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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App.
Howard Marks, co founder and co chairman of oak Tree Capital Market, issuing a warning at his latest memo, I find the resulting outlook for employment terrifying. I am enormously concerned about what will happen to the people whose jobs AI renders unnecessary or who can't find jobs because of it at this moment of transformation. Howard joins us now after writing a memo that I really recommend everybody read. It really was one of the absolute best you've ever written.
Thank you for being here with us, So I can stop now, No, please don't, I want to keep reading your membos. I want to start with this idea of different types of bubbles, and you talk about there are productive bubbles and unproductive bubbles. What's the difference and how does that make it either something you want to invest in or not.
Well.
I think that the unproductive bubbles I would describe as financial fads. Portfolio insurance was one, subprime mortgages was another. Just you know, financial activities that become fashionable, zoom into popularity, get over hyped, and then recede. But then there are bubbles which are based on technological progress, the starting with the steam engine, the railroad, the radio, the automobile, computers, internet, etc. And these actually push society ahead and change it irreversibly.
But in the process there is a bubble surrounding their implementation, which is overly accelerated and overly financed and goes to excess and end up destroying a lot of capital, but leave society greatly changed. And I'm sure that AI is in the latter category in terms of effect on society. And the question is will the implementation prove to have been excessive in scope and in the way it's financed.
Just because something is excessive doesn't mean that you can't invest in it.
No, But.
When investors hate everything and we'll touch it with the ten foot poll, chances are it's going to be on sale because nobody has pushed up the price. In fact, their disinterest has pushed down the price. But when everybody likes something, he's excited about something, chances are it may be overhyped and overpriced.
So you just have to be careful. So that's where we are right now.
You said you can invest and you campaticipate, but you just have to be careful. What does being careful look like? Does it mean focusing more on debt versus equities, more on equities versus debt, more on small companies versus big ones.
What does that look like?
Well, what I say in the memo is that it's okay to lend for activities even if they're uncertain, but not if they are if the outcomes are purely conjectural. I mean, in order to be a smart lender, you have to have good visibility on the extent to which the thing is likely to repay interest. In principle, if it's just purely conjectural, it's not you shouldn't be a lender.
And in fact, I think the memo says that where that's the case, you should actually, if you want to participate, you should be in the equity so at least you get the upside.
The lender has no upside.
You make it a nine percent own all you're going to get is nine percent, no matter how well the thing does.
You certainly shouldn't do that in activities that have a high.
Probability of not paying off at all, because then you have unlimited downside and limited upside. That's absolutely the wrong combination.
So you think, right now, in some circumstances, the equity might actually be a better option than the debt because of that potential level.
Exactly, because the point is that if you go into some startup which has a possibility, you know, let's say a small possibility of a raging success, you know you wouldn't lend to it because you have a high probability of losing all your money and no probability of participating in the success.
That's a bad trade.
So you always talk about this risk reward pendulum, the risk and fear, this sort of fear and greed pendulum. Right now, and yesterday we saw Oracle come out and talk about having to borrow more money, having to spend more and people are selling off the shares.
Does this make you feel good?
Does this make you feel like there actually is some discretion?
Well?
Well, yeah, well I think that I think that it's you know, Buffett says, the less prudence for which others conductor affairs, the greater the prudence with which we must conduct our own affairs. So when other people are acting imprudently and mindlessly and care free, we should be worried. When other people are showing appropriate concern, that's a positive
sign that the market is applying some discipline. The greatest some of the greatest moments that I've seen, some of the greatest signals of danger in the markets have been when people were not applying any prudence at all, like in six for example. So if people are reacting harshly to aggressive, possibly risk indicating activities, yes, that's a healthy sign. And this market is seems healthy year than the two thousand market.
To me, How concerned are you that we get a federal reserve that's more accommodative for a variety of reasons that leads to even more risk taking. This idea that not only did the Fed cut rates indicated more rate cuts but also is adding to its balance sheet in a way that could potentially prop up demand.
Well, you know, I was thinking about this when I was waiting to see you today. You know, most of the people listening to this program, including me and you, are interested in the free markets, and we think free markets should set the prices of things. And the FED manipulations are a form of price controls. You know, they control the price of money. And if the FED puts money artificially cheap, then it induces behavior like risk taking.
It forces people into risk.
Of your activities because the returns on safe activities are so low. It tends to reinforce the view that there's a FED put that if there's a problem, the FED will solve it, and that contributes to risky behavior.
