(Bloomberg) — Recent artificial intelligence related market stumbles have somewhat burst the bubble of infallibility around the sector, Howard Marks, co-chair of Oaktree Capital Management LP, said in an interview with Bloomberg TV.
“I think that now people are saying, hold on, wait a minute, let’s be a little more thoughtful, let’s be a little more skeptical,” Marks, who wrote in a note last year that he was on bubble watch, said. “That’s very healthy,” he added.
Marks’s comments come as investors are showing less tolerance for tech companies whose core businesses are cooling beneath an unprecedented AI spending spree. Recent results from Alphabet Inc. and Amazon.com Inc. have fueled concerns that AI is eroding the businesses financing those investments.
“Over the last couple of years, there has been great excitement and eagerness surrounding buying into or lending to AI, and so that’s that’s been a crowded trade,” Marks said.
If you think you’re in the later innings and everybody’s excited about it, it’s been done a lot, Marks added. “The standards have come down, prices have gone up. You have to be cautious in what you do,” he said.
Marks gained attention in January 2000 for his memo “bubble.com,” in which he warned of dot-com mania ahead of the bust.
Referring to the massive amounts of AI funding that companies have been seeking, Marks said that firms are in an AI arms race, raising trillions of dollars. “A trillion is $1 a second for 31,000 years,” he said. “Nobody can think about 31,000 years or what it means.”
The question investors should be asking, Marks said, is whether there can be enough business and profit to produce an attractive return on these investments.
“I think the answer is: Who knows?” In which case, “we have to take that into account when we make our decisions,” he said.
In a separate interview with Bloomberg TV, Jody Jonsson, vice chair at Capital Group, said a disconnect exists between what AI companies expect and the pace at which enterprises can actually adopt the technology.
“We’re seeing a little bit of that in market reactions now that maybe it’s not happening quite as fast as everyone thought or the ROI is not quite clear,” she said.
“Markets are getting very concerned about the scale of the capital raising involved, whether there’s enough appetite in both equity and fixed income for all the issuance that’s coming to fund it.”
Jonsson said the debt picture is complicated by the fact that much of the financing sits off balance sheet in unconsolidated vehicles, concentrated among a handful of companies that do business with one another.
“The more that they lend their credit to others, the more fragile the system becomes,” she said.
Produced with the assistance of Bloomberg AI.
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