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00:00Howard Marks joins us now on set here at the Qatar Economic Forum.
00:02He's the co-chair of Oak Tree Capital Management.
00:05I'm very keen to talk with you about AI,
00:07something about which you've written a lot in recent memos.
00:09Before we get there, though, I'm very curious how you've processed
00:12what we've heard from the Fed chair,
00:14yes, in this most recent set of remarks that he gave after the Fed's decision,
00:18in the limited number of speeches he's done as Fed chair.
00:21Are you satisfied with the level of communication you're getting?
00:23How novel is the way that he's communicating with the Marks?
00:25Well, I actually think that less communication is better.
00:30I'm not looking for the Fed chair to tell me what to do
00:32or even tell me what he's going to do.
00:34But I think that if to the extent that the central banker
00:38tells people less about what he's going to do,
00:41they have to make their portfolios and their businesses anti-fragile,
00:46which is better for society.
00:49When everybody in society thinks they know exactly what the Fed's going to do
00:53and prepares for that, then society is dependent on that outcome.
00:58And if something else happens, then, you know, bad things can happen.
01:02So I think it adds to safety in the environment overall.
01:07So you think Borscht was on to something with a bit of this tail wagging the dog
01:11at the Fed, let the markets decide without relying too much on this forward projection.
01:14I've learned a lot about the dot flocks in the last month of my life,
01:17things I never knew I needed to know this much about.
01:19Well, my personal preference is for a less activist central bank
01:23that normally lets the economy do its thing
01:26unless it's in danger of going off the rails too hot or too cold.
01:30Yeah.
01:32If it's not too hot or too cold, leave it alone.
01:35So, you know, I'm in alignment on that.
01:38We talk about something called natural interest rates.
01:41Those are the rates that result from negotiations between borrowers and lenders.
01:46I think that's a great idea.
01:47Yeah. This is called the free market.
01:50Let the market do its thing.
01:51Listen, I'm a tough negotiator.
01:53Anything that can get that mortgage rate down, you and I will go at it.
01:56Howard Marks, what is this environment like for a value investor like yourself?
02:00It occurs to me that we have been obsessing so much over the Fed
02:02that maybe to have it take maybe not more of a back seat,
02:05be less front and center.
02:06That opens the door to relying once again much more on the fundamentals of stocks
02:10than we have in the past.
02:11Well, look, I am what's called the value investor,
02:15not with a capital V, but a small V.
02:17And that means our approach is to figure out the intrinsic value of an asset
02:25and see if we can buy it at a fair price relative to that value.
02:29That's all it means, in my opinion.
02:34And the challenge today is that, in my opinion, you know, since roughly October the 1st of 22,
02:43I believe that the markets have been generally ruled by optimists.
02:47And, you know, the S&P has more than doubled in that period.
02:52It's been a very strong period.
02:53And I think that, you know, you have to recognize that when the optimists rule,
03:00prices tend to be high relative to intrinsic value,
03:03which means that it's a time for a little bit of caution.
03:07It's not the worst thing I've ever seen.
03:10But I do think it's important to note that the optimists have been in control.
03:16Why do you think that is?
03:17Because as someone who comes more from the diplomatic side,
03:20watching, we talk about this all the time,
03:21watching these markets respond positively to any trace of,
03:25oh, we've got a deal coming out of either Washington or Europe or the Middle East.
03:28I mean, those of us who covered this know it's not going to happen.
03:31But there's this indefatigable optimism that the markets at the moment just can't shake.
03:35Why is that?
03:36Well, that's a great question.
03:40But I think there are certain underlying truths which are positive,
03:46which are in the ascendancy.
03:50Our economy is doing pretty well in the aggregates.
03:53Yeah.
03:54It is, in my opinion, the best performing developed world economy.
03:58So?
03:59So, you know, the old Tina trade, there is no alternative.
04:06And there is the excitement over AI.
04:13And so...
04:14So the optimism is just coming from the core.
04:17Oh, and the other thing is that, you know,
04:20we haven't really had a really bad time since March of 2009,
04:27when the stock market bottomed during the global financial crisis.
04:31And so people get used to good times and they extrapolate good times.
04:35And that contributes to the optimism.
04:37So, I mean, certainly there is no rampant pessimism today.
04:43And when people are optimistic...
04:45Just for me, I'm personally keeping rampant pessimism alive.
04:47But the point is that when the optimists are in charge,
04:51they kind of slough off the bad news.
04:54Yeah.
04:54And, you know, but they get excited when there's a word of a settlement.
05:00They don't get depressed when it falls through.
05:02That's true.
05:02And so you have to look at that and you have to say,
05:05well, there's a positive bias in the market today.