These are all bad things.
And you know, I believe that the FED should be passive most of the time and only come to the rescue if the market is if the economy is seriously overheated and tending towards hyperinflation, or seriously under active and not creating jobs. I don't think that's the case right now. I don't think there's a and you can see in the divided Open Market Committee that there's a difference of opinion. So I don't think that action on the part of
the Fed is compelling right now. And you know, there are people who think that rates should be a lot lower than they are today.
I just don't see that the merit in that right now. Going forward.
I remember back in two thousand and fifteen, sixteen seventeen, more rates were incredibly low. You were saying people just need to lower their expectations for returns because ultimately you have to look at the risk free rate. You don't want to reach too much at a time where people are greedy. Where are we right now in terms of what types of returns people ought to expect based on the current income rates?
Well, the lower base interest rates are everything scales off that, so you know, I mean the FED funds rate at three and a half is below history. It's these are not high rates, They're only high relatives the last fifteen years. But this is a low rate, So everything scales off that. Most things will give moderate returns in the dead area. I think prospective returns are moderate, okay, not lush, but
not inadequate. The trouble is that the S and P, based on its pe ratio relative to history, appears to be priced to provide a very low prospective return. Historically, if you bought at this pe ratio, your return over the next ten years averaged in the very low single digits. So I think we're in a moderate return scenario. The problem is that how do you get a high return
in a moderate return scenario? And most people's resort is to take a lot more risk, and that's something I don't like to do, other than when it's compelling.
You had a personal note in a dentum at the end, and we let off with that idea of what artificial intelligence and machine learning will do to the labor market, it's something clearly on the Fed's mind, clearly on investor's mind, talking about concerns that there is going to be cannibalization from human jobs. How do you see this playing out?
How are you kind of grappling with this when you look at investments, when you look at fiscal deficit, when you look at the backdrop for the financial system.
Well, look, Lisa, here, I'm not talking about investing or economics.
I'm talking about society. And it's very worrying to me.
And you know, I've gotten some very nice response from people I respect to the memo, and one of them said he thinks we've seen this in response to the Internet over the last twenty five years, but it has not raised unemployment because the Internet eliminated white collar jobs that were replaced by blue collar jobs, like you know, people who pick stuff in warehouses and send it out in e commerce. So the job count is not down, but job quality is down. And I think that this
is very worrisome. And as I said the addendum, when we lost jobs to automation and offshoring, I think that that coincided with the opiate epidemic, and not only in the amount, but also in location. And I think it's a natural consequence of people sitting around all day. And even if we we can find a replace, a way to replace their income, I worry about purposelessness. And you know, we get so much job, so much from our jobs other than a paycheck, and you can't replace that stuff.
So I worry for society.
Stay with us more Bloomberg surveillance coming up after this.
Joining us now for more, Libby, thank you so much for being here.
Why not just give the role to.
Kevin Hassett at this point, Well, I mean, look, I think that this is obviously President Trump loves a horse race, and I think he loves the drama. And of course he doesn't need to nominate anybody until Powell's term is up, which is, of course, as you know, until May of twenty twenty six, and so there really is no rush here. But I do think this is, you know, sort of speaks to the dramatic that the president, that the President likes.
I mean, I do you know, you're kind of a broader issue though, is sort of this these rumors that there has been kind of pushed back on on Hassett. I think it does show that even though the market has been pretty sanguine about FED independence, that there may be some concerns and that when you have somebody from the White House that then rotates to the FED, that there could be some politicization of the institution.
Libya here from the President saying that what he cares about somebody honest about interest rates. There's more to it than that, of course, and I think that there was a narrative for a while that this was going to be a reformer, and I think Kevin Warsh represents that he somebody's talked a lot about the way the FED is structured and what could change. Do other candidates share
those same inclinations. How much does the president price I should say, weve heard from the Treasury Secretary he's interested in reforming the way the whole system is set up. Who can be regional presidents and the like. How big an issue is that? Do you think for the presidents he goes through the search?
