This podcast episode presents insights from two distinct areas: the Trump administration's economic policy as articulated by Treasury Secretary Scott Bessent, and global investment strategy from prominent investors Sheikh Abdullah Al Khalifa and Howard Marks.
To distinguish signal from noise and navigate uncertainty (which unlike risk, is not calculable), they advise focusing on "hard data, not soft data". They differentiate between a "known unknown" (like tariffs under a new president, where the policy is known but the impact isn't) and an "unknown unknown". Dealing with uncertainty means acknowledging it and knowingly, intelligently taking risks that are aware, analyzable, diversifiable, and adequately compensated. They cite the Nifty 50 in the 1970s as an example of the danger of taking risks one is unaware of.
On investing in the US, Al Khalifa is direct: "underweight America at your own risk". He argues that focusing solely on equity markets misses the breadth and depth of US capital markets, including fixed income, private equity, real estate, infrastructure, and credit. The US maintains its exceptionalism through a dynamic economy, rule of law, capital markets, and innovation. While the US is the premier destination, Marks adds the question is whether it is as best as it was, which is a subjective judgment. Large global funds would struggle to make substantial reductions in US exposure, as "everything has to go someplace". Capital allocation within the US might shift from equities to areas like infrastructure or private credit.
They discuss public versus private markets. In public markets, they identify demand risk in index investing due to the high concentration and correlation of top names in indices like the S&P 500, which makes it act like adding leverage. They believe active management is "back" as a way to reduce risk by moving away from these concentrated names. Opportunities might be found in high yield debt offering equity-like returns at better positions in the capital structure.
In private markets, Al Khalifa finds private equity, especially large buyout and venture capital, "very troublesome". He points to poor underwriting, lack of exit optionality, and challenges with realizing value from increasingly large funds. He warns of a "perfect storm" with $3 trillion of unrealized assets approaching the end of their lifecycle. Opportunities are seen in secondaries and special situations, providing solutions for firms needing to exit problematic investments. Marks notes that the tailwind from 40 years of declining interest rates, which benefited leveraged ownership, is over.
On illiquidity, they acknowledge a premium exists but is often underestimated when things are going well. One must realistically appraise their ability to live without liquidity, as there may be a need for money.
Regarding investing in AI, Al Khalifa suggests exposure can come from developing companies or, with a potentially better risk-return profile, from investing in the "enablers" like data centers, power, and connectivity. He sees significant opportunities in lending against AI infrastructure, yielding high returns (10-15%) on relatively safe assets. Marks anticipates AI will "supplant a lot of investing and a lot of investors," similar to how indexation affected active management.
Finally, they reflect on mistakes, agreeing everyone makes them. The key is to refine one's process. Al Khalifa states the best investment decisions are sometimes opportunities not pursued. Marks acknowledges his conservative bias as something he has had to manage.
