How Oaktree's Howard Marks Spots a Market Bubble
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January 27, 2025
TLDR: Investment expert Howard Marks discusses market bubbles, specifically the 'Bubble.com' note he wrote during the run-up to the 2000 Nasdaq peak and his perspectives on current conditions. Notable for predicting the dot-com bubble and surviving financial crises in 2000 and 2008.

In the recent episode of the Odd Lots podcast, hosts Tracy Alaway and Joe Wiesenthal engage with Howard Marks, co-founder and co-chair of Oaktree Capital Management, to discuss his perspectives on market bubbles, particularly in light of the excitement surrounding Big Tech stocks and AI. With a track record of accurately predicting market bubbles, including the infamous Dot-Com bubble, Marks shares his insights on identifying market frothiness and the current investment landscape.
Understanding Market Bubbles
Key Concepts Discussed:
- Distinction Between Bubbles and Bull Markets: Marks emphasizes that a bubble is characterized not just by high prices but by a collective psychological state where investors abandon caution, often driven by excitement and fear of missing out (FOMO).
- Historical Context: Reflecting on his experiences from the late 1990s Dot-Com bubble and the 2008 financial crisis, Marks articulated how behavioral indicators play a critical role in detecting excesses in the marketplace.
Behavioral Indicators vs. Numerical Assessments
Behavioral Observations:
- Marks likens his market assessments to staying attuned to "cultural markers" that indicate investor sentiments. Such markers might include peculiar behaviors at social gatherings, like an investor discussing their latest tech stock achievements at a cocktail party.
- He argues that many market bubbles are symmetrical: a prior comforting environment can lead to complacency, which might corrupt judgment as conditions change.
Analytical Framework:
- Bubble.com Memo: Marks revisited his 2000 memo titled "Bubble.com," which documented excessive behaviors in the investment community. Importantly, he clarifies that the memo described conditions rather than predicted a market crash, which is crucial for understanding investor psychology during volatile times.
- Integrating Numbers and Behavior: In his evaluations, Marks states he relies 99% on behavioral signs and only 1% on numerical indicators, arguing that numbers alone cannot capture the psychological fervor driving a bubble.
Current Market Temperature: Is There a Bubble?
Marks assesses whether the current market conditions represent a bubble. Although he acknowledges some elevated price-to-earnings (P/E) ratios, he asserts that the current market lacks the frenzied behavioral components typical of a bubble. Points made include:
- Market Analysis: By analyzing the performance of stocks, especially "magnificent seven" tech companies, Marks finds that while their P/E ratios are high, the overwhelming excitement indicative of a bubble is not present.
- Comparative Analysis: He contrasts today’s market with historical bubbles, noting that while the numbers might signal caution, investor behavior remains more grounded than in past speculative periods.
Practical Applications for Investors
Strategy Recommendations:
- Risk Management: Marks advises investors to identify their risk tolerance and adjust portfolios between aggressive and defensive positions based on market conditions. This means maintaining flexibility in approach rather than rigid adherence to ‘buy-and-hold’.
- Monetary Preparedness: He underscores the importance of being prepared for downturns by conserving capital during periods of high valuation so that investors can take advantage of lower prices when a correction occurs.
Lessons from the Past:
- Historical Insight on High-Yield Investments: Referring back to the Nifty Fifty of the 1970s, Marks emphasizes the lesson that no asset is immune from becoming overvalued and that successful investing doesn’t just rely on picking the right stocks but rather purchasing them at the right price.
- Adopting a Long-Term Perspective: Marks reminds investors to avoid chasing fleeting market trends and to focus more on long-term fundamentals when evaluating investments.
Conclusion
Howard Marks' insights offer a valuable perspective for any investor looking to navigate the complexities of market behavior and valuation. By understanding the historical context of bubbles and applying a framework that balances numerical analysis with behavioral cues, investors can position themselves more expertly in today’s rapidly changing financial climate. Takeaway: A bubble isn't just about high prices; it's about behavior, sentiment, and the overall market psyche—factors that must be carefully monitored to avoid the pitfalls of speculative investing.
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Hello, and welcome to another episode of the All Lots Podcast. I'm Tracy Alaway. And I'm Joe Wiesenthal. So Joe, we recently recorded an episode with Kevin Mirror where we were talking about concentration risk in stock indices and I guess historical analogies with the dot-com bubble of the 2000s. And I know that this is one of your favorite subjects. I think I said it was like your own personal catnip. That's right.
And so I thought, you know what, I did not get Joe a Christmas present this year. In fact, I don't think I've ever gotten you a Christmas present, but wouldn't it be nice if I got him a whole episode where we're talking to one of the world's most famous investors who correctly called the Internet bubble?