Yeah, I mean, maybe not for the president himself, but I do think for this administration, and I think for you know, many folks on the Hill as well. I mean, this has been a long time in coming. Obviously, Congress has tried to pass legislation to reform the FED that requires sixty votes, so they haven't been able to get kind of by a partisan support. But I do think we could see some reforms. But I do you know, it's important to contextualize what the reforms could be and
what is possible. There's just not as much that the president or a FED chair can do unilaterally without actually changing the law, and of course you need Congress to change the law. So could we see sort of incrementally how reserved presidents are chosen, maybe a little bit more pressure on reserve presidents. Of course, the FED Board does
have authority over who stays as a regional president. But I think just by and large, there's probably I think, you know, we're expecting more incremental reform, if any, just given some of those constraints.
Let's say cast as the front runner, which Bloomberg has reported, and you point out the fact there's been this kind of growing concern within the bond mark about him as potential FED share that kind of became so we first saw on the ftpiece a couple of days ago. Now seeing that brought in a little bit more. What does the bond market want to see? I think of what Anna Wong, our colleague at Bloomberg Economics roads, saying she knows Kevin Asse, She's worked alongside him.
Actions speak louder than words.
He's somebody who has talked a lot about fit independent since prized it through the entirety of his career. He did advise some more traditional Republicans in years past. What does he have to do to kind of assuage or pacify those who are concerned about the prospects of him being the next.
FED shir Yeah, I think, as you know, there's what he says publicly, and what he says, you know, to the media and in this you should he get nominated, That all important confirmation hearing, but also what he says privately and to the very key Republican senators who will effectively cast sort of the vote whether he gets nominated
or not. So I think what they want to see is again just reassurances that they know that he will uphold independence, that he will not be sort of suaged by the whomever is in the president who's ever in the White House beaks. Of course, this next FED chair will outlive President Trump's term and will be in for
whomever is president in twenty twenty nine. And then also that some of these rumors about the regional presidents and what have you may again maybe the reforms will be more incremental and not necessarily existential.
I mean, how do you think about the bond market and it's reaction all of this, For all the kind of rumors of pushback since Bloomberg broke the kind of hasset news, ten year yield has been relatively well behaved, two year yields relatively well behaved. I think, you know, the work is still pricing in kind of a three percent terminal rate. It seems like the bond market is taking the kind of measure of Hassett and saying it's not a really significant shift in policy, and bond market
seems relatively comfortable. How do you.
React to that?
Yeah, I think we do what I just said earlier. I mean, I do think the bond market has been relatively sanguine about this is just about in general, this fear about FED independence, and I think that you know, kind of you know, maybe underscores two things. One is that oftentimes the market doesn't believe anything until they actually see it, and so they're not going to necessarily just trade on speculation or on rumor. And of course we
don't even have a FED chair nomine yet. It's all just been kind of those and of course you know the drama. But I also think the number two is that the market understands some of these guardrails that are in place, and that while the chair, of course is very important, the chair is not kind of almighty in terms of changing monetary policy, and that of course it is the majority of as you know, the FOMC twelve members, not just the seven FED Board governors. And then also
not to overstate the sort of confirmation process. But something I, maybe to their chagrin, always reinforce to our Investment Committee is that this advice and consent role that the US Senate plays is very important. And actually, if you just look at the number of nominees that this president has had to withdraw, it's really unprecedented, and it's all kind of been backchanneling and private. But that sort of speaks to the fact that the Senate, they have not had
the votes in the Senate to confirm those nominees. So I think if somebody were to be nominated, who would be too political, who would really compromise the independence of the foot I think the bomb market is reassured that the Senate would push back.
This goes to a bigger question, and I was glad that you went there about how much Republicans are starting to push back on President Trump after some of the recent elections and some of the recent losses on the part of certain Republican candidates. Do you get the sense that there is a greater constraining of some of the more extreme policies by Congress as a result of some of the recent elections, You.
Know, I do.
I think the political runway for this president is absolutely shortening. But I would also say that this is very consistent with history. If you look at Biden's administration, you know, the Democrats, of course had both the House and the Senate in his first two years, and they basically allowed Biden to do whatever he kind of wanted to do,
right to really advance his policy agenda that first year. However, as you got closer to the midterms, as you had some of these off cycle elections, the Democrats really did start pushing back on President Biden. I think that's the corollary here. The kind of the parallel is that, you know, Republicans have been pushing back on the president sort of privately, but I think we expected them to do that more more publicly. But again, this is not necessarily President Trump's specific.
This is kind of just the political cycle in Washington.
Stay with US multlempag Savannah's coming up of this.
