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You know, when you first learn to bowl, um, they put those inflatable bumpers in the gutters. You roll the ball, it bounces left, it bounces right, but like it always hits the pins. Yeah. It feels amazing, right? You feel totally invincible. But you are actually learning how to bowl. You're just learning how to throw a heavy object without any consequences.
And the second somebody deflates those bumpers, uh, panic sets in. Suddenly the reality of the lane actually matters because you haven't developed the underlying skills to navigate the actual physical environment. I mean you've just developed this reliance on an artificial safety net that guarantees a somewhat positive outcome you know no matter how poorly you actually perform.
Exactly. And that illusion of safety u that tension between relying on the bumpers and facing the very real unforgiving reality of the lane is exactly what we are unpacking today. But uh before we reveal the realities of the Ashra lane, a quick note for those looking to do their own lane reading. To access more advanced researches, follow Guru's latest movement mad and leverage our latest Deep Values agents.
Welcome to download Deep Values A from App Store. To track stock market temperature, welcome to download iOS app buffet indicator from Apple App Store or Bubble Watch from Google Play. Links in the description. Disclaimer: All analysis is based on publicly available sources and may be subject to revisions or different interpretations.
All contents from this channel is for research and entertainment purposes only and does not constitute any investment or financial advice or service. Conduct your own due diligence before making investment financial decisions. Okay, so with that out of the way, let's look at today's source. Yeah, it's a really fascinating transcript from Bloomberg television, specifically um an interview recorded at the Qar Economic Forum.
Right. And the person sitting in the hot seat is Howard Marks. Yeah. And for those who track the really smart minds in finance, he is the co-chair of Oak Tree Capital Management. He's just a legendary figure, mostly known for his incredibly thoughtful uh meticulously argued and often really contrarian memos.
Yeah. And if you're listening to this, you're here because you are a learner. You know, you are constantly trying to find the actual signal and the absolute noise of the market. and you want to figure out how these brilliant minds operate, but like without drowning in impenetrable financial jargon, which is exactly what we're going to try to do here,
right? So, our mission for this deep dive is to unpack Mark's genuinely surprising views on how central banks should operate. Uh why the market is currently entirely ruled by optimists and how a traditional value investor wrestles with the massive unquantifiable uncertainty of this whole AI boom. It really is a masterclass in how to process uncertainty in real time.
And you know, the conversation starts with a topic that usually puts casual observers right to sleep, but Markx completely flips the conventional wisdom on its head. And we're talking about the communication strategy of the Federal Reserve. Right. Exactly. The interviewer asks Markx how he's processing the recent remarks from Fed Chair Jerome Powell because, you know, there's been this whole narrative lately about the Fed giving very limited speeches,
right? Like they aren't giving the market perfectly clear signals about what they're going to do next. Yeah. And you would think a billionaire investor managing massive portfolios wants all the forward-looking information possible, like every little crumb of data, obviously. Yeah. But Mark says less communication is actually better.
He says he does not want the Fed chair to tell him what to do or even tell him what the Fed is going to do. Wait, really? Because it seems like the entire market hangs on every single word Pal says, right? But Markx is pointing out a fundamental flaw in how the modern financial system has evolved over the last couple of decades.
The system has grown just deeply deeply reliant on central bank signaling. Oh, right. Like the dot plots. Yes. The interviewer actually brings up the dot plots, which are those literal charts the Fed publishes showing where each official thinks interest rates are heading over the next few years. Yeah.
And Markx kind of jokes that he's had to learn way too much about dot plots lately. His core argument though, it's about the systemic health of society. If the central banker stops handholding the market and tells people less about what's coming, businesses and investors are forced to make their portfolios anti-fragile.
Anti fragile, meaning you build a system that can withstand unforeseen shocks rather than a system perfectly optimized for like one specific guaranteed outcome. Kind of like driving with a GPS that dictates every single micro turn, every single lane change, like a mile in advance. If you drive like that for years, you completely lose your innate sense of direction.