Let's do it. Let's jump right into it. No more intro. I'm so thrilled about this conversation. Let's just get it started. All right. I will also admit, this is a belated Christmas present to myself as well. So we are going to be speaking with Howard Marks. He is, of course, the co-founder and co-chair of Oak Tree Capital Management. He's famously a credit investor, but he did call, as I said, the dot com bubble correctly. So Howard, thank you so much for coming on the show.
It's a pleasure to be with you, Tracy, and also Joe. Maybe just to begin with, give us some context around what the early 2000s, late 1990s were like for you. What were you doing and what were you observing at that time? Well, the 1990s were a slow time for credit investors.
we're kind of opportunistic and bargain hunters and bargains come from dislocations and you know people feeling urgency to get out of positions and the 90s were generally a placid period except for the around 98 we had a devaluation of the Russian ruble and a southeast Asian crisis and we had the meltdown of a
highly levered hedge fund called long-term capital management. But those were all kind of idiosyncratic events, not macro and not broad-based. Other than that, the investment environment was placid. Importantly, it was the best decade in history, I think, for stocks. And the S&P 500 rose an average of 20% a year for 10 years, which is an astronomical accomplishment. If you rise 20% a year for 10 years, I would guess that
something goes up roughly eight times in 10 years, which is incredible. And of course, this was all powered by the, what we call the TMT bubble tech media and telecom bubble. Some people call it the internet bubble, which prevailed in 98, 99 and into 2000. So it was hot times, not for credit investors, hot times for equity investors.
You know, you recently wrote a memo that called back to a memo that you had written basically exactly 25 years ago, so right at the start of 2000, of course, the dot com bubble or the TMT bubble peaked, I think it was in March of that year. You got the timing right. And that's sort of extraordinary because there were a lot of people
probably starting in 1998 and 1999. Maybe even earlier, like this is ridiculous. There's all these companies. They literally don't have a penny in earnings or perhaps don't even have a penny in revenue. They just have the name.com in their name, the IPO at crazy prices.
What is the experience like, I mean, that was very fortunate timing on your part, but there were a lot of people who are famously correct and early and they had clients abandoned them and so forth and they were thought is like, oh, you don't understand the new paradigm, et cetera. What's that like in the years before that as it feels like the market is becoming increasingly untethered from any sort of reality and yet there's no payoff in being correct?
Well, there's so much to say in response to your question. I use a lot of quotes and adages when I write because other people have said things so much better than we can. One of the first adages I learned in the early 70s was that being too far ahead of your time is indistinguishable from being wrong.
Yeah, it's painful to say something and predict something and then have to wait years and years for it to come true. Alan Greenspan famously said, I think it was in 1996, that we're beginning to see signs of irrational exuberance in the stock market. And of course, the market went straight up for the next four years. And there are people who pronounced that we were in a stock market bubble, I think,
I can think of one in June of 2020. And here we are almost five years later. And of course, we did stall out in 22. But if you went out in 20 and weren't smart enough to come back in in 22, you've missed a big ride. So I think, well, you know, one thing I argue strenuously, Joe, is that in the investment business, there's no place for certainty.
And Mark Twain said, it ain't what you don't know that gets you into trouble. It's what you know for certain that just ain't true. And so you can have opinions, but you should never be certain that you're right. And you should never
arrange your financial affairs on the assumption that your forecast is right. Because it can be right intellectually or factually or rationally, but just take a long time to materialize. And if you can't survive between when you take your position and when your expectation comes true, then obviously it's not something you should do.
And one of my colleagues once wrote a note to his clients, he says, if you name a price, don't name a date. And if you name a date, don't name a price. That's good advice for journalists, too. But anybody who names a price and a date is probably going to get carried out of it sooner or later.
So what was it like then when you hit the publish button on the note? I think it was called bubble.com and you published it. I think it was right at the start of January 1st. It was January 2nd, 2000 was the first business day of 2000. And then stocks later that month, right?
No, I think a little later that year, Joe said it was in March. I don't remember exactly. I thought it was a little later than that. But, you know, I'd started writing these memos in 1990. I've been writing for 10 years. Of course, in those days, they went out in the mail and to a limited audience, just my clients.
you know, for 10 years, I never had a response. And then I spent the full of 99 working on this memo, bubble.com, and was ready to push the button. I guess I polished it over Christmas probably and sent it out the first day. And, you know, let me just clarify one thing for the record and for the benefit of the listeners. If you read that memo, it does not predict the bubble. And it does not say,
you know, the market's going to collapse. All it did is describe the current conditions. And that's two different things. Now, I don't make predictions. I only describe current conditions. And my motto is, we never know where we're going, but we sure as hell ought to know where we are. And I believe
You know, this is a little bit of a matter of semantics. I believe that where we are, if we properly assess it, informs where we're going. But I think people who waste their time figuring out making predictions, which I'm strongly against, are wasting their time. I think that describing current conditions can be done
accurately and obviously has an impact on what the future holds. So, as I say, read the memo. I think it reads well in retrospect, but don't expect to find a place where I say get out of the market or the market's going to collapse or they're over in a bubble that's going to pop. What I say there is I just want to call your attention to all these
forms of excessive or overheated behavior and let you know what I think is going on. That's all it says. So in the art of just identifying where we are and when we're talking about financial markets, obviously we can use all kinds of ratios, etc., price to earnings, price to forward earnings, valuations, a million different ratios that you can come up with.