The team at MasterCards Economic Institute predicting moderate global GDP growth at three point one percent and twenty twenty six. A key dynamic is continued trade realignment between the US and China. Joining US now is Michelle Meyer and Michelle wonderful to see you as always. I would love to get your take on what Steve Shiverin was just talking about, which is he thinks the stealth story is the recovery
and acceleration in the consumer in twenty twenty six. Are you seeing that in any of the data that you're collecting.
Yeah, I would say it's probably not a stealth story. It's a reality, and I think it has been the reality that consumer has been extraordinarily engaged. You just heard it from Robert Eisam in the interview you aired that consumers are still traveling, You are still seeing the embrace of discretionary spending in addition to the necessities. So it's consumers that you know, again it's going to vary depending
on income cohort. It's a big part of the narrative that it's not even It never is even, frankly, but you have consumer spending that is still running at a healthy clip. For the holiday shopping season. We're looking for a mid three percent pace for holiday sales. Black Friday came in with our data. We saw a four point one percent increase in spending on Black Friday.
How much is this inflationary? How much is this because simply the prices were higher, not necessarily more items for ticketed.
So you know, we'll find out for sure once we get the CPI report at some point.
Do you know when it's going to be bad?
Well, no, at some point.
But in the inrum, what we know as of now in terms of the basket of holiday shopping items that we typically see inflations running maybe around two percent or so year of the year. So certainly there's very much still real spending and growth.
In terms of volume. Would you look at where people are spending money, what's the story that emerges from that? So you talk about how kind of discerning consumers are being about where they're spending it on?
What?
Yeah, can you break that down by I don't know, strato or sector? What can that tell us just about people's habits at this moment.
Yeah, So I certainly think that consumers are savvy. I think they have been savvy this whole period of time coming out of the pandemic. Once they experienced that price level shock that was, you know, challenging for them. It was a first time consumers are a significant increase in the price of goods across the board, and since then, I think consumers have been really mindful in terms of what they buy, when they buy, why they buy it.
They certainly concentrate spending around promotional periods, which is what we saw during the Black Friday period, But you know, making those choices, making those choices that work for them.
As you look at kind of the evolution of consumer psychology in this moment, I think there was a lot of anxiety surrounding the prospect of what tariffs might mean for all of us. Has that eroded it' staved just a moment ago talking about how people might feel once these tax benefits come into effect. Are we at a point where the immediate effects of those tariffs are now
not front of mine? And for a lot of consumers, it's not as big of kind of psychic wight as it was at the beginning of the Liberation Day and the like.
Well, I think we've moved from the headlines the uncertainty to the reality right so now we're actually seeing that enter into the economy. It's still happening, but there's a little bit more stability in terms of the.
Process.
And I think for consumers what they're focus on is when they walk into the store, they try to purchase something online, what is the price and does it make sense for their budget? And if it's an item that prices have increased, whether it's because of tariffs or because of other reasons, they might say, you know what, does it make sense? How badly do I want to or can I buy something else where I feel like I
get better value? So that decision is always happening. And in a world where there's more digitalization, where you have a greater share of spending that's happening online, more choices that are out there for consumers, I think they have a little bit more power to navigate this environment.
You talked about the kind of unevenness of consumer spending by kind of income cohort, and I'm interested in what trends you're seeing, at least over the holiday season. You know, is the high end focusing they're spending in a particular place. Is the lower end consumer? Are they still healthy? Where are they spending? Break that down for us a little bit, give us an understanding of kind of how the high end and low end consumer behaving through this holiday season.
Sure, so, I.
Mean we don't have the ability to break that down specifically with our own aggregated data, But what we do look at is different baske sets of spending and how that varies across the US in terms of different locations, which could be a nice proxy for income spending. And you know, this holiday season, I would say it has
been and a lead in has been experienced. Spending has done well, So we've seen a good amount of spending on restaurants, travel, lodging, a bit weaker in terms of furniture, home improvement, footwear, so some of the more discretionary gooes categories that may have tariff impacts where perhaps the value
isn't as notable. And then apparel has been a really strong one this season feels like kind of across the board as well, where we're seeing this engagement in terms of greater spending on apparel.
So we shouldn't necessarily look at all the sales as being just people trying to reel in consumers that are reluctant. I mean, when you have things in your basket in Amazon or some other company, how many times you get emails, often from people say you haven't checked out, the deal's still there fifteen days and how long Frida at work?
Well, that's true.
This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app