Oaktree's Howard Marks on Unpredictablility, Importance and Investing in AI
Howard Marks•Co-Founder and Co-Chairman, Oaktree Capital Management
Executive Summary
Howard Marks argues that artificial intelligence has made the world more unpredictable than at any point in his lifetime, complicating long-term investment decisions.
The private credit market is nearing the end of a classic investment cycle, where initial high returns attracted excess capital, compressing spreads and reducing safety standards.
Marks predicts a period of tough economic times lies ahead, which will expose the poorly underwritten loans made during the recent long stretch of market optimism and low defaults.
Current market sentiment is characterized by optimism and a lack of skepticism, as evidenced by low credit spreads and long-duration tech bonds, making it difficult to find investments with excess returns.
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Concerns Raised
The unprecedented unpredictability introduced by AI makes long-term forecasting exceptionally difficult.
Lax lending standards during 17 years of good times have likely created a significant number of bad loans that will be exposed in a downturn.
Retail investors in private credit may not fully understand the illiquidity and valuation risks, posing a risk of panic when the cycle turns.
Current low yield spreads indicate the market is complacent and not adequately pricing in the risk of a future default cycle.
Opportunities Identified
A future period of economic stress will create significant buying opportunities in credit markets as fear overtakes greed.
Publicly traded credit may offer better relative value than private credit now that the illiquidity premium has compressed.
Maintaining a cautious and disciplined investment approach now will preserve capital for aggressive deployment during a future market downturn.