And then, you know, there are sort of cultural markers. And I remember in summer 99, I would get lunch every day at the same pizza shop and the pizza shop owner had CNBC on and he was trading tech stocks at the time. And these other sort of.
indicators that people are just excited about the prospect of making money and making money fast. And when you do an assessment and you say, okay, here's where we are, how much do you sort of hue strictly to the math, so to speak, and how do you systematically incorporate other indicators of exuberance, which perhaps can't always be captured on a Bloomberg terminal, for example?
Now, look, I think you're absolutely on the right track, Joe. You read the memo. My observations are, I would say, 99% what you call cultural markers, which I think is great, or behavioral indicators, and 1% math. And to me, it's the behavior that is so indicative. And in my first book, which is called The Most Important Thing, I have something in there
called the Poor Man's Guide to Market Assessment. And it really takes mostly cultural markers and puts them in two columns left and right. And whichever column is prevailing, it tells you something. And for example, I say in there that if people like me are being invited to cocktail parties and are at the center of attention,
and so forth, then it probably means that investing has been doing well, and everybody's optimistic about it, and it indicates that maybe things are too hot. And if people like me are not invited or shunted off to the corner, maybe the markets are too cold, too cheap, and it's time to strike. So I think that these behavioral indicators are extremely important, and I wrote a memo in
I think it was the summer of 23 called taking the temperature. And I describe what I do in this regard as taking the temperature of the market to figure out if it's hot or cold. And when I was working on my second book, which is called Mastering the Market Cycle, and I was speaking with my son, Andrew, who's a venture capitalist, I said to him, you know, I think my forecasts over the course of my career have been about right. And he says to me, yeah, dad, that's because you did it five times in 50 years.
Five times in 50 years, I found the market is so crazy high or crazy low that you could make a logical case that was either overextended or too cheap. And you could do so with a high degree of confidence. And then I recount the five times I did it and why.
But if I had tried to do it 500 times or 5,000 times in my career, I mean, I'd probably been in investment business for about almost 20,000 days. But I tried to do it 5,000 times every fourth day. I'd probably be 50-50 at best. So to me, it's noting extremes of behavior.
And that's what I was doing with bubble.com, and that's what I did in five other observations. 89% of business leaders say AI is a top priority, according to research by Boston Consulting Group.
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So you've emphasized that you're describing current conditions, not necessarily making predictions. I'm curious how you translate those, let's say accurate assessments of the current environment into actionable investments. Or I guess another way of asking this is if you're looking at stocks,
and thinking they're overvalued or there might be signs of overvaluation, how does that translate into the credit space? Good question, Tracy. To me, the main axis along which one establishes one's behavior as an investor is the axis that runs from aggressive to defensive.
Each of us should figure out based on our personal conditions, our wealth, our income, our needs, our dependence, our age, plans, et cetera, and also ability to withstand fluctuations. Each of us should figure out what our normal risk posture should be. Normally, should I be a low risk person and normal or a high risk person? And then you should build the portfolio that
response to that decision. But then you might try to vary your position from time to time as conditions in the markets change. And I believe that, as I said, that the main axis along which one should think about varying one's position is between offense and defense.
So, you know, you establish a position, which is your normal position, which has a certain amount of aggressiveness, a certain amount of defensiveness. But then, are there times when you should become more aggressive? And are there times when you should become more defensive? And that's what I did on those five occasions. And I gave you an exam. And by the way, these are all described in taking the temperature.
I've mentioned, or you've mentioned, the memos from time to time, and I just want to note for the listeners that they're all available at oaktreecapital.com under the heading of insights. There's 35 years of worth of memos there, about 200, and there's no price of admission. They're all free, and anybody wants to sign up for a subscription can do so.
But in taking the temperature, I describe the way in 0506, I was getting really leery of the markets. What was my indicator? My indicator, or as Joe would say, my cultural marker, my indicator was that I'm reading in the paper about new deals that are getting done. And the deals were crazy deals.
deals that, in my opinion, should not get done. They were too good for the issuer and, in my opinion, too bad for the investor and the deals were getting done anyway. One of the investors' main jobs is to decline to engage in stupid deals.
