Oaktree's Howard Marks on Credit Yields, Trump's Tariffs

In the wake of Hoover-style tariffs thanks to the Don from Queens...

MARKS observes: Credit yields have increased; for instance, high-yield bonds were yielding around 7.2% then and are now close to 8%, as their prices have decreased while the stock market has fallen significantly.

Marks emphasizes the difficulty, even impossibility, of quantifying or measuring the impact of a potential paradigm shift like the new tariffs. He considers this the biggest change in the environment of his career, moving away from free trade and globalization towards significant trade restrictions and potential isolation for the United States. 

He believes the last 80 years of economic growth were largely due to the growth of trade, where countries specialize and exchange goods, benefiting global welfare. Restricting trade could make countries worse off, as they would have to produce goods they are less efficient at making. He highlights that globalization helped keep inflation low in the U.S., with durable goods prices falling significantly over a 25-year period. Tariffs, by design, encourage domestic production but are likely to increase costs, potentially leading to a more persistent inflationary regime. These tariffs represent an increased cost that someone will have to pay, likely the consumer, and the overall benefit to society is questionable.

Regarding asset classes in this environment, Marks notes that while stocks have historically delivered an average of 10% annually, this was not when the price-to-earnings (P/E) ratio was as high as it is today (around 19). Historically, a P/E ratio of 19 suggests lower future stock returns, possibly in the 1-7% range. In contrast, credit offers a more predictable return based on the promised yield, with the main risk being default, which Marks' experience in non-investment grade credit over 47 years suggests is relatively low (around 99% of issuers paying as promised).

Marks considers the current situation a time of dislocation, and individuals need to decide if the reduction in asset prices is adequate, inadequate, or excessive before acting. He stresses that it's impossible to definitively judge if today's asset prices are right for the future environment, as this is always conjecture and guesswork. The world economy and geopolitical landscape have been significantly disrupted, creating immense uncertainty about the future. 

Marks is a strong advocate against forecasting, especially macro forecasting, as the future is unusually unclear now. He argues that even with a forecast, one needs to assess the probability of its accuracy, which is currently lower than ever.

He believes the U.S. is still probably the best place to invest, but its advantage has diminished due to potential issues with the rule of law, predictability of outcomes, and its significant fiscal deficits and debts.

The U.S.'s past behavior of unlimited spending might face consequences if investors become wary of holding its debt due to its actions, complicating the fiscal situation.

Subsequent to this TV appearance, Marks stretched-out further on the subject in one of his Nobody Knows letters. Good reading. 

Walter Deemer: “When the Time Comes to Buy, You Won’t Want To.”