05:09And when there's a positive bias, you should acknowledge it.
05:12And what do you do about it?
05:14Maybe you build in a little defense.
05:15Or maybe you take care in what you do.
05:19Before we get into AI from a market's perspective,
05:22what stood out to me, and I think it was two memos back that you wrote,
05:25was your engagement with the potential societal ramifications of AI.
05:29And you expressed very clearly acute concern about what AI,
05:33if it comes to the fruition that we've been promised,
05:35you would mean for people across this country,
05:37maybe not in cities, but in middle America,
05:38what it means if all of these jobs were to disappear.
05:41You've been listening, as we have over the course of the last week or so,
05:44about the larger existential fears brought about by the promise perils of AI.
05:50And I'm curious how you're processing those,
05:51how that builds upon what you warned about, you know, six months ago.
05:55The fears that you had then,
05:56if they got worse, if they compounded as a result of the conversations that you've been having.
06:00Well, I think that a sentient human being has to think about these things,
06:06has to acknowledge there's nothing we can do about it.
06:09And when I reach that point in my own process,
06:12I kind of let it go.
06:14Because, you know,
06:17my wife defines worrying as bleeding before you're shot.
06:21And in this case,
06:23there's nothing we can do about it.
06:26Nothing, certainly nothing I can do about it personally.
06:28So, you roll with it.
06:31That's all.
06:31You acknowledge it.
06:33You let people think about it.
06:35But it should not be a preoccupation, in my opinion.
06:39Are you satisfied people are thinking about it enough or in the right way?
06:42Well,
06:45people are.
06:47On the other hand,
06:48I don't see anything out of government.
06:50You know,
06:51I think there should be a task force
06:55on the effect of,
06:56the coming effect of AI.
06:58And there isn't.
06:59Now,
07:00when they form the task force,
07:02I don't know what they can do about it.
07:03But it might be nice to think about it.
07:06And, you know,
07:07if you want one little task to work on,
07:09how about this?
07:10If people are put out of work,
07:11they won't pay taxes.
07:13If AI takes their place
07:17as workers,
07:19will it take their place as taxpayers and how?
07:22So,
07:22what will happen to
07:24government revenues
07:26when and if
07:27people lose their jobs?
07:29Do you use it in your daily life?
07:31Do you chat GPT things?
07:33Have you integrated it into your business?
07:35You know,
07:36well,
07:36Oaktree certainly has integrated it into business.
07:39And, you know,
07:39we use it to marshal data
07:41and do early analysis
07:42and,
07:44you know,
07:46tasks that used to take a long time.
07:48We don't,
07:49we certainly haven't turned business decisions over to it.
07:53Investment decisions.
07:55And,
07:55and I think that
07:57to the extent you want to be an exception,
07:59investor,
08:01the exceptionalness
08:03doesn't come from some
08:06computer or algorithm.
08:09The exceptionalness
08:10comes from
08:11being able to do a superior job
08:14of assessing the import
08:16of the data.
08:18and that superiority
08:21I don't think is available
08:22through AI yet.
08:24So,
08:24Do you see when you hire younger people
08:26that they're outsourcing
08:28more and more of that critical thinking
08:29to AI
08:30or have you not come across that yet?
08:31we don't encourage that.
08:32Okay.
08:33There's a lot of,
08:35there's a lot of work to be done
08:37but
08:40number one,
08:41if you stop doing critical thinking
08:42you'll lose the muscle,
08:44I think.
08:44I think so too.
08:45And number two,
08:46I continue to say,
08:48Christine,
08:48that the exceptionalness
08:50is,
08:51is,
08:51is human.
08:53Uh,
08:54and,
08:54uh,
08:54I think that,
08:57kind of like indexation
08:58did for equity investing,
09:00it'll put a lot of active investors
09:02out of business,
09:03but
09:04not the best.
09:05Um,
09:06it would be great
09:07if we could spot a bubble
09:07in real time.
09:08As you've pointed out,
09:09you can't.
09:09It's something you do
09:10in hindsight.
09:11Um,
09:12but I'm curious
09:12how bubblicious
09:13this,
09:14this environment looks
09:14to you right now.
09:16So,
09:16uh,
09:16you know,
09:17you've written before
09:18when you're assessing bubble,
09:19you're looking at
09:20company behavior,
09:20investor behavior as well.
09:22There is such a swirl
09:23of,
09:23um,
09:25hand wringing about,
09:26uh,
09:27circular financing
09:27and the like.
09:29Are there things
09:30that give you pause
09:30or concern
09:31when you look
09:32at the AI space
09:32in particular
09:33from a market perspective?
