Howard Marks, co-founder and co-chairman of Oaktree Capital Management, who predicted the dot-com bubble 25 years ago, has a new paper that has suggestions for caution in 2025. Among the signs - over optimism in the market, ongoing AI hype, reliance on “Magnificent Seven” (those tech names- TSLA, AMZN, NVDA, MSFT, GOOGL, META, AAPL), and index investing bias.
Another bubble?? On one of the items - the AI hype. I have definitely gotten a sense of it. There has definitely been more discussions about AI around my workplace. Or, the potential for more AI use cases. Even the Motley Fool media side seem to be pushing hard on the AI angle - magical picks that could be the next Nvidia (NVDA).
I will acknowledge that there might be some “inadvertent” accumulation of some Magnificent Seven holdings. How would that work? Well, suppose I had an Apple (AAPL), Amazon (AMZN) or Nvidia (NVDA) stake from a few years ago. Then last year, got interested in the YieldMax Income ETFs such as YMAG (Focused on Magnificent Seven tech names) or individual names (NVDY or Nvidia-focused ETF). Then, I also have a QQQ position, which also contains the Magnificent Seven tech names. Yup, it definitely begins to add up to more Magnificent Seven tech that I originally considered.
Again, for me, not horribly bad at the moment. But, certainly something to watch.
What is the difference between dot.com and AI? Money!
A well respected economist working for a well respected firm wrote a paper that has long ago disappeared from the Internet, stating that the key factor was money, no matter its source. Investment money was as good as free cashflow. It wasnl’t and the boom went bust.
The question to answer, “Can AI generate free cashflow?” Nvidia selling chips certainly can. Tesla powering self driving CyberCabs and Optimus robots most likely can. Test each company that touts AI to discover their source of free cashflow.
@captainccs - I think someone did “test the finances” with one AI related company, Super Micro Computer Inc (SMCI), and the company had to postpone earnings.
I think that’s only part of the question. The other part is “can it generate enough cashflow, quick enough, to justify the huge investment?”
For example, let’s say a big company G invests $15B into AI equipment (gen 1 equipment) and begins offering their services. Along comes another big company M and says “we are investing $80B into gen 2 equipment and will offer our services that are 5 times better/faster/etc”. So now, can company G earn enough cashflow on their $15B investment before company M completes their investment into the gen 2 stuff that is better? Of does company G also need to invest another $80B in gen 2? Or does company G wait a while and invest $150B into gen 3 equipment? Can they all earn enough cashflow to justify the investments before the next generation arrives? Or will they all slow their investment to allow the cashflow to catch up? And if they slow their investment, what happens to the suppliers at that point? And when is that point reached? And what happens if the requisite cashflow isn’t reached and the buyers not only slow their investment, but also refuse to buy unless the prices are lowered?
These are the salient questions for investors.
We talked about the fiber implosion from a few decades ago. Global Crossing, etc. But I can’t think of the names of many of the suppliers into that “bubble”? Maybe Corning (market cap around $50B IIRC)? Maybe JDS Uniphase (pieces sold off)? There must have been plenty of others.
The potential for fiscal budget problems is huge. The next four or five months will be a disaster. Odds are. Nothing being said right now makes any sense in econ. It is voodoo economics on steroids.
BTW Google needs to get rid of the AI results. It is laughable. They take up the top of the page. Remember Giggle you make money selling from the top of the page? Remember?
HohumYNWA has another reason to like Howard Marks. Like me, Howard Marks & Oaktree Capital have been long-time investors in the shipping sector. Last year, Oaktree exited a long term holding in Star Bulk Carriers (SBLK). Somewhat ironic because Star Bulk had become a consolidation of other dry bulk shipping companies, including some (Eagle Bulk, Excel) that Oaktree had also invested in. At this time, Oaktree Capital’s primary shipping investment is in Torm Plc (TRMD), a Danish-based clean tanker company. When Oaktree Capital originally invested in Torm Plc, it was based on the Oaktree Capital’s original expertise - distressed assets. Torm is so much healthier now. TRMD was a significant Oaktree Capital public investment in 2024 (probably still is, but cannot confirm that at this time)
The bottom line is investors must be selective in what they buy. Buying anything with an AI component is probably a mistake. Companies like Nvidia are growing earnings and not over valued. But eventually their sales will slow. But if AI succeeds that can take a long time. And they can invest to develop new products and markets.
Companies like Google must invest in AI to protect their search leadership. If AI improves the user experience they must get there first.
For many companies AI investment is speculative. Inevitably some will fail. Their hardware investment should be a saleable asset (unless it ages and becomes obsolete).
Yes, over time AI markets will mature. Yes, corrections will occur. A crash seems unlikely as most think the assets are real.
I liken it to the dawn of the internet. A few will be astonishingly successful (Amazon, Netflix, Facebook). Some will be thought of as successful and will flame out (AOL, Yahoo, EarthLink). There will be some modest, sustainable businesses (eBay, iTunes). And many many will get 15 minutes of fame, never to be heard from again.
I have my doubts about the idea that their assets will have much value. By the time they’re in decline a whole new generation of chips and softwares will be in use, and nothing depreciates faster than last years’ computers.
In the internet boom many stocks went sky high without earnings. Those can crash and many did. Of course there are speculative AI stocks too but most we discuss have earnings.
Sure, but there’s a lot of AI hype being attached to companies whether or not it’s deserved. I’m reminded of the small company that added “blockchain” to their name and got a big pop even though they had nothing to do with, you know, blockchain.
Apple has earnings. Is it really going to be a big player in AI? (“Wow, the new iPhone 16 has AI!”). Google and Meta have earnings. Is AI going to significantly change their business?
Heck, I’m expecting Coke and McDonald’s to announce their new AI menu any minute now. Hamburger that taste like Coke! Ice drinks that taste like hamburger!
Can’t wait. It’s a wonderful new world opening up.
Sure, and there are companies out there who claim they have an AI project just to boost their stock price. The program may be fiction. Of course if they are spending big bugs for AI chips, we should know. But that does not guarantee success.