What Oaktree's Howard Marks Thinks of Credit Markets, Fed

Above: Not Howard Marks

What can we forecast? What is knowable? Howard Marks of Oaktree Capital focuses on these vexing questions in a memo called “Thinking about macro” which forms backdrop to YouTube video posted here.

He's convinced the macro future view isn't knowable, and that this is a worthwhile lesson to take into account as we watch ongoing arguments about what’s next for inflation. But let’s posit a mini-review of how Marks got to this post.

 

Going into 2020 this credit [bonds, junk and other] maven had positioned his firm defensively. Then as COVID hit there was a brief but spectacular market crash. Once the Federal Reserve entered with massive liquidity, Marks was without great distressed opportunities. His firm is doing no great shakes at present, and he has to face up to the question that everyone faces: If bonds are bogged in the face of zero interest, how do you view equities?

 

In macro forecasting of inflation or interest rates, he says, it's easy to be as right as the general consensus but very, very hard to be more right than the general consensus. So, the forecast gives you no advantage. He tells people to admit to themselves that they don't know what the macro future holds – that agnosticism is probably wiser than such self-delusion.

In any case, he has come around to the idea that, in relative terms,  securities are not wildly mis-priced. Zealots for AMC and GameStop can come to the same conclusion, but not with so pretty a word picture and interesting an argument as Marks.

He says you can't predict the future but you can prepare -- and what you should do to prepare is to 1-look at floating rate debt investments, 2-identify firms with largely fixed costs that they are able to pass on, and 3-spot situations where profits have the potential to grow faster than prices. And remain fully invested.

Marks has his faults like any man, and these may be exaggerated as they may be with a rich man. But he can write a helleva memo, and salt it with some good quotes on forecasting. One follows.

 

“No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.” – Jan H. Wilson, GE

 

https://www.oaktreecapital.com/insights/howard-marks-memos