100%. You stop looking at the road signs entirely, right? And if that GPS signal suddenly cuts out or, you know, the map is outdated, you have absolutely no idea how to navigate. You just crash. And that's exactly what Markx is warning about. If every investor and business owner thinks they know exactly what the Fed is going to do, they all calibrate their entire financial structure for that exact telegraphed outcome.
They build around the bumpers. Yes. The entire society becomes completely dependent on that single path. So if an unexpected macroeconomic shock hits like a pandemic or a geopolitical conflict or a supply chain collapse, Yeah. the system just shatters because no one built in a margin of safety they didn't think they needed one.
So Markx wants the Fed to just step back. Yeah. He advocates for a decidedly less activist central bank. He wants the economy to just function on its own unless it's in danger of going completely off the rails, you know, like hyperinflation or severe depression. But if the economy is just humming along somewhere in the middle,
his advice is to leave it alone. He points directly to this concept of natural interest rates. Right. And he defines natural interest rates as the rates that result purely from negotiations between borrowers and lenders. Yeah. like actual market dynamics. We're talking about the free market pricing the cost of money based on actual risk and reward.
Think about it. If you are starting a highly speculative tech company, the free market should naturally demand a higher interest rate from you than from someone taking out, say, a 30-year mortgage on a stable piece of real estate because the risk dictates the cost of the capital. Exactly. When a central bank artificially suppresses interest rates and broadcasts exactly how long they're going to stay suppressed, they distort that natural negotiation.
Capital flows into places it probably shouldn't simply because the money is artificially cheap. But wait, let me push back on this a little bit. Isn't a lack of communication from the Fed exactly what causes massive market panics? I mean, investors hate uncertainty. Oh, they despise it, right? So if the Fed goes completely silent and stops providing forward guidance, doesn't everyone just panic and sell off because they don't know what the cost of capital will be next month?
Investors absolutely crave certainty in the short term. But Markx is saying that constantly feeding that craving creates a long-term systemic danger. Providing artificial certainty breeds this very specific and honestly sometimes dangerous type of market psychology where risk assessment is essentially just outsourced to the government.
So when the central bank stops handholding the market, investors are suddenly forced to confront their own psychology. Yes. And right now, according to Markx, that psychology is overwhelmingly one-sided. Yeah. I mean, the interviewer asks him what this current environment actually feels like for a value investor.
And Markx makes a very distinct categorization of himself to answer this. He says he identifies as a value investor, but with a small V, not a capital V. A small V, value investor. Okay. So what does that actually look like in practice when someone is analyzing a stock? Because usually value investing sounds pretty rigid.
Well, a capital V's value investor tends to be heavily dogmatic. You know, they might have these rigid unbreakable rules about price to earnings ratios or they only buy companies trading below their book value. Right. Old school Buffett stuff. Yeah. But those strict historical metrics often lock them completely out of modern asset-like growth companies.
A small value investor strips the discipline down to its core philosophy which is what you figure out the intrinsic value of an asset and you try to buy it at a fair price relative to that value. Intrinsic value being the actual measurable worth of the business based on the future cash it's going to generate.
Right. So basically yeah you calculate how much cash a business will produce over its lifetime. Discount that back to today's dollars and um that's your intrinsic value. If the stock market is offering you the company for a less than that number, you buy it. But doing that right now is incredibly difficult, isn't it?
I mean, Markx points out that since roughly October of 2022, the markets have been entirely ruled by optimists. He notes the S&P 500 has more than doubled in that specific period. Yeah. And when optimists dictate the flow of capital, prices naturally detach from that grounded intrinsic value calculation Markx is looking for, people start paying for best case scenarios rather than current realities,
which is wild. The interviewer asks a really crucial question about the source of this optimism. Because even when diplomatic or economic deals in Washington, Europe, or the Middle East seem completely unlikely to materialize, the market just responds positively to just the trace of a rumor. It's just wild optimism.
And Markx lists a few core reasons driving this behavior. First, to be fair, the underlying truths are actually pretty solid. The US economy is doing well in the aggregate. Um he actually calls it the best performing developed world economy. Okay, that's fair. What's the second reason? Second, there's the TINA trade.
Tina, there is no alternative, right? For years, bond yields were incredibly low. If you kept your money in a savings account or a safe government bond, you were actually losing purchasing power to inflation. So, you had to buy stocks. Investors were essentially forced to put their capital into the stock market to get any sort of real return.
