple more hours, probably longer than that, but 761 00:48:47,880 --> 00:48:50,439 Speaker 2: this has been an absolute treat. Thank you so much 762 00:48:50,560 --> 00:48:51,720 Speaker 2: for coming on the show. 763 00:48:52,640 --> 00:48:55,400 Speaker 4: Well, thank you for your good questions, and I'd be 764 00:48:55,440 --> 00:48:57,880 Speaker 4: glad to do it too, and let's do it again sometimes. 765 00:48:57,880 --> 00:49:00,360 Speaker 3: Absolutely love to thank you so much those I. 766 00:49:00,440 --> 00:49:15,720 Speaker 2: Guess Joe, I thought that was so interesting. So first 767 00:49:15,719 --> 00:49:18,080 Speaker 2: of all, you know that I love just listening to 768 00:49:18,360 --> 00:49:23,920 Speaker 2: like wartime financial crisis stories, so that was great. And 769 00:49:23,960 --> 00:49:26,239 Speaker 2: then I thought one thing that was really interesting. Well, 770 00:49:26,280 --> 00:49:31,160 Speaker 2: first of all, there aren't as many cross asset investors 771 00:49:31,280 --> 00:49:34,360 Speaker 2: as you might think out there, and so it's really 772 00:49:34,360 --> 00:49:37,520 Speaker 2: interesting to hear someone that is, you know, firmly in 773 00:49:37,760 --> 00:49:41,520 Speaker 2: the credit space, but is also looking at other asset 774 00:49:41,600 --> 00:49:45,759 Speaker 2: classes in order to judge current market conditions. And then 775 00:49:45,800 --> 00:49:50,160 Speaker 2: the other thing I thought was the emphasis on action 776 00:49:51,160 --> 00:49:55,680 Speaker 2: being sort of a spectrum of caution and risk. So 777 00:49:55,760 --> 00:49:58,680 Speaker 2: it's not the tech bubble is about to come and 778 00:49:58,800 --> 00:50:02,440 Speaker 2: you know, sell all your tech exposure. It's more like, 779 00:50:03,200 --> 00:50:06,320 Speaker 2: maybe I should ratchet down a little bit, maybe start 780 00:50:06,600 --> 00:50:09,600 Speaker 2: raising you know, some dry powder for a rainy day. 781 00:50:10,160 --> 00:50:14,520 Speaker 3: That was really interesting the specific story this sequence, Yeah, 782 00:50:14,640 --> 00:50:17,680 Speaker 3: raising that dry powder starting with the warning in two 783 00:50:17,719 --> 00:50:21,840 Speaker 3: thousand and five that didn't get deployed or wasn't able 784 00:50:21,920 --> 00:50:24,959 Speaker 3: to be paid off for years. But the idea of okay, 785 00:50:25,000 --> 00:50:27,279 Speaker 3: if you see something coming down to the horizon is 786 00:50:27,320 --> 00:50:30,239 Speaker 3: not enough to say, well, yes something there's going to 787 00:50:30,280 --> 00:50:33,560 Speaker 3: be an opportunity. The idea of you know, raising one 788 00:50:33,640 --> 00:50:36,360 Speaker 3: fund and then having that other fund on the shelf, 789 00:50:36,560 --> 00:50:39,440 Speaker 3: cash that can be callable for the day that it comes. 790 00:50:39,760 --> 00:50:42,359 Speaker 3: You know, there were a lot of people that probably thought, oh, 791 00:50:42,360 --> 00:50:45,320 Speaker 3: there are really good deals to be had in September 792 00:50:45,360 --> 00:50:47,359 Speaker 3: two thousand and eight or March two thousand and nine 793 00:50:47,520 --> 00:50:51,120 Speaker 3: or whatever. But there's no good in having stuff being 794 00:50:51,200 --> 00:50:53,400 Speaker 3: cheap if you don't have any cash available to buy it. 795 00:50:53,880 --> 00:50:57,399 Speaker 2: Do people