Bloomberg Television• Mar 18, 2026• 29:52Interview

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.

Key Themes

The Unpredictability of Artificial Intelligence

Marks asserts that AI's introduction makes the future profoundly less predictable, affecting everything from corporate business models to societal stability. This uncertainty challenges traditional investment forecasting, which relies on a stable set of assumptions about the future.

This fundamental uncertainty requires investors to demand a greater margin of safety and reconsider the long-term viability of business models, even for established companies.

The Private Credit Cycle

The conversation details the boom-bust cycle of private credit, from its attractive origins when capital was scarce to its current state where competition has eroded returns and safety. Marks notes that the yield spread between private and public credit has narrowed, suggesting the 'specialness' has gone and the asset class is now at equilibrium.

Investors should be wary of the narrative that private credit offers superior risk-adjusted returns, as the influx of capital and competition has changed the market dynamics, increasing the risk of poorly underwritten loans.

Investor Psychology and Market Complacency

Marks emphasizes that long periods of good times, like the one since 2009, breed complacency, lax lending standards, and a fear of missing out (FOMO). He uses the adage "the worst of loans are made in the best of times" to warn that a downturn is necessary to reveal who has been taking on excessive risk.

The current low yield spreads on sub-investment grade credit indicate that the market is not pricing in significant default risk, creating a dangerous environment for lenders and a potential opportunity for patient, cautious investors.

The Limits of AI in Investing

While acknowledging AI's power as a data-processing tool that can outperform humans by operating without emotion, Marks believes it currently lacks crucial human capabilities for investing. He argues AI does not possess the intuition, judgment, or 'sense' to know when a market has become cheap enough to buy aggressively during a panic.

This highlights the enduring value of human judgment and experience in navigating market extremes, suggesting that a hybrid approach combining human oversight with AI tools is optimal.

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Topics

Artificial Intelligence Private Credit Direct Lending High-Yield Bonds Credit Cycles Market Sentiment Investor Psychology Risk Management Howard Marks Oaktree Capital Management Default Risk Yield Spreads Illiquidity Premium Retail Investors Tech Investing

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