And if somebody comes and says, I'm going to sell you a goldmine, and if you can put up a million dollars, you're going to make $100,000 a month for the rest of your life. Your job is to say, no, that's too good to be true.
Or, you know, if I say, I think there's a goldmine in Australia. And if you put up a million dollars, it'll probably give you a pay a million dollars a year the rest of your life. If we find gold, you should say, no, that sounds too risky. You know, I just think that we're unlikely to find gold. But if you see those deals getting done, it tells you that investors are not applying vigilance. They're not doing their job.
of resisting deals that are too risky or structured, not in their favor. And in 0506, I was seeing these deals done that made absolutely no sense. And I described myself as wearing out the carpet between my office and my partner, Bruce Cash. And every day I would go and say, look at this piece of crap that got issued yesterday. A deal like this shouldn't get done. And if a deal like this can get done, there's something wrong.
That was 99% of my observation at that time. That investors were not being suitably skeptical, cautious, demanding, and risk-averse. And Buffett has a great saying, which feeds right into this. He says, the less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. And when others are
wacky, we should head to the sidelines. That was the foundation of that conclusion. Now, what happened was it turned out we were in a housing bubble and the housing bubble gave rise to a mortgage bubble and the mortgages, the subprime mortgages issued to people who could not or would not document their income or their assets were packaged into mortgage-backed securities
and the people who bought the risky or tranches of those securities lost all their money, which the radio agencies rated very highly, because they didn't understand either. And this was going on on mass. And it was the collapse of the mortgage bank securities, of which the banks had in many cases retained the risky portions when they structured them. It was the collapse that took, you know, bears to urns and Merrill Lynch and Lehman Brothers.
and other AIG, et cetera, out of business as independent entities. I hasten to point out, I didn't know anything about mortgage-backed securities. I didn't understand subprime. I didn't know what was going on. It was going on in a distant corner of the investment world, which I was not in on. I just knew that the climate was too permissive and the mortgage-backed developments
were a manifestation of that. But your question, I always try to come back to the question. Your question was, what do you do about it? So what did we do? We sold most of our real estate holdings. We reduced holdings in many areas. We liquidated
Holdings in large funds are opportunistic debt funds that we had formed in a one oh two oh four Etc. We sold those holdings We raised either small funds or no funds and we waited For this behavior to produce opportunities after it passed on the first day of oh seven
Bruce and I sent the memo to our clients saying we'd like to have three and a half billion dollars for distressed debt fund. The largest distressed debt fund in history had been two billion. It was our 01 fund. We wanted three and a half because we thought there was something big coming. And within a month, we had eight billion. We went to our investors. We said, we can't use eight billion. We'll take three and a half. We closed that fund.
in March of 2007. But we said, we'd like to have the rest of your appetite for a standby fund. And we continued for a year to raise a standby fund. Again, in an area where the biggest fund that history was $2 billion, we raised $11 billion. And that was our fund 7B. And we put it on the shelf. And we said, this is for when the stuff hits the fan.
And we're not going to invest it until that time, and we're not going to charge any fees. And it's just commitments on the shelf because we'd like to have capital we can draw. And when Lehman went bankrupt on September 15th of 2008, we had that $11 billion. We had only invested about $1 billion. We had $10 billion that we could call on. And so unlike most people, we didn't have to worry about where are we going to get money.
Or can we invest or our clients going to withdraw their money rather than we had commitments? We were sure we could draw and so we could plunge in and we started to invest. Bruce does the investing and we developed our position jointly and we decided to get down to work. So the next week after the Lehman bankruptcy was Friday the 15th,
we started investing. And he invested for that fund alone, $450 million a week on average for the next 15 weeks. That's $7 billion in one quarter. Remember, in an area where the biggest fund in history was $2 billion. Why? Because we had prepared mentally. We had noted the bad climate. We had prepared for a day numeral and
we swung into action when it arrived. And I was very proud of him for taking that position. And people on the street have told me that in that quarter, we were the only buyer. Well, that's how you get good deals. If you can buy when nobody else is buying, you get your pick of the litter at low prices. So that's, I just gave you a four or five year, I guess four year description of a process. But man, you have to be patient.
Because in 056, we were doing nothing, just selling. And we were not rewarded in 005 or 006 for that behavior. The reward came at the end of 008. But I think it's not everybody's in a position to apply that process to that extent. But I think it describes the process. And of course, I use it as an example. For one simple reason, it was successful.
always a good, always a good outcome when you have the success from it. Obviously fantastic story. Your latest memo, which inspired us to reach out and want to chat with you on bubble watch. And as you mentioned, is the 25th anniversary of the bubble.com memo. And so 25 year anniversaries are just probably a good time to go back. But on the other hand, there is also
this moment that we alluded to in the intro of incredible enthusiasm really for like a handful of tech AI related names that's lifting the entire market up. Is this one of the moments? I mean, what is the temperature right now? As you see it, you've mentioned you've had five moments, sort of maybe five calls in your career. Is this a sixth right now?
