A (2:52)

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 in the way it's financed?

B (3:05)

Just because something is excessive doesn't mean that you can't invest in it.

A (3:08)

No, but, but.

A (3:12)

You Know when, when, when, when investors hate everything.

A (3:18)

And won't touch it. With the 10 foot pole, 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, is excited about something, chances are it may be overhyped and overpriced. So you just have to be careful.

B (3:34)

So that's where we are right now. You said you can invest, you can participate, but you just have to be careful. What is being careful look like? Does it mean focusing more on debt vs equities, more on equities vs debt, more on small companies vs big ones? What does that look like? Well.

A (3:50)

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 has, is likely to repay interest and principal. If it's just purely conjectural, it's not, you shouldn't be a lender. And in fact it's, 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 9% loan, all you're going to get is 9% no matter how well the thing does. You certainly shouldn't do that in, in, in.

A (4:39)

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.

B (4:48)

So you think right now in some circumstances the equity might actually be a better option than the debt because of that potential.

A (4:55)

Exactly. Because the point is that if you, if you go into some startup which has a, the possible, you know, let's say a small possibility of a, of a raging success.

A (5:09)

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.

B (5:18)

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?

A (5:37)

Well, yeah, well, I think that, I think that it's, you know, Buffett says the less prudence with which others conduct our affairs, the greater the prudence with which we must conduct our own affairs. So when other people are acting imprudently and mindlessly and carefree, 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 06, for example. So if people are reacting harshly to, to aggressive, possibly risk.

A (6:25)

Indicating activities. Yes, that's, that's a healthy sign. And this market is, is, seems healthier than the, than the 2000 market to me.

B (6:35)

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.

A (6:51)

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.

A (7:11)

The Fed manipulations are a form of price controls. You know, they control the price of money. And.

A (7:19)

If, if the Fed puts money artificially cheap.

A (7:24)

Then it induces behavior like risk taking. It forces people into riskier 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, 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, if the economy is seriously overheated and tending towards hyperinflation or seriously.

A (8:04)

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, than they are today. I just don't see that the merit.

B (8:29)

In that right now going forward. I remember back in 2015, 2016, 2017, when 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 and 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?

A (8:54)

Well, the lower base interest rates are. Everything scales off that. So you know.

A (9:04)

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 relative to the last 15 years. But this is a low rate. So everything scales off that. Most things will give moderate returns. In the debt area, I think prospective returns are moderate. Okay, not lush, but not inadequate. The trouble is that the S and P based on its P E ratio relative to history appears to be priced to provide a very low prospect of return. Historically, if you bought at this P E ratio.

A (9:51)

Your return over the next 10 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.

B (10:17)

You had a personal note, an addendum at the end, and we led 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 investors. Mind you 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.

A (10:43)

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 25 years.

A (11:06)

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 job count is not down, but job quality is down. And.

A (11:27)

I think that this is very worrisome. And as I said in the addendum.

A (11:36)

When we lost jobs to automation and offshoring, I think that that coincided with the opiate epidemic and not only in amount but also in location. And I think it's a natural consequence of people sitting around all day. And even if we can find 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.

B (12:21)

Howard Marks, you are absolutely one of the best. My favorite to talk to. Howard Marks of Oaktree Capital Management. Thank you. Thank you so much for being with us.

A (12:29)

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