And that ingrained habit is hard to break even as interest rates have shifted recently. Okay, so that's two. Third is obviously the massive excitement over AI which uh we will dig into shortly. [snorts] But the fourth reason is the most fascinating to me from a psychological standpoint. Yeah. The time frame.
Markx points out that we haven't had a truly devastating prolonged bad time since March of 2009 when the stock market bottomed out during the global financial crisis. It's incredible to think about. An entire generation of investors and financial professionals has essentially never managed money through a catastrophic multi-year bare market.
They don't know what it feels like when the bumpers are gone. Exactly. People get used to good times and human nature naturally extrapolates those good times into the future. Optimists, as Markx observes, they just slough off bad news. They get thrilled by the rumor of a settlement, but they do not adjust their valuations downward when that deal inevitably falls through.
But wait, if optimists are just blindly ignoring bad news, shrugging off failed deals, and extrapolating good times indefinitely, aren't they just building a massive house of cards? Like buying stocks at historically high prices relative to their intrinsic value? Sounds like the exact scenario where a value investor should just liquidate everything and hold cash.
You'd think so, but Mark's takeaway is remarkably pragmatic. He really avoids extreme reactions. Absolutely. He doesn't say sell everything. No, he doesn't advocate panic selling at all. He says you have to clearly acknowledge the positive bias in the room. You have to recognize who was setting the prices.
When optimists are in control, prices are high. That doesn't mean a crash is imminent tomorrow. Markets can remain elevated for years. It simply means your margin for error is smaller. So, it's time for caution. You build in a little defense. Exactly. You don't leave the game entirely, but you start favoring companies with stronger balance sheets.
you take a lot more care in how you allocate new capital because the forces driving this current wave of optimism carry risks that are genuinely unprecedented in modern financial history. And that need for caution is exactly why Marx's view on AI is so surprising to me. I mean, you'd think the ultimate market optimist engine uh the promise of artificial general intelligence reshaping everything would absolutely terrify a disciplined value investor.
It does, but his concerns are focused completely outside of the stock market. In previous memos, Markx has expressed acute concern about AI wiping out jobs, particularly in middle America. Right? So, the interviewer asked him, given all the hype and all the recent existential dread we hear about AI, have his fears compounded?
And this is where Mark shares a quote from his wife that frames his entire approach to this macrolevel anxiety. She defines worrying as bleeding before you're shot. Bleeding before you're shot. Wow. Yeah. A sensient human being observing the landscape obviously has to think about these massive technological shifts.
But you also have to acknowledge when there is absolutely nothing you can personally do to alter the trajectory, right? He can't put the AI technology back in the box. He can't stop companies from adopting it. So he rolls with it. He actively prevents it from becoming a daily preoccupation that clouds his judgment.
But that personal stoic acceptance doesn't mean he thinks society as a whole should just ignore the implications. Right. Not at all. He points his finger directly at the lack of structural governmental action. People are endlessly debating philosophical existential threats like killer robots. But he doesn't see any concrete policy coming out of the government to manage the economic transition.
Right. He argues there needs to be a dedicated government task force to address the coming societal effects of AI. Yes. And he poses a purely practical balance sheet question that completely bypasses the usual sci-fi debates. He asks, "If AI puts millions of people out of work, who pays the taxes?" Oh, wow.
If a software program takes the place of a human worker, how does it take their place as a taxpayer? What happens to municipal, state, and federal government revenues when payroll taxes just vanish? It is a devastatingly simple question with massive macroeconomic implications. Like, we hear constantly about universal basic income as a solution for displaced workers, but Markx is looking at the other side of the ledger.
Exactly. How do you fund any societal safety net if the primary revenue engine, human income tax, just evaporates? It is like a corporate board deciding to rip out the heavy gas engine of a delivery truck to save on weight and improve efficiency. Completely forgetting that the engine's alternator is what powers the headlights, the dashboard, and the refrigeration unit in the back.
