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Howard Marks joins us now at the Qatar Economic Forum. He is the co-chairman of Oaktree Capital Management. I'd really like to talk to you about AI , you've written a lot about it in recent memos . Before we discuss , I'm very curious how you processed what we heard from the Fed Chair , yes, in his most recent remarks since the Fed's decision.
In the limited number of speeches he has given as Fed Chair, are you satisfied with the quality of communication you receive? How innovative is his way of communicating with the market ? Well, I think less communication is better . I'm not looking to the Fed Chair to tell me what to do or even to tell me what he's going to do .
But I think as long as the central banker tells people less about what he's going to do, they should make their portfolios and businesses less vulnerable. Which is better for society? When everyone in society knows exactly what the feds are going to do and prepares for it , society depends on that outcome, and if anything else happens, bad things can happen.
So, I think it will increase safety in the environment. So, do you think Warsh is involved in something that is wags the tail at the Fed ? Let the markets decide without relying too much on this forward projection . I learned a lot about dot plots in the last month of my life. I didn't know I needed to know that much , but well, my personal preference is to leave it alone, unless it's too hot or too cold, until it's in danger of derailing.
So, you know, I agree with that. We are talking about something called natural interest rates . These are the rates that result from negotiations between borrowers and lenders . I think that's a great idea . This is called the free market . Let the market do its thing. Listen, I'm a tough contractor.
Anything to lower that mortgage rate , you and I will do it . How do we operate? What is this environment like for a value investor like you ? I think we've attracted a lot of attention to the Fed , and maybe it shouldn't be considered a backseat , it should be front and center a little bit . That opens the door to relying more on the fundamentals of stocks again than in the past.
Okay, look, I'm what's called a value investor , um not a capital V , but a small V. Um, that means um, our approach is to find the intrinsic value of an asset and see if we can buy it at a fair price relative to that value. In my opinion, that's all it means . Oh, the challenge today is that, in my opinion , since about October 1, 2022 , I believe the markets have generally been ruled by optimists , and the S&P has more than doubled during that period .
This was a very strong period , and you need to recognize that when optimists rule, prices tend to be high relative to intrinsic value , meaning it's a time to be a little cautious. This is not the case , it's not the worst thing I've ever seen, but I think it's important to note that the optimists were in control.
Why do you think so? Because as someone who comes more from the diplomatic side, we always talk about this , when these markets see a deal coming out of Washington or Europe or the Middle East. Oh, we're getting a deal . Those who reported this know it's not going to happen , but there's a relentless optimism that the markets can't shake quickly .
how so ? Okay, that's a big question. Um, but um, I think some basic truths are positive and they are emerging . Um, our economy is doing well overall . Yes. Um, in my opinion , it's the best- performing developed world economy . Still? Um, so, you know , the old Tina trade, there's no other alternative.
Um, and um, and then there's the excitement about AI. Um, and um, and um , and um, and so, the other thing is that the optimism comes from the whole, you know, we haven't really had a bad time since March 2009, when the stock market went down during the global financial crisis . Thus, people adapt to good times and they extrapolate the good times , which results in optimism.
So, you mean, there's certainly no widespread pessimism today. When people are optimistic, while you personally maintain an excessive pessimism , you have the right. But the thing is, when optimists are in power, they shy away from bad news . You know, but that's how it is, they get excited when news of a settlement comes out .
They are not disappointed when it happens. That is the truth. So, you have to look at it , okay, you have to say there's a positive bias in the market today . When there is a positive bias , you have to acknowledge it . What will you do about it ? Maybe you should build up a little defense or be careful about what you do .
Before I get into AI from a market perspective, what struck me was , I think, two memos you wrote , which were your engagement with the potential societal implications of AI . You expressed very clear concerns about what the AI we were promised would mean for people across this country, if it comes to fruition .
Maybe not in the cities, but in Central America. What would it mean if all these jobs disappeared? As we've heard over the past week, you've been hearing about the great existential fears caused by the promised dangers of AI . I'm curious how you're dealing with them and how it's growing based on what you warned me about 6 months ago .
