Billionaire Howard Marks believes that the AI boom carries the familiar signatures of a technological bubble, but notes that investors seem to have learned from the mistakes of past cycles.
In a new interview with Bloomberg, the co-founder of Oaktree Capital Management highlights that there are two types of market bubbles: unproductive and productive.
Marks says the AI boom belongs to the second category.
“Well, I think that the unproductive bubbles I would describe as financial fads. Portfolio insurance was one. Subprime mortgages were another, just financial activities that become fashionable, zoom into popularity, get overhyped, and then recede. But then there are bubbles that are based on technological progress. starting with the steam engine, the railroad, the radio, the automobile, computers, the internet, et cetera. And these actually push society ahead and change it irreversibly. But in the process, there is a bubble surrounding their implementation, which is overly accelerated and overly financed and goes to excess and ends up destroying a lot of capital, but leaves society greatly changed.
And I’m sure that AI is in the latter category in terms of effect on society.”
Even though he believes that the AI cycle has slipped into bubble territory, he notes that investor caution surrounding the potential for excess could keep the market from imploding in the short to medium term.
“So when other people are acting imprudently and mindlessly and carefree, we should be worried. When other people are showing appropriate concern, that is a positive sign that the market is applying some discipline. Some of the greatest moments that I have seen, some of the greatest signals of danger in the markets, have been when people were not applying any prudence at all, like in 2006, for example. So if people are reacting harshly to aggressive, possibly risk-indicating activities, yes, that is a healthy sign.
And this market seems healthier than the 2000 market, to me.”
In a recent memo, Marks said that while the AI trade is in a bubble, investors watching from the sidelines could miss out on the potential growth.
“No one should stay all-out and risk missing out on one of the great technological steps forward.”
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