09:34Well,
09:34look,
09:35the main thing is,
09:36as I wrote
09:37in the last memo
09:38on the subject,
09:39Alan Greenspan
09:40used the phrase
09:40in 97,
09:41I think it was,
09:42irrational exuberance.
09:44Uh,
09:45and that is
09:46the definition
09:46of a bubble.
09:47Uh,
09:49we certainly have
09:50exuberance.
09:51The question is
09:52whether it's irrational.
09:53And since nobody,
09:54in my opinion,
09:55can,
09:55can spec out
09:57exactly what it is
09:59that AI's been,
10:00going to be doing
10:00and with what effect
10:01and with what
10:03profitability,
10:04I don't think
10:05anybody can say,
10:06uh,
10:07that it's,
10:08that it's irrational.
10:10Uh,
10:10but,
10:11but,
10:12but you have to
10:13consider the possibility.
10:15And so,
10:16you know,
10:16when you tackle AI
10:17from an investment
10:18point of view,
10:19you have to think
10:20about,
10:20uh,
10:23how,
10:23uh,
10:24confident you are
10:25that,
10:26that,
10:28that,
10:28uh,
10:28in your judgments
10:30and,
10:30uh,
10:31you know,
10:32how much,
10:33like in,
10:34like in everything else
10:35but taken to a higher power,
10:37we have to think about
10:38how much,
10:40how important is us
10:41to make all the money
10:42that's going to be made
10:43by the most aggressive people
10:45and are we willing
10:46to take on
10:47the uncertainty
10:48which is associated
10:49with that?
10:50Is it difficult
10:50for a value investor
10:51to warm to
10:52AI companies?
10:53A number haven't
10:54done public,
10:55of course,
10:55but,
10:55well,
10:56I,
10:56I think it's challenging
10:58because when,
10:59and when you're talking,
11:00certainly if you're talking
11:01about a,
11:02uh,
11:03you know,
11:04the so,
11:04so-called hyperscalers,
11:06Yeah.
11:06Microsoft and,
11:08and,
11:08and,
11:09and Amazon
11:10and the like,
11:11they have other businesses
11:13which will support,
11:15for example,
11:15an earnings estimate.
11:18But if you're looking
11:20at somebody
11:21who's just in the business
11:22of AI,
11:23and they're all in
11:25on AI,
11:26their entire business model
11:28is dependent on AI,
11:29uh,
11:30maybe they,
11:31uh,
11:32haven't produced
11:33a profit yet
11:33or,
11:34or,
11:35you know,
11:36I,
11:36I just think
11:36that there's
11:37an unusual,
11:38uh,
11:39degree of uncertainty
11:41in coming up
11:42with any
11:43quantification
11:44of earnings potential
11:46and thus
11:47of what we call
11:48intrinsic value.
11:49I think it's,
11:50you know,
11:51it's going to be hard
11:51and,
11:52you know,
11:53uh,
11:54Warren Buffett
11:55always said,
11:56oh,
11:56oh,
11:57we put that
11:57on the too hard pile.
11:59It may be too hard
12:01for the value investor,
12:03uh,
12:03certainly the one
12:04with the capital V
12:05and,
12:06and it's,
12:06and it's challenging
12:07for the one
12:08with the small V.
12:09But given everything
12:10you just said,
12:11all of those unknowns,
12:13doesn't that make
12:14the exuberance
12:14kind of irrational?
12:15Why have you not
12:16reached that threshold?
12:17Not necessarily.
12:18Okay.
12:18Because maybe
12:20it's inadequate.
12:21But you don't know that.
12:22No,
12:22but you don't know
12:24it doesn't mean
12:25it's,
12:25it's,
12:26that something's true.
12:27You're silly.
12:28So I'm all,
12:29we have to think
12:30that you take
12:31a traditional company
12:32today,
12:33you can make an estimate
12:34of their earnings.
12:35Right.
12:35A tech company,
12:36you can only have,
12:38do that with less certainty.
12:39Yes.
12:40But,
12:40you know,
12:42a pure AI company,
12:44which has never
12:44announced results,
12:45you,
12:46and what are they
12:47going to make
12:47five years from now?
12:48You have to say,
12:49well,
12:49there's an unusual
12:50amount of uncertainty.
12:51The fact that there's
12:52uncertainty present
12:53doesn't mean
12:54you don't do something.
12:55But you acknowledge it
12:57and that may inform
12:58how you do it,
12:59which form of AI
13:00investing you do
13:01and it may inform
13:03how much you bet
13:04on that.
13:05But the fact that
13:07there's uncertainty
13:08involved cannot keep
13:10you from doing
13:10something.
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