No, it's not. Okay. Because you asked before, behavioral or numerical, the main observations today are numerical. Yeah. The PE ratio on the S&P 500 is elevated relative to historic norms. And the so-called magnificent seven, the biggest companies in the S&P dominate its behavior are, you know, going up
or have been going up rapidly, and they're hot stocks. And when you see one group perform especially well, you have to ask whether it's a bubble. And the S&P, of course, has done up more than 20% a year for the last two years. And it's only the, I think, the fifth time, according to JP Morgan, the fifth time in history. So you have to ask these questions. But the troubling aspects, those,
are numerical. And what I say in the memo is that in my opinion, it lacks the behavioral aspects of a bubble. And I talk about some of them. And I say that a bubble is not just a numerical. It is behavioral. And a bubble is really it's not a rise. It's that's a bull market. It's not high prices. A bubble is a temporary meaning.
in which people are so agog at things that they throw over a whole discipline, a whole caution. And I just don't, it just doesn't feel to me like we're there. We're high priced, I say lofty but not nutty. And the bubbles I've seen, and I've lived through starting with the day I joined this business in 69, we had what was called the 50-50.
What you see going on is what they call in literature, the willing suspension of disbelief. You know, I know it's high, but if I don't go in, I could miss something. Or I know it's high, but I don't think it's going to end tomorrow. And by the way, if it ends, I'll just get out. And of course, as I mentioned in the memo, the real hallmark
of a bubble is when people say it's so great this thing we're talking about whether it's the 50-50 stocks in 69 or Nvidia today or TMT in 99 they say it's so great that there's no price too high and that was the official dictum in the money center banks in 69
with regard to the net to 50, it was the official victim with regard to the internet in 99. What did people say? The internet will change the world. And so for the stocks, there's no price too high. Well, guess what? The internet did change the world. But because they bid up the stocks so high, the people who invested in them lost almost all their money. So, you know, people become psychologically unhinged.
and not tethered to reality, and their portfolios slip their moorings, and they think that they've found a perpetual motion machine or a tree that will grow to the sky. And I just don't see those psychological or behavioral aspects today.
So one of the things that Joe likes to emphasize when it comes to, well, the tech bubble specifically is the importance of stories or narratives. So one of the things that will drive this kind of behavior is you'll see a company come out with like,
this huge ambition. Uh, I think Joe's favorite example is, wasn't there like a car company that claimed to have found the cure to AIDS? That's right. This is a good story. This was 1999 and people were just so optimistic that they thought he used car dealership in Nevada head in the, in their back office, found a cure for AIDS. That's that never sees this real story. I'll tweet out a link when this episode comes out.
So nowadays, there's an argument that some people make that we have a faster tech cycle than ever. And that means more stories can be generated more quickly. And given that you're a veteran in the space, can you maybe compare and contrast the tech cycle now to previous history? Well, listen, Tracy, number one, not an equity guy. Number two, I'm not a tech person. I have no
personal knowledge of the tech companies of today. I have an idea about AI. I've seen it do wonderful things so far. Most of my direct experience is with what I would call parlor games. I did an interview like this one with a Korean media company that I've worked with over the years. They sent me a video clip of it.
And in the video clip, I'm sitting there speaking Korean. It wasn't titles, it wasn't dog, but I'm speaking Korean. And it's not somebody else's voice coming out of my mouth. It's my voice coming out of my mouth in Korean and my lips are moving correctly.
That's an incredible accomplishment. I don't know if it's a money maker. But so I guess what I'm saying is I don't know exactly how AI is going to be used in the future. But I can imagine that it's going to have a significant impact when computers can start thinking and doing things like that. It will change the world.
Jobs are going to be created, jobs are going to be lost, efficiencies are going to be created, maybe whole new products. But I list in the memo a couple of the mistakes people make. And I saw it with the Nifty 50, by the way, so in 1969, this was a list of roughly 50 companies, the best and fastest growing companies in America, companies that were so great that number one, nothing bad could ever happen. And number two, as I said, there was no price too high.
And if you bought those stocks in 69, you held them for five years. As I recall, you lost about 95% of your money. Because the price turned out to have been too high, and it came down by 90% the peak ratio. And some of them ran into fundamental problems and had to be rescued or went through bankruptcy or disappeared from existence. So people assume that the trends that are underway will continue.
One is the trend toward the internet, and 99, and another is the trend toward AI today, and that it will be of great consequence, and I'm sure it will. They also believe, however, that the companies that are successful today will continue to be successful, that they won't be challenged or disrupted or displaced.
