00:00Well, I think that the unproductive bubbles I would describe as financial fads.
00:07Portfolio insurance was one, subprime mortgages was another.
00:11Just financial activities that become fashionable, zoom into popularity, get overhyped, and then recede.
00:22But then there are bubbles which are based on technological progress,
00:28starting with the steam engine, the railroad, the radio, the automobile, computers, internet, etc.
00:35And these actually push society ahead and change it irreversibly.
00:42But in the process, there is a bubble surrounding their implementation,
00:46which is overly accelerated and overly financed and goes to excess and end up destroying a lot of capital.
00:59But leave society greatly changed.
01:02And I'm sure that AI is in the latter category in terms of effect on society.
01:07And the question is, will the implementation prove to have been excessive in scope and in the way it's financed?
01:14Just because something is excessive doesn't mean that you can't invest in it.
01:17No, but when investors hate everything 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.
01:33In fact, their disinterest has pushed down the price.
01:36But when everybody likes something and is excited about something, chances are it may be overhyped and overpriced.
01:41So you just have to be careful.
01:43So that's where we are right now.
01:45You said you can invest and you can participate, but you just have to be careful.
01:48What does being careful look like?
01:50Does it mean focusing more on debt versus equities, more on equities versus debt, more on small companies versus big ones?
01:56What does that look like?
01:56Well, what I say in the memo is that it's OK to lend for activities, even if they're uncertain, but not if the outcomes are purely conjectural.
02:10I mean, in order to be a smart lender, you have to have good visibility on the extent to which the thing is likely to repay interest in principle.
02:21If it's just purely conjectural, you shouldn't be a lender.
02:25And in fact, 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.
02:35So at least you get the upside.
02:36The lender has no upside.
02:39You make it 9% alone.
02:41All you're going to get is 9% no matter how well the thing does.
02:44You certainly shouldn't do that in activities that have a high probability of not paying off at all, because then you have unlimited downside and limited upside.
02:55That's absolutely the wrong combination.
02:57So you think right now, in some circumstances, the equity might actually be a better option than the debt because of that potential upside?
03:04Yes, exactly, because the point is that if you go into some startup which has, let's say, a small possibility of a raging success,
03:18you wouldn't lend to it because you have a high probability of losing all your money and no probability of participating in the success.
03:25That's a bad trade.
03:27So you always talk about this risk-reward pendulum, the risk and fear, the sort of fear and greed pendulum right now.
03:35And 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.
03:42Does this make you feel good?
03:43Does this make you feel like there actually is some discretion?
03:46Well, yeah, well, 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.
03:58So when other people are acting imprudently and mindlessly and carefree, we should be worried.
04:05When other people are showing appropriate concern, that's a positive sign that the market is applying some discipline.
04:11Some 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.
04:25So if people are reacting harshly to aggressive, possibly risk-indicating activities, yes, that's a healthy sign.
04:37And this market is, seems healthier than the 2000 market to me.
04:44How 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?
04:52This 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.
05:01Well, you know, I was thinking about this when I was waiting to see you today.
05:05You know, most of the people listening to this program, including me and you, are interested in the free markets.
05:15And we think free markets should set the prices of things.
05:19And the Fed manipulations are a form of price controls.
05:25You know, they control the price of money.
05:26And if the Fed puts money artificially cheap, then it induces behavior like risk-taking.
05:36It forces people into riskier activities because the returns on safe activities are so low.
05:43It tends to reinforce the view that there's a Fed put, that if there's a problem, the Fed will solve it.
05:50And that contributes to risky behavior.
05:53These are all bad, bad things.
05:55And, 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 economy is seriously overheated and tending towards hyperinflation or seriously underactive and not creating jobs.
06:18I don't think that's the case right now.
06:20I don't think there's a—and you can see in the divided open market committee that there's a difference of opinion.
06:27So I don't think that action on the part of the Fed is compelling right now.
06:30And, you know, there are people who think that rates should be a lot lower than they are today.
06:37I just don't see the merit in that.
06:39Right now, going forward, I remember back in 2015, 2016, 2017, when rates were incredibly low.
06:46You 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.
06:55Where are we right now in terms of what types of returns people ought to expect based on the current income rates?
07:02Well, the lower base interest rates are.
07:08Everything scales off that.
07:11So, you know, I mean, the Fed funds rate at three and a half is below history.
07:19These are not high rates.
07:20They're only high relative to the last 15 years.
07:22But this is a low rate.
07:26So everything scales off that.
07:28Most things will give moderate returns.
07:31In the debt area, I think prospective returns are moderate.
07:37Okay.
07:38Not lush, but not inadequate.
07:42The trouble is that the S&P, based on its P.E. ratio relative to history, appears to be priced to provide a very low prospective return.
07:55Historically, if you bought at this P.E. ratio, your return over the next 10 years averaged in the very low single digits.
08:05So I think we're in a moderate return scenario.
08:10The problem is that how do you get a high return in a moderate return scenario?
08:15And most people's resort is to take a lot more risk.
08:20And that's something I don't like to do, other than when it's compelling.
08:26You had a personal note, an addendum at the end.
08:30And we led off with that idea of what artificial intelligence and machine learning will do to the labor market.
08:36It's something clearly on the Fed's mind, clearly on investors' mind.
08:39You're talking about concerns that there is going to be cannibalization from human jobs.
08:43How do you see this playing out?
08:45How 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?
08:52Well, look, Lisa, here I'm not talking about investing or economics.
08:56I'm talking about society.
08:58And it's very worrying to me.
09:00And, you know, I've gotten some very nice response from people I respect to the memo.
09:05And one of them said he thinks we've seen this in response to the Internet over the last 25 years.
09:15But it has not raised unemployment because the Internet eliminated white-collar jobs that were replaced by blue-collar jobs,
09:23like, you know, people who pick stuff in warehouses and send it out in e-commerce.
09:28So job count is not down, but job quality is down.
09:34And I think that this is very worrisome.
09:39And as I said in the addendum,
09:42When 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.
10:01And I think it's a natural consequence of people sitting around all day.
10:08And even if we can find a way to replace their income, I worry about purposelessness.
10:17And, you know, we get so much job, so much from our jobs other than a paycheck.
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