Mark Yusko, Founder, CEO & Chief Investment Officer, Morgan Creek Capital Management
Mark Yusko, founder, CEO, and chief investment officer of Morgan Creek Capital Management, discussed the concentration of capital in Artificial Intelligence infrastructure, the effects of macroeconomic uncertainty, and the market risks created by speculative momentum and excessive leverage. “The imprudent use of leverage can be dangerous. In fact, leverage can never make a bad investment good, but it can, and unfortunately sometimes does, make a good investment bad,” Yusko said in an interview with Invest:.
What changes have most influenced your view of the investment landscape?
The biggest change has been the rapid shift in capital expenditure by major hyperscalers, particularly around data centers. A significant share of national gross domestic product growth in the past year has come from building these facilities, buying chips and cooling technology, and expanding the infrastructure required to make artificial intelligence tools more available and effective. That capital allocation decision has created two different market outcomes.
Construction companies and businesses supporting these projects have benefited from multibillion-dollar contracts, increased hiring activity, and rising demand for services, such as lodging in smaller or more remote markets. The challenging side is that the majority of the capital has flowed into a narrow area. That concentration has made funding less available for other businesses; hence, economic growth and employment in many service-oriented sectors have become more difficult. This bifurcation of capital flows contributes to the widening gap in the K-shaped economy.
Business owners, landowners, and equity owners have generally seen their assets appreciate. People working hourly wage jobs or living on more fixed incomes have faced rising prices and weaker growth in the parts of the economy where they participate. This is the classic dilemma of unanticipated consequences.
How are geopolitics, inflation, and interest rates affecting investors?
Geopolitical conflict has direct and indirect effects on the economy. War benefits companies that produce tanks, planes, drones, and other defense equipment, but the secondary economic consequences are much broader. A spike in oil prices, for example, disproportionately affects the lower half of the economy. Someone with significant capital may barely notice higher gasoline costs, but a worker who depends on a car to get to a job can experience real hardship.
There are also second- and third-order consequences. Materials moving through the Strait of Hormuz include products used to manufacture silicon chips and nitrogen fertilizer needed for agriculture. Disruptions can therefore affect technology supply chains, food prices, and the broader economy. Interest-rate expectations have shifted as well.
Many investors entered the year convinced that the Federal Reserve would cut rates, even though the chair had indicated otherwise. Higher rates, or even the possibility of an increase, can reduce market liquidity, and strong economic growth is highly dependent on abundant global liquidity. Macroeconomics and geopolitics can oftentimes sound like someone else’s problem, but the local consequences can be significant. North Carolina, for example, does not produce enough oil to meet its needs and relies on imports. A major increase in energy prices will eventually affect the local economy.
What less visible policies are influencing local economic activity?
Changes involving immigration enforcement have had economic consequences that many people may not immediately consider. A restaurant investor I know expected labor availability to be affected because some workers were afraid to come to work. What surprised him was the effect on customers.
A meaningful share of his business at restaurant chains came from Hispanic Americans, and some were also reluctant to go out and spend money. Those unanticipated behavioral shifts matter disproportionately because restaurants and other service industries are major contributors to the economies of smaller communities. Similar effects also extend into construction, laundry services, retail, and other local businesses. One of the most important concepts in economics is the velocity of money. If I pay a barber, that barber may use the money at a grocery store.
The grocer may then use the money to buy a shirt, and the retailer may use the money to purchase equipment or pay another supplier. The same dollar continues circulating through the local economy. When people stop participating because they are fearful, that capital does not circulate and economic growth slows. A policy decision that appears narrow can therefore produce much broader economic consequences.
What are investors watching as they decide where to deploy capital?
We are in what I would call a late-stage momentum environment. Markets generally move through a cycle based on the relationship between an asset’s price and its fair value and the activity level of different types of market participants, investors, traders, speculators and gamblers. Investors typically buy assets below fair value or purchase growing businesses that they believe can expand their profits unusually quickly.
Traders focus more on price movement and may take either a long or short position in securities with little attention paid to the company fundamentals. Speculators enter as price movement accelerates, often taking the other side of hedging activity of asset and commodity owners. Gamblers arrive near the end and frequently use borrowed money or margin and tend to push prices to extreme levels beyond fair value.