When the thinking really gets optimistic, they conclude that every company can succeed, and we know that that's highly unlikely. There are going to be winners and losers. We can't always predict which is which. If we find a company that's a leader today and dominant, and we pay a price consistent with that dominance, and they turn out not to be dominant, price may turn out to have been excessive. And then ultimately,
people engage in what's called lottery thinking or what I call lottery, which is, well, it's nowhere as a competitor in this new thing. But, you know, maybe it has a 2% chance of becoming a big winner and going up a thousand times. And if it could go up a thousand times, then I can pay a PE ratio of a hundred X because I'll still make money.
So they will buy into things that have a very low probability of producing a very good outcome. And that's like buying a ticket in the lottery. And most lottery tickets are losers. But this is what happens in bubbles. Now, you asked me to differentiate. Since I'm not an expert on AI, I can't differentiate. But I think there's a very good comparison to the internet. We expected the internet to change the world.
We can't imagine today living in the pre-95 world without all the tech we have today. And yet, the vast majority of internet and e-commerce companies that were minted in 1998, 1999, 2000 are out of business and worthless. I'm not sure it's going to be the case with AI, but it has to give you caution.
That's all I'm saying. Just keep your eyes open and don't drop all reason in a rush to get in. And by the way, one of the great differences in a bubble is that usually people are afraid of losing money. But one of the hallmarks of the bubble is that people forget to worry about losing money and only worry about missing out. FOMO. When FOMO takes over,
People say, yeah, well, the price seems high. But if my competitor or my golf buddy or my brother-in-law buys it, and I don't buy it, and it triples, I'm going to kill myself. So I got to buy it regardless. And I guess maybe to sum up on bubbles, a great way to characterize that is that it's when people say, I got to buy it regardless.
And I would argue, prudently, that nobody should ever do something regardless. 89% of business leaders say AI is a top priority, according to research by Boston Consulting Group.
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There are two kinds of people in the world, people who think about climate change and people who are doing something about it. On the Zero Podcast, we talk to both kinds of people, people you've heard of like Bill Gates. I'm looking at what the world has to do to get to zero, not using climate as a moral crusade. And Justin Trudeau.
There are still people who are hell-bent on reversing our approach on fighting climate change. And the creative minds you haven't heard of yet really don't need to have a tomato in December. It's gonna taste like nothing anyway. Just don't do it.
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I guess I'm interested a little bit more in why you don't see those characteristics today because all people talk about is AI. We just had the president make this big announcement. We're going to spend half a trillion on data centers and so forth. It's just this dominant mode of conversation. I'm sort of of two minds of this because I've been hearing
people, you know, regular people on the street talk about their speculations or their Robin Hood accounts or their crypto accounts, whatever, for years now. And mostly the prices have been going up. It certainly feels to me like some of the indicators that you describe of fear of missing out and so forth currently exist in this incredible, this incredible hype. I'd like to hear you talk a little bit more about why
Right now, mostly you just see, yes, the math is expensive. The numbers are expensive, but you don't feel that sort of euphoria that has characterized past bubbles. Well, you know, I guess, Joe, part of it is that I don't live in that world. You know, since I'm a credit guy and not a tech person,
I don't spend much time talking to people who are interested in AI stocks or who are doing AI businesses. So it might just be that I'm missing that. So, you know, some of the conditions, some or all of the conditions of a bubble might be present in a few stocks or in the AI and related niche. I'm just saying that I don't feel it across the world.
And if you take the magnificent seven out of the equation, I think things are rich, but not crazy. I did read an article on that subject. I did read an article about a month or two ago, which said that if you look at the S&P and leave out the magnificent seven, and you compare the S&P companies with their non US equivalent,
in something like the MSCI index of non-US equities. You'll find that the US equities in every industry just about sell at higher PE ratios than their counterparts outside the US. So I think the US is more expensive than the rest of the world. Again, not crazy. And by the way, I'm convinced that the US has the best economy in the world.
And all these questions, especially in the stock market, in the bond market where I mostly work, the credit market, you have an indicator of value, which is the yield. And you'll look at the promised return from a given investment. And you say, well, I think that's sufficient to reward for the risk or not. In other words, I think the price is fair or it's not fair or it's too cheap or too high.
In the stock market, it's hard to do that. Because in the stock market, you can enumerate the pluses and minuses of a given company or industry or a phenomenon like AI. But it's hard to say, you know, but the current price is fair or too high or too low.
it's hard to turn a recitation of merit into the fairness of value. And so, you know, people may be too excited about AI, and that may result in prices that are too high for their stocks. And, you know, I spent in 2020 during the pandemic, I spent a lot of time living with my son and his family. And one thing he talked me out of, he says, Daddy, oh, to stop talking about things you don't know anything about.
