Chapter 1: What are the current trends in interest rates and market reactions?
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Seeing a market gut check some of the enthusiasm post-Fed meeting yesterday after Oracle came out, throwing some cold water on some of the risk appetite down 0.4% on S&P futures. The bid into bonds actually gaining as the morning grows older after jobless claims came in just slightly elevated. 10-year yields at 4.13%.
Turning to the economy, Fed Chair Jay Powell saying AI may be at least partially responsible for the cooling labor market, but the future remains uncertain. Howard Marks, co-founder and co-chairman of Oak Tree Capital Market, Issuing a warning in his latest memo, I find the resulting outlook for employment terrifying.
I am enormously concerned about what will happen to the people whose jobs AI renders unnecessary or who can't find jobs because of it. At this moment of transformation, Howard joins us now after writing a memo that I really recommend everybody read. It really was one of the absolute best that you've ever written. Thank you for being here with us.
So I can stop now.
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Chapter 2: How does Howard Marks view the impact of AI on the labor market?
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.
Well, I was thinking about this when I was waiting to see you today. Most of the people listening to this program, including me and you, are interested in the free markets. And we think free markets just set the prices of things. And the Fed manipulations are a form of price controls. They control the price of money.
If the Fed puts money artificially cheap, 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 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 ā if the economy is seriously overheated and tending towards hyperinflation or seriously under ā active and not creating jobs. I don't think that's the case right now. 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 there are people who think that rates should be a lot lower than they are today. I just don't see the merit 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?
Well, the lower base interest rates are, everything scales off that. So the Fed funds rate at 3 and 1 half is below history. 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&P, based on its P-E ratio relative to history, appears to be priced to provide
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Chapter 3: What distinguishes productive bubbles from unproductive bubbles?
a very low prospective return. Historically, if you bought at this P-E ratio, 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.
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're 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?
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.
But it has not raised unemployment because the internet eliminated white collar jobs that were replaced by blue collar jobs, like 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 I think that this is very worrisome. And as I said in the addendum,
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.
Howard Marks, you are absolutely one of the best. My favorite to talk to, Howard Marks of Oak Tree Capital Management. Thank you so much for being with us.
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