Howard Marks is closely followed by investors, and for good reason. He’s the Co-Chairman of Oaktree Capital Management, the world’s largest distressed credit investor managing more than US$200 billion. He’s best known for his client letters published since 1990.
Over the past week, Marks appeared on Bloomberg TV and he was both blunt and nuanced - as he was in a follow-up client memo.
In his TV interview, he was blunt about changes wrought by Trump and his tariff policies. He thinks they amount to nothing less than a regime change.
Mark says that we’ve lived in an era of globalisation since World War Two. There’s been open trade, efficient supply chains, and cheap goods:
“I believe that the last 80 years since World War Two have been the best economic period in the history of mankind. And one of the major reasons was the growth of trade.”
Free trade brought significant benefits, including greater productivity, broader access to goods, and lower prices. It helped keep inflation down, which aided central banks, consumers, and investors:
“Worldwide welfare is maximized when every country does the things it does best and cheapest and then sells them to the countries that need them, which do other things and sell them to other people. That’s how trade works ...
… The good news is that Italians make the pasta and the Swiss make the watches. But if we stop world trade, and the Swiss have to make their own pasta and the Italians have to make their own watches … people in both countries will be a little worse off.”
Marks believes the era of free trade is now fading.
In its place is a new world. One where countries are rethinking trade, tariffs are increasing, and domestic production is finding favour, even if it means higher prices for goods.
“Tariffs are an increased cost. Somebody has to pay them.”
This will result in slowing trade, increased inputs and prices, and less efficient supply chains - all of which will hurt economic productivity.
Not prone to big statements, Marks makes one anyway:
“This is the biggest change in the environment that I’ve seen probably in my career.”
How investors should play it
For investors, Marks says old models and playbooks need to be thrown out. Because what’s worked over the past 80 years may not work in future. The new environment demands a different approach.
That approach shouldn’t rely on forecasting. In the past, Marks has been scathing of macroeconomic forecasts, and he now thinks they’re even less useful. He thinks forecasts can’t work in an environment like this because the world is so uncertain. It’s hard to predict what will happen the next day, let alone the next year:
“… the probability that we know what the future is going to look like is lower than ever.”
So what should investors do?
At first glance, Marks isn’t encouraging, suggesting that there’s “no analysis you can do to determine whether today’s asset prices are right for the environment ahead.”
However, he doesn’t just mean today’s environment, but any environment. Put simply, we can’t possibly know whether a market multiple of 20x earnings is appropriate pricing for what’s ahead, or whether that multiple should be higher or lower.
What Marks is saying is that given the enormous changes happening today, and the likelihood of higher prices and inflation, investors need to tread carefully. And more than ever, they should focus on probabilities and price.
He says the market falls should have investors thinking like a shopper at a sale. “Bloomingdale’s just put everything on sale,” he quips. “Prices have come down…It’s on sale. That should encourage people to think about buying.”
Notice that he doesn’t urge investors to buy now, but that they should think about buying assets that have fallen in price, while being conscious of the risks brought by Trump and his tariffs.
Marks does say that he maintains his preference for credit over stocks right now. “The yields on credit are still very healthy,” he notes, pointing out that high-yield US bonds have jumped from 7.2% to nearly 8% yields in just weeks, making those bonds cheaper.
His take on stocks is more cautious: “[US] Stocks have delivered an average of 10% a year for the last hundred years, but not when the P/E ratio was 19.” With valuations where they are today, he thinks expecting historical returns would be a mistake.
Finally, as to whether the US remains a strong place to invest, Marks says that it’s no long a given, especially given its large trade deficits:
“Can the events of the recent days … cause there to be a credit limit? Can they cause a bill to be presented at some point in time? And if the answer to either or both of those questions is yes, that’s a real risk. If people don’t like the [US] dollar, if they don’t like investing in the United States, don’t want to hold an unlimited number of Treasuries, if we just make people mad, and say “the US is still a great credit but I don’t want to hold your debts because look how they’re treating me”, the fiscal situation would be very complicated.”
James Gruber is Editor at Firstlinks.