Only a son can say that to his father, but I think it's good advice as we get more specific in this conversation and it goes from stock market to S&P to AI You know I become more reticent to say anything concrete because I really don't have superior knowledge and my hero John Kenneth Galbraith said that one of the shortcomings of the market is
is the specious relationship between money and intelligence. And most people tend to look at somebody who's made money, and especially who's made money in the markets, and credit them with general intelligence, which is usually a mistake.
So I just have one more question. And I guess it's about the aftermath of bubbles. And it's based on a conversation that you had with Mike Milken at the Milken conference. And both of you were on stage and reminiscing about your time in the markets. And one of the stories you were telling was about the bursting of the nifty 50 bubble and its impact on the development of the financial industry.
And I think the idea was that all these people had put their money into things that were, you know, expected to be quite reliable, reliable stocks, stalwarts of corporate America. And then they lost virtually all their money.
And that development ended up catalyzing the money management industry because if you could lose money on boring stuff like blue chip stocks, then why not try high yields or some alternative credit instead?
And I guess I'm curious, do you see any interesting developments in the finance industry right now, perhaps not in the immediate aftermath of a bubble, but maybe related to a paradigm shift like higher interest rates?
First of all, I've been writing something about something called the sea change. I met Mike in 78. That's when Citibank asked me to look into high yield bonds, and I was very fortunate. It was maybe the luckiest day in my life that I got that call because that put me at the front of the line. That's kind of the year that the high yield bond market began and became very important. And here I was.
no fault of my own, you know, working there. And the Hayao Ban Fund that I started at City in 78 might have been the first one from the mainstream financial institution. And as Malcolm Gladwell said in his book, Outliers, you know, it's great to be demographically lucky. So in 1980, the Fed Fund's rate reached 20, Paul Volcker, as head of the Fed, put the Fed Fund there to battle the inflation that was rampant at the time.
And it worked. And I had a loan from the bank. And I got a slip in the mail saying that the rate on your loan is now 22 and a quarter. And that was 80. And in 2020, I was able to borrow at two and a quarter. So rates came down by 2000 basis points over 40 years. I believe that was a paradigm shift. And that changed the whole world.
And it made a lot of people a lot of money, but I published a memo in December of 22 called C change saying that it's over. We're no longer in an environment where declining rates and ultra low rates are going to be the rule. We're going to have higher rates and they're going to be essentially stable, not downward trending all the time. The other thing that you note is that prior to the meltdown of the NISTI 50,
The simplistic thought process in investing was that it's responsible to buy high-quality assets, and it's irresponsible to buy low-quality assets. The job of the fiduciary was to buy high-quality assets. Well, here, the best companies in America is lost almost all your money.
then I shifted to Iowans, now I'm investing in arguably the worst public companies in America and making money steadily and safely. So it did occasion a sea change
in how investing is done. It was a very important lesson that I was happy to learn at the very beginning of my career. I was 23 years old when I started working in 1969, and I lived through this whole collapse in my 20, and it's very important to learn your lessons early. The lesson I learned was
that successful investing doesn't come from buying good things, but from buying things well. And if you don't understand the difference, it's more than grammatical. And that it's not what you buy that matters. It's what you pay. The price has to be fair. And there is no asset, which is so good that it can't become overvalued and dangerous. And there are very few assets that are so bad that they can't become
cheap enough to be attractive. It was an epiphany for me, and I think it changed the whole world. And we no longer say, is it a good asset or a bad asset or a good company or a bad asset? We say, is it risky? How risky is it? What return do we expect is the return sufficient to compensate for the risk. And that is the change that has dominated the investment world for the last
I would say 47 years since 78. And, you know, we do so many things today, like venture capital and private equity and the transt securities, which entail conscious risk bearing that couldn't have been done in the old world of good and bad or safe and risky.
I just have one last question. I was going to let Tracy have the last question, but you said one thing that's been that hit something that's been on my mind and you mentioned in the summer of 2020 being able to borrow money for 2%. One of the questions that's been debated the last several years is why haven't the interest rate increases that we've seen across the curve?
