Howard Marks: Overhyping artificial intelligence, having excessively high expectations for NVIDIA, when expectations are not met, will lead to disillusionment and disappointment

On June 17th, Howard Marks, co-founder of Oaktree Capital, a well-respected investor on Wall Street, and Peng WenSheng, Chief Economist of CICC, shared their investment philosophy and market insights in a live dialogue.

The Investment Homework Representative summarized Howard Marks' views as follows:

1. The current market is showing a very fierce wildness (artificial intelligence AI), which dominates the market and disconnects it from the economic fundamentals.

2. If emotions dominate and positive changes occur in the real world without meeting investors' expectations, the stock market may even decline.

Taking artificial intelligence as an example, if there is excessive hype, overly high expectations for NVIDIA, and the results fall short, it may lead to disillusionment and disappointment.

1. Market overheating and recession cause cyclical fluctuations. Currently, I do not see (the US stock) market overheating. 4. In the next two to three years, if the US experiences an economic recession, it is likely due to geopolitical and other external factors, rather than internal issues. 5. I do not want anyone here to think that I believe artificial intelligence is a bubble. I have seen many bubbles, such as the "Nifty Fifty" in the US, the tech stock bubble in 1999, the real estate bubble in 2006, etc.

These bubbles all share a common characteristic, that they are short-lived phenomena. Bubbles attract excessive attention and expectations for new things, and when expectations are not met, the bubble bursts. 6. Do not try to predict market ups and downs, but understand the essence of things. Once you understand, market fluctuations should be clear. In addition, do not be clever, and control your emotions.

Here are the highlights of the dialogue between the two, compiled by the Investment Homework Representative (WeChat ID: touzizuoyeben), shared with everyone:

AI Boosting the US Stock Market

Peng WenSheng: Despite the Fed not cutting interest rates yet, why do you think the stock market remains strong?

Howard Marks: We have noticed that some stocks are performing exceptionally well, supporting the entire stock market and market expectations. The most outstanding performer this year is NVIDIA.

Currently, artificial intelligence AI is a burgeoning field, and the outlook for the chip market looks promising. This trend supports the stock prices of companies like NVIDIA. We also see that the US economy is stronger compared to other economies, attracting capital inflows.

Furthermore, as I mentioned before, investors are inherently optimistic, and this optimism can last for a long time. If the market can foresee rate cuts from late 2022 to the second half of 2024, then the market may not be as strong. This also reflects the unpredictability of the market. Investors must accept and realize this. The market is not a precise machine following the laws of physics, where the appearance of A will inevitably lead to B, which will inevitably lead to C. The main actors in the market are people, and the nature of people is unpredictable.

Currently, we see a very fierce wildness in the market, which dominates and disconnects the market from the economic fundamentals.

If AI is overhyped and falls short of expectations, the stock market may decline

Peng Wensheng: One possible trigger is the general optimism towards artificial intelligence, which has also led to the soaring of NVIDIA's stock price. However, from a business perspective, there are still many unknowns about how artificial intelligence will specifically integrate into business and bring profits, there is a gap between people's perception of artificial intelligence and reality.

Howard Marks: Your point is very precise. Many people believe that positive developments in the real world will inevitably lead to a rise in the stock market, but they overlook human nature and psychological factors. If emotions dominate, and positive changes in the real world do not meet investors' expectations, the stock market may even decline.

Taking artificial intelligence as an example, if it is overhyped, expectations for NVIDIA are too high, falling short of expectations may lead to disillusionment and disappointment.

I do not want anyone here to think that I believe artificial intelligence is a bubble. I have seen many bubbles, such as the "Nifty Fifty" in the United States, the technology stock bubble in 1999, the real estate bubble in 2006, and so on.

These bubbles all have one characteristic, that they are all short-lived phenomena. Bubbles attract excessive attention and expectations for new things, and when expectations are not met, the bubble bursts.

Artificial intelligence is the newest member of a series of new things. We can look back at the 1999 TMT bubble, the technology stock bubble, the e-commerce bubble, and so on. The internet has indeed changed the world, but this does not mean that stocks of internet companies are all good stocks.

Currently, there is no sign of overheating in the US stock market

Peng Wensheng: After the COVID-19 pandemic, the Chinese economy lagged behind the United States and Europe. The U.S. economy is performing at a world-class level, but you also mentioned future risks. If we were to point out the biggest risk, what do you think we should focus on?

Howard Marks: I am not a qualified macroeconomist. In my book "The Most Important Thing," I discuss the reasons for cycles. Market overheating and recession cause cyclical fluctuations. Currently, I do not see the market overheating, the growth rate of the U.S. capital market seems reasonable.

In the next two to three years, if there is an economic recession, it is likely to be due to geopolitical and other external factors, rather than internal issues.

Peng Wensheng: I remember before the COVID-19 pandemic, people were saying that the U.S. economy was experiencing the longest period of recession in history, the longest period since World War II. The COVID-19 pandemic then broke out, so I want to ask, are we now back to the pre-pandemic state?

Our growth is not very high, inflation is not very strong, but it will not lead to a recession. I think this theory makes sense, how do you see it? Howard Marks: As I said, this is the longest ten-year recovery period and also the longest bull market in history, lasting for ten years. I think the Federal Reserve has done well in this regard.

In fact, the Federal Reserve has indeed learned some lessons in terms of quantitative easing and tightening. They have learned how to use these tools, not just the past interest rate adjustments, but also using quantitative methods for regulation now. I think this statement makes sense and is possible.

Inflation levels in the next ten years may be higher than before the pandemic

Peng Wensheng: As you said, economic recovery is the longest and slowest in history. As a macroeconomist, I would like to share an observation in this regard.

I think inflation may be a driving factor or trigger, which may not be related to the Russia-Ukraine war, supply shocks, and some geopolitical events in the Middle East. Instead, it may be due to two structural shifts on the supply side.

One of them is climate change, we know about the so-called green transformation. For example, manufacturing investment in the United States has reached its highest point in the past 30 years. Of course, this is related to the green transformation. So there has been a lot of investment demand in this regard.

In addition, potential tariff increases, as well as the rise of global trade protectionism, may increase the cost burden for economic participants.

Another point is that in the United States, currently under the leadership of this administration, especially due to the policies adopted during the COVID-19 pandemic, we see the income gap narrowing between the richest and the poorest. If we combine these two factors, does it mean that inflation will average higher than the 2.5% we are used to?

Howard Marks: I think the whole world has experienced a very unusual period of low inflation. You may remember that in the 2010s, we expected higher inflation at that time because the unemployment rate was very low. According to the Phillips curve, inflation should have been higher, but it did not happen.

The green transformation you mentioned, the downward trend in globalization, and deficit spending are now accepted by governments around the world.

I think the average level of inflation in the next ten years may be higher than before the COVID-19 pandemic.

Do not try to predict market fluctuations based on charts, but understand the essence of things

Peng Wensheng: What valuable advice do you have for investors in the current market?

Howard Marks: I had everything ready, but then you added "in the current market," so now I won't say it.

My advice remains the same, do not try to predict market fluctuations, but understand the essence of things. Once you understand, market fluctuations should be clear to you.

Do not predict market entry and exit points, as this is very difficult. You must enter the market in a prudent manner, with reasonable expectations.

Also, do not be overconfident. And control your emotions.

Do not sell out of panic, nor go crazy buying in on a whim, have investment literacy, keep a steady hand, control your emotions, and have long-term reasonable expectations. Successful investors need to possess these qualities Source: Investment Homework Pro Author: Class Representative

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