Bloomberg Audio Studios, podcasts, radio news seeing a market gut check some of the enthusiasm post FED meeting yesterday after Oracle came out throwing some cold water on at some of the risk appetite down four tenser percent on s and b futures, the bitten de bonds actually gaining as the morning grows older after jobless claims came into slightly elevated ten year yields at four point one three percent.
Turning to the economy, FED chair J Powell saying AI may be at least partially responsible for the cooling labor market, but the future remains uncertain. Howard Mark's 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 job's AI renders unnecessary or who can't find jobs because of it at this moment of transformation,
joins us. Now after writing a memo that I really recommend everybody read.
It really was one of the absolute best that 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 memos. 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 fans.
Portfolio insurance was one, subprime mortgage was another. Financial activities that become fashionable, zoom into popularity, get over hyped, and then receide.
But then there are.
Bubbles which are based on technological progress, 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's 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.
You know, when investors hate everything and won't 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, you're 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 can participate, 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 ups The lender has no upside. You make it a nine percent loan, 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 levels.
Exactly, because the point is that if you go into some startup which has the 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 it's.
You know, Buffett says, the less prudence with which others conduct their 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 seems healthier 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 just 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 risky or 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 it 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, so 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, very worrisome. And as I said in the uhudendum, w when we lost jobs to automation and offshoring, I think that that coincided with the opiate UH epidemic and UH 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 I we've can find a replay, a way to replace their income, I worry about UH purposelessness. And you know, we we get so much job, so much from our jobs other than a paycheck, and you can't.
Replace that stuff. So I I worry for society.
Howard Marks, you are absolutely one of the best, for my favorite to talk to Howard Marks of Oakby Capital Management.
It's great.
Thank you so much for being with us.