had a more dampening effect on the strength of the US economy. And one story that gets put out is that a lot of borrowing entities, whether their households like yourselves or various firms, locked in very low borrowing in those couple of years, and that the effect of higher rates, therefore, has been muted, hasn't transmitted to the real economy
Have we felt that adjustment yet? Is there something coming because those rates can't stay locked in forever, especially for shorter term borrowing? Have we felt the impact of this seed change yet on the economy? Or is there more to come downstream from this reversal of what may be a 40 plus year trend? No, I think it clearly hasn't worked its well way through because when you borrow money,
you borrow for a period of time. And if you borrow at a fixed rate, there's also a floating rate borrowing, but if you borrow at a fixed rate, you fix your rate for a maturity of five or seven years, then even if rates go up, you're immune to it and you don't feel the impact until your debt matures and has to be rolled over. You know, people in this business or in the business world in general are not brain dead. And many of them, as you say, rolled over their debts in 20
20 or 21 and you know locked up low cost debt until 26 or 27 so they're fine but you know
Maybe they took on too much debt when debt was cheap and readily available. And maybe they won't be able to refinance all of it, or some of them may not be able to refinance all of it when it rolls over in 26 or 27. That's what we call a credit crunch when you can't roll over your debts. Nobody ever repays their debts. They just roll them over. And sometimes you can't. You know, we believe that they're, I mean, look, they're already
some defaults, not many compared to the crises in the past. But, you know, when maturity start coming due in 2627, and if Wall Street or the banks are a little less generous and optimistic, maybe there'll be some difficulty rolling it over. And then, you know, just the cost of money. So, you know, the federal government has a portfolio of debt. They don't own a portfolio.
they owe a portfolio of debt, some of which is long and some of which is short. And so they're paying low rates on the long debts. But when that comes due, they'll have to roll that over at higher rates, and it'll cost them money. And so if the interest rate merely stays where it is, the cost of
capital to the US government will rise over time as they replace low cost debt with high cost debt. So this has not fully worked itself through the economy yet, and there's more of it to come. All right, Howard Marks, we could easily keep going for a couple more hours, probably longer than that. But this has been an absolute treat. Thank you so much for coming on the show.
Well, thank you for your good questions, and I'd be glad to do it too, and let's do it again sometime. Absolutely. We'd love to. Thank you so much, holidays. Thank you.
Joe, I thought that was so interesting. So first of all, you know that I love just listening to like wartime financial crisis stories. So that was great. And then I thought one thing that was really interesting. Well, first of all,
There aren't as many cross-asset investors as you might think out there. And so it's really interesting to hear someone that is firmly in the credit space, but is also looking at other asset classes in order to judge current market conditions. And then the other thing I thought was the emphasis on action being sort of a spectrum of caution.
and risk. So it's not the tech bubble is about to come and sell all your tech exposure. It's more like, maybe I should ratchet down a little bit, maybe start raising some dry powder for a rainy day.
That was really interesting, the specific story, the sequence of raising that drive powder starting with the warning in 2005 that didn't get deployed or wasn't able to be paid off for years. But the idea of, okay, if you see something coming down the horizon, it's not enough to say, well, yes, there's going to be an opportunity
the idea of raising one fund and then having that other fund on the shelf, cash that can be callable for the day that it comes. You know, there were a lot of people that probably thought, oh, there are really good deals to be had in September 2008 or March 2009 or whatever, but there's no good in having stuff being cheap if you don't have any cash available to buy it.
Do people still call it patient capital? I remember people used to call, you know, dry powder patient capital because the idea was you set it aside and it might be a long time until you're actually able to invest it.
You also, you know, this also strikes me as where like brand value of a firm really matters, right? Because you're not gonna get billions in excess commitments. And to that, you know, you and I aren't going to get. It's like Tracy and I was like, oh, we think AI is gonna crash in a few years or wanna buy data. Give us 10 billion. We wanna buy data center real estate on the cheap. So give us a billion. But you know, that's the only, that's a thing that you can monetize
only after having, you know, years of success. I thought it's interesting this idea of, you know, there's a difference between expensive and a bubble. Yeah. And that in his assessment, we're not there yet. And I really appreciate his perspective because it's easy for me to say on the day, oh, everyone's talking about AI all the time, et cetera. And therefore, you know, we must be near the top or a bubble, but I don't have, you know, experience in markets going back to the 1960s of like what that actually feels like.
Well, when a car company, a car rental company in Nevada says that it's like they have a new AI model. Yeah. That's going to start. I don't know. That's going to revolutionize the world. Yeah. Then maybe that's the time to be concerned. That's how we'll know.
All right, shall we leave it there? Let's leave it there.
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There are two kinds of people in the world, people who think about climate change and people who are doing something about it. On the Zero Podcast, we talk to both kinds of people, people you've heard of like Bill Gates. I'm looking at what the world has to do to get to zero, not using climate as a moral crusade. And Justin Trudeau.
There are still people who are hell-bent on reversing our approach on fighting climate change. And the creative minds you haven't heard of yet really don't need to have a tomato in December. It's gonna taste like nothing anyway. Just don't do it.
What we've made here is inspired by Shockskin. It is much more simplified than actual Shockskin. Drilling industry has come up with some of the most creative job titles. Tell me more. Tell me more. You can imagine. Tool pusher. No. Driller. Motorman. Mudlogger. It is serious stuff, but never doom and gloom. I am Akshatriati. Listen to Zero Every Thursday from Bloomberg Podcasts on Apple, Spotify, or anywhere else you get your podcast.
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