That is a perfect analogy. If citizens lose jobs on mass, the government's revenue engine collapses. You can optimize corporate efficiency all you want with AI, but if you break the underlying funding mechanism of the society those corporations operate within, the efficiency gains literally don't matter.
Right? It's a macrolevel societal risk that is entirely unquantifiable right now. Nobody knows how fast job displacement will actually happen or if new industries will replace the old ones quickly enough to maintain that tax base. And this sober kind of pragmatic view of the macro risks translates directly into how Markx is utilizing AI inside his own billion-dollar firm right now because the interviewer asks if he's out there actively using chat GPT and if Oakree has integrated AI tools into their workflows
and they have. Oakree has absolutely integrated AI to marshall massive amounts of data and perform early analysis. The technology is phenomenal at taking tedious manual tasks that used to consume days or weeks and compressing them into minutes. It is an undeniable massive timesaver. Like instead of a junior analyst spending three grueling weeks reading 400 pages of obscure corporate debt covenants just to find a specific legal loophole, the AI model flags that exact loophole in 3 seconds.
3 seconds. Yeah. That is the prep work. Yeah. But Markx is adamant that they absolutely do not turn actual business or investment decisions over to the AI. Right. And the reasoning gets to the absolute core of what Markx believes makes a great investor. He argues that exceptional investing doesn't come from a computer or an algorithm simply having access to more information.
Okay. Then what does it come from? It comes from a human being doing a superior job of assessing the import of that information. The import like the weight, the subtle meaning, the broader context of the data. Exactly. The AI can gather the data perfectly. It can summarize the debt covenants flawlessly.
But judging what that loophole actually means in the messy, irrational real world is a uniquely human skill. Right? A human analyst has to decide if exploiting that loophole will ruin a vital long-term relationship with a corporate partner. The AI doesn't understand reputation or human psychology. Markx explicitly states that this level of nuance superiority is just not available through AI.
And the interviewer asks a really insightful follow-up to this. When Oak Tree hires younger people, young analysts who grew up digital natives, are they seeing them outsource their critical thinking to these AI tools, which is a huge concern. Mark says Oak Tree actively discourages that reliance. He warns that if you stop doing the hard, slow work of critical thinking, you will inevitably lose the muscle.
The analogy of a kitchen works perfectly here. I think AI is like the ultimate sue chef. It can dice 10,000 onions perfectly and instantly, measure every complex spice blend to the microgram, and prep all the ingredients faster than any human brigade ever could. But wait, if the AI Sue Chef is that flawless, if it processes a million times more data and makes zero mathematical errors, why wouldn't we just trust it to cook the final meal?
Because the sue chef doesn't know who's sitting in the dining room. Yeah. The sue chef doesn't know that it's an unusually hot day outside. So, the soup needs to be balanced with a little more acidity to feel refreshing to the guests. Ah, context, right? Context. You still require the human head chef to taste the broth, assess the broader atmosphere of context, and know what the dish actually needs to succeed in reality.
And Markx believes AI will do to active investing exactly what index funds did decades ago. It will put average unexceptional active investors out of business, but it won't replace the exceptional human ones. The true alpha, the actual edge remains human judgment. But applying that human judgment to the current AI landscape is where things get really complicated.
How does a human mind evaluate the pure chaos and intense hype of AI companies trading on the stock market today? Oh, this prompts the interviewer to ask the bubble question. The bubble question. Yeah. The interviewer references Alan Greenspan's incredibly famous phrase from 1997, irrational exuberance.
They ask Markx how bublishious this current AIdriven market environment actually looks to him through his small value lens. And Marks agree is that there is definitely exuberance, right? The optimism is visible in the valuations everywhere. But he hesitates very specifically to call it irrational, which is a striking, deeply analytical distinction for a traditional value investor to make because usually high prices driven by overwhelming optimism are immediately labeled irrational by value purists.
So why doesn't he call it irrational? Markx explains his logic. To definitively call a market behavior irrational, you have to know with certainty what the rational baseline is. And right now, absolutely nobody can spec out exactly what artificial intelligence is going to be doing in 5 years. Right?
No one knows what specific transformative effect it will have on global productivity or how profitable these underlying models will actually be because that future is completely unwritten and technologically unprecedented. You cannot definitively state that the current excitement is irrational. But he draws a really sharp practical contrast between different types of technology companies currently involved in this boom.