So have your fears gotten worse ? Are they more complex as a result of the conversations we have had ? Well, I think a sensible person needs to think about these things and accept that there's nothing we can do about it . When I got to that point in my own process , I kind of gave up on it, because my wife defines worrying as bleeding before she shoots you .
In this case, we can't do anything about it. Nothing, of course I can't do anything personally about it. So, you accept it . That's all. You accept that . You let people think about it , but in my view it shouldn't be a precaution . Are you satisfied that people are thinking about this enough or are they thinking about it in the right way ?
Well, people, on the other hand, I don't see anything from the government. Um, um I think there should be a task force on the impact of the upcoming outcome of AI . Um, nothing like that . Um, when they form the task force , I don't know what they can do about it , um, but it would be good to think about it , you know , if you want to do a little work , how about this?
If people are laid off , they won't pay taxes. If AI takes their place as workers , will it take their place as taxpayers , and how? So, when people lose their jobs , what happens to government revenue? Do you use it in your daily life ? Do you talk about GPT issues ? Have you integrated this into your business ?
You know , no, well, Octtree is definitely integrated with the business , and we use it to marshal data and do early analysis, you know, these are tasks that used to be very time-consuming. Business decisions, investment decisions, we certainly haven't moved on to that , and I think as much as you want to be an exceptional investor , exceptionality doesn't come from any computer or algorithm .
Exceptionality comes from being able to do a better job of evaluating the import of data . I think that excellence is not yet available through AI. So when you hire young people, do you see them outsourcing that critical thinking more and more to AI or haven't you seen that ? Don't encourage it . Okay.
There isn't much, but there is a lot of work to do. But first, I think you lose muscle if you stop thinking critically. The second thing, Christine, I keep saying is that exceptionalism is human. Just like indexation did for stock investing, it would put a lot of active investors out of business, but not for the better.
Um, that would be great if we could find a bubble in real time . As you pointed out , you can't. This is what you do when you look back. Um, but I'm curious how bubbly this environment seems to you right now. So, as you've written before, when you evaluate a bubble you look at company behavior and investor behavior .
There is a whirlwind of talk about circular financing and the like . Are there things that give you pause or concern when looking at the AI space, especially from a market perspective ? Well, I think the main point is that, as I wrote in the last memo on this subject, what Alan Greenspan used in '97 was irrational exuberance .
Um, that's the definition of a bubble . Um, of course we are enthusiastic. The question is whether it is unreasonable. In my opinion , since no one can say exactly what AI is going to do, with what results and with what profit, I don't think anyone can say it's irrational. But, but you have to consider the possibility .
So, when you're dealing with AI from an investment perspective , you should think about how confident you are in your judgments. Um, no matter how much we like everything else, when it comes to higher power , we have to think about how important it is to make all the money that the most aggressive people are going to make .
Are we ready to face the uncertainty associated with it ? Is it difficult for a value investor to be close to AI companies ? Of course, many have not come out publicly , but well, I think that's challenging, because when and where you're talking about, of course, if you're talking about aa and, you know, the so- called hyperscalers , Microsoft, Amazon, etc.
They have other businesses , for example, supporting an income estimate . But if you look at someone who is in the business of AI, maybe they are all in AI , their entire business model depends on AI . Maybe they haven't made a profit yet or, you know, I think there's an extraordinary amount of uncertainty in figuring out the amount of earnings potential, so that's what we call intrinsic value .
" I think you know that, it's going to be tough , you know , Warren Buffett always used to say , 'Oh, we put it in the two hard piles.'" This can be very difficult for a value investor , certainly for someone with a capital V, and it can be challenging for someone with a small V. But considering everything you just said , all those unknowns , doesn't that make that euphoria irrational ?
Why haven't you reached that limit ? It doesn't have to be because it's inadequate. But you do n't know that. That seems unreasonable to me. That doesn't mean it's true . You say, so I suppose you should take a traditional company today, and make an estimate of their revenue. A tech company, you can only do that with minimal certainty.
Yes. But you know , a pure AI company that has never announced results, what will you and they get after five years? You have to say well, there is an extraordinary amount of uncertainty. Just because uncertainty exists doesn't mean you're not doing something . But you accept that , it depends on how you do it, what kind of AI investment you make, and how much you bet on it . But the fact that there is uncertainty cannot stop you from doing something.
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