still call it patient capital? I remember people 796 00:50:57,480 --> 00:51:00,000 Speaker 2: used to call you know, dry powder patient capital because 797 00:51:00,400 --> 00:51:03,319 Speaker 2: the idea was you set it aside, and it might 798 00:51:03,360 --> 00:51:06,040 Speaker 2: be a long time until you're actually able to invest 799 00:51:06,080 --> 00:51:06,480 Speaker 2: in you. 800 00:51:06,560 --> 00:51:09,360 Speaker 3: Also, you know, this also strikes me as where like 801 00:51:09,960 --> 00:51:14,160 Speaker 3: brand value of a firm really matters, right, because you're 802 00:51:14,200 --> 00:51:17,520 Speaker 3: not going to get billions and excess commitments into that. 803 00:51:17,840 --> 00:51:20,200 Speaker 3: You know, you and I aren't going right. It's like 804 00:51:20,320 --> 00:51:22,400 Speaker 3: Tracy and I was like, oh, we think AI is 805 00:51:22,440 --> 00:51:24,840 Speaker 3: going to crash in a few years or want to 806 00:51:24,840 --> 00:51:27,160 Speaker 3: get buy bill We want to buy data center real 807 00:51:27,280 --> 00:51:29,920 Speaker 3: estate on the chief, so give us a billion. But 808 00:51:29,960 --> 00:51:32,160 Speaker 3: you know that's the only that's a thing that you 809 00:51:32,200 --> 00:51:36,840 Speaker 3: can monetize only after having you know, years of success. 810 00:51:37,040 --> 00:51:39,960 Speaker 3: I thought it's interesting this idea of you know, there's 811 00:51:39,960 --> 00:51:43,279 Speaker 3: a difference between expensive and a bubble, and that in 812 00:51:43,360 --> 00:51:47,759 Speaker 3: his assessment, we're not there yet. And I really appreciate 813 00:51:47,880 --> 00:51:51,000 Speaker 3: his perspective because it's easy for me to say on 814 00:51:51,040 --> 00:51:53,720 Speaker 3: the day, oh, everyone's to talk about AI all the time, 815 00:51:53,760 --> 00:51:55,960 Speaker 3: et cetera. I'm therefore, you know, we must be near 816 00:51:56,000 --> 00:51:58,640 Speaker 3: the top or a bubble. But I don't have you know, 817 00:51:58,800 --> 00:52:02,480 Speaker 3: experience in markets going back to the nineteen sixties of 818 00:52:02,560 --> 00:52:03,920 Speaker 3: like what that actually feels like. 819 00:52:04,520 --> 00:52:07,680 Speaker 2: Well, when a car company or car rental company in 820 00:52:07,719 --> 00:52:11,400 Speaker 2: Nevada says that it's like a model. 821 00:52:11,520 --> 00:52:13,960 Speaker 3: Yeah, yeah, that's going to start. 822 00:52:14,000 --> 00:52:17,520 Speaker 2: I don't know that's going to revolutionize the world. Yeah, 823 00:52:17,600 --> 00:52:20,000 Speaker 2: then maybe that's the time to be concerned. 824 00:52:20,160 --> 00:52:20,719 Speaker 3: That's how well. 825 00:52:20,760 --> 00:52:22,799 Speaker 2: No, all right, shall we leave it there. 826 00:52:22,880 --> 00:52:23,600 Speaker 3: Let's leave it there. 827 00:52:23,880 --> 00:52:26,960 Speaker 2: This has been another episode of the Audots podcast. I'm 828 00:52:27,000 --> 00:52:30,200 Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway and. 829 00:52:30,160 --> 00:52:32,719 Speaker 3: I'm Joe Wisenthal. You can follow me at the Stalwart. 830 00:52:33,000 --> 00:52:36,279 Speaker 3: Follow our producers Carmen Rodriguez at Carmen armand dash ol 831 00:52:36,280 --> 00:52:39,799 Speaker 3: Bennett at Dashbot and kill Brooks at Kilbrooks. 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