He points to the hyperscalers, right? Massive companies like Microsoft, Amazon, and Google. Yes, they are investing tens of billions of dollars into AI infrastructure, but they also have massive existing highly robust legacy businesses like global retail logistics or enterprise cloud hosting, things that actively support their current earnings estimates.
Exactly. You can actually build a financial model around their existing cash flow. But then he points to pure AI companies, companies whose entire existence and valuation are dependent solely on AI technology, many of which have never produced a single dollar of actual operating profit. So for anyone trying to calculate intrinsic value, a pure AI company presents an almost insurmountable degree of fundamental uncertainty.
You are trying to discount future cash flows, but you can't even quantify what the basic revenue model looks like. Yeah. Markx brings up Warren Buffett's famous strategy for dealing with exactly this kind of scenario, putting it in the too hard pile. It is practically impossible for a small value investor to confidently slap a fair valuation on a pure AI company today.
But hold on. If we have absolutely no idea what a pure AI company will generate in revenue in 5 years, if we can't quantify the future earnings at all, isn't throwing billions of investment dollars at the literal definition of irrational behavior? It sounds exactly like venture capital gambling, not disciplined public market investing.
It does sound like that. But Markx addresses this exact tension with a piece of counterintuitive logic that forms the bedrock of his risk philosophy. He essentially argues that just because you do not know the exact outcome, that does not mean the underlying premise is untrue or silly. Okay? The fact that there is an unusual historically high amount of uncertainty present doesn't mean you just freeze up, sell everything, and do nothing.
You don't just ignore a massive technological shift simply because the math is hard. The presence of immense unquantifiable uncertainty shouldn't paralyze you. It should simply inform how you structure your investments. It informs which specific form of AI exposure you choose to take. Like leaning heavily toward the established hyperscalers that offer a downside floor instead of, you know, rolling the dice on the pure play startups.
Exactly. And more importantly, it informs exactly how much of your total portfolio you allocate to that theme. You acknowledge the heavy uncertainty. You size your financial bets accordingly. and you actively build in that defensive posture we talked about earlier. You don't walk away from the table out of fear, but you carefully manage your exposure to a hand you cannot fully see.
Man, pulling all of these threads together to view the entire landscape we've just covered. What does this all mean for you, the learner? Howard marks his entire worldview, whether he's analyzing the silent strategy of the Federal Reserve, the relentless optimist driving market valuations, or the unquantifiable societal threat of artificial intelligence, is fundamentally about embracing uncertainty without losing your analytical discipline.
Right? The goal of investing and perhaps navigating the modern economy isn't to perfectly predict a future that is inherently unpredictable. The goal is to build a robust, anti-fragile system for yourself that can survive multiple different futures. And you can actively apply that small V value mindset to so much more than just a financial portfolio.
You can apply it to how you consume daily news or how you make long-term career decisions in an increasingly AI heavy world. You calmly acknowledge the positive bias in the room. You accept that you cannot control macro forces like central bank policy or technological evolution. You don't waste energy bleeding before you're shot.
Exactly. But you always build in your own margin of safety. And crucially, as Markx warns, you never let the algorithms do your critical thinking for you. Because the moment you stop actively assessing context, you lose the only real advantage you have. If the AI models can eventually marshall all the world's data and perform the basic fundamental analysis instantly and flawlessly, the only genuine edge left in the market and in the workplace is the human capacity to assess subtle context
to weigh the nuance meaning of that data against the messy reality of human behavior. Which leaves us with something really fascinating to chew on as we wrap up. If the ultimate investing edge and quite possibly the ultimate professional edge of the next decade is exceptional human critical thinking and artificial intelligence is rapidly automating all the basic analysis and data gathering is the most valuable asset of the future simply the human ability to ask the right unprompted questions and if so how are you actively training that muscle today?
Are you practicing your swing on the real lane or are you still relying on the bumpers? Thanks for joining us on this deep dive into the mind of Howard Marks. Keep exploring, keep questioning, and we'll catch you on the next deep dive.
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