The artificial intelligence buildout drove substantial gains in chip companies, memory producers, and related businesses. In markets such as South Korea, investors began borrowing against homes, cars, and other assets to buy stocks. Prices rose to levels that were difficult to justify.
Eventually, all parabolic moves in prices reverse. Charts do not rise vertically and then remain there; prices tend to come down the other side, creating what is sometimes called an Eiffel Tower pattern. Once prices begin declining and leverage is involved, margin calls can force investors to sell other assets to repay loans. That can create a downward spiral.
Investors are now looking more carefully at geopolitics, interest rates, slowing growth, and the possibility that enthusiasm around artificial intelligence has moved too far. We are not necessarily at a panic stage, but caution and rebalancing are becoming more important. Investors who made significant gains may consider taking some money off the table.
Why does leverage amplify both gains and losses?
Leverage increases returns when asset prices rise, but it magnifies losses when they fall. If someone buys a $100 asset entirely with cash and it rises by 10%, the return is 10%. If that person invests $20 and borrows $80, the same $10 gain represents a 50% return on the equity invested. The problem appears when the asset declines. A 10% drop on a fully owned asset leaves the owner with $90. If the investor contributed only $20 and borrowed $80, the same decline eliminates half of the investor’s equity. With extremely high leverage, the investor can lose more than the original equity contribution and still owe the lender money. That dynamic contributed to the housing crisis.
Some borrowers made minimal or no down payments, so even a relatively small decline left them with negative equity. As more people tried to sell, prices fell further, triggering a vicious spiral. Borrowing is not inherently bad. Banks exist for good reasons, and businesses use debt productively. Real estate can also support prudent leverage because prices do not generally fluctuate every day. The imprudent use of leverage can be dangerous. In fact, leverage can never make a bad investment good, but it can, and unfortunately sometimes does, make a good investment bad
How can investing become more approachable for new investors?
Every industry develops jargon that makes its work appear more complex. Investing is fundamentally much simpler than it sounds. You are either an owner or a lender. You can own equity in a company, or you can own its debt. A bond is a contractual claim. The company agrees to repay the lender, and the return reflects the risk-free rate plus compensation for the possibility that the borrower may not repay (default). Equity is a contingent claim. After the company pays its debt obligations, what remains belongs to shareholders.
Choosing what risk you are willing to take and positioning accordingly is the critical first step of investing. That said, the most important step is simply to start, particularly when you are young. People can begin with small amounts or even buy fractional shares. Younger investors generally have more time to own long-duration assets, such as equities, and allow wealth to compound. Older investors may have more reason to hold bonds because capital preservation becomes more important.
Volatility often frightens people into making poor decisions. Humans tend to buy what they wish they had purchased earlier. They watch an asset rise until fear of missing out becomes overwhelming, then buy near the top. They also tend to sell what they may soon need after prices have already fallen. That is the opposite of what they would do in most other parts of life.
Investing may be the only business where people run out of the store when products go on sale. A more disciplined approach is to invest a little today, a little next week, and a little after that. Buying gradually reduces the pressure to identify the perfect moment.
What principles should people follow when building wealth?
Start with businesses and products you understand. My son has done well by investing in companies connected to products he uses and industries he follows, including technology, streaming, and gaming. Familiarity does not eliminate risk, but it helps investors understand what they own and have conviction to continue to own through times of volatility.
Consistency matters more than trying to make one perfect decision. Saving is difficult because rent, food, gifts, and other expenses compete for every dollar. Paying yourself first changes the equation. Set aside a small amount for investing before spending the rest, then make decisions based on what remains.
The industry often makes investing feel intimidating because fear encourages people to choose easy products without fully understanding fees or incentives. The best investors get started, invest consistently, avoid excessive leverage, and resist the emotional urge to chase assets after they have already risen dramatically. Investing is easy. Discipline is hard. My first boss had a coffee mug with the saying “Invest Without Emotion,” and that rings true to me every day. Create an investing plan, have discipline to follow the plan, even when it is hard, and don’t let your emotions get the best of you.
