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

Summary

Howard Marks from Oaktree discusses the changing landscape of global trade and its impact on credit yields. He argues that even amidst recent market sell-offs and tariff implications, credit yields remain attractive and have slightly increased. Marks highlights that the shift from globalization to restrictive trade practices marks a significant change, potentially increasing inflation and reducing worldwide welfare. He stresses that predicting market outcomes is extremely challenging now due to the unprecedented changes in international relations and economic policies. Despite uncertainties, Marks sees the current asset price reductions as opportunities, though he advises cautious evaluation of their adequacy.

Highlights

• Howard Marks sees credit yields as a better deal than equities 🏦.
• The rise in tariffs marks the biggest change in the trade environment in decades 📈.
• Restrictive trade could lead to higher inflation and reduced welfare globally 🌐.
• There's no precise measurement tool to predict impact of current market changes 📊.
• Investors should be cautious yet opportunistic with current asset prices 📉.

Key Takeaways

• Credit yields are still attractive despite market sell-offs and tariffs 📉.
• Tariffs signal a paradigm shift from globalization to restricted trade 🌍.
• Predicting future market scenarios is harder than ever due to global uncertainties 🔮.
• The U.S. remains a strong investment option but with increased risks 🇺🇸.
• Current market conditions offer buying opportunities but require careful assessment 💼.

Overview

In the recent Bloomberg interview, Howard Marks of Oaktree Capital delves into the current economic turmoil sparked by heightened tariffs and market sell-offs. He reiterates his stance on credit markets offering better returns than equities, even amidst volatile conditions. With credit yields rising slightly since his last memo, Marks discusses the favorable risk-reward balance currently available in credit investments.

Marks highlights the critical shift from a globalization-driven economy to one marked by restrictive trade practices, with tariffs that could potentially reverse the benefits enjoyed from global trade over past decades. He emphasizes that this change, which he considers the most significant of his career, could lead to increased inflation and hindered global welfare. Despite these challenges, Marks suggests that the current market prices offer a buying opportunity if investors can accurately assess the situation.

Finally, Marks addresses the unpredictability of future market scenarios, pointing out the difficulty in forecasting due to unparalleled changes in geopolitics and economic policies. He underscores the importance of cautious but explorative investments during these times. While the U.S. still presents itself as a viable investment ground, investors should be wary of rising risks stemming from fiscal policies and global perceptions.

Chapters

• 00:00 - 00:30: Introduction and Howard Marks Memo Discussion In the chapter titled "Introduction and Howard Marks Memo Discussion," the speaker discusses recent market turmoil and references a memo written by Howard Marks a month prior, asserting that credit offers a better deal than equities despite not being a giveaway. The chapter explores whether Marks' thesis still holds given significant market changes, including a major market sell-off and historically high tariffs.
• 00:30 - 01:30: Current State of Credit Yields and Market Sell-off The chapter discusses the current state of credit yields and the market sell-off, highlighting that credit yields have increased compared to six weeks ago. High yield bonds, for instance, have seen an increase in yield from around 7.2% to close to 8%, indicating that bond prices have decreased. This results in a higher potential return. Additionally, the stock market has experienced a significant decline, with an estimated drop between 15% to 17%.
• 01:30 - 02:30: Impact of Tariffs and Global Trade Changes This chapter discusses the impact of global trade changes, including the imposition of tariffs, on equity prices. The economic environment is described as being in a state of flux, causing uncertainty among investors. This uncertainty is reflected in the decline of equity prices. The main question posed is whether the prices have fallen too much, just enough, or not enough, a question that remains unanswered due to the unpredictability of the current global situation.
• 02:30 - 03:30: Importance of Global Trade and Potential Consequences of Isolation The chapter discusses the challenges in measuring or gauging paradigm shifts, particularly in the context of recently announced tariffs. It highlights that while 'measuring' implies quantification, which isn't feasible, the focus should instead be on understanding and thinking about changes in the global trade environment. The chapter underscores that these changes, such as the implementation of tariffs, represent significant shifts in the economic landscape, potentially the biggest in recent times.
• 03:30 - 04:30: Inflation and the Effect of Tariffs The chapter discusses the shift in global trade dynamics from a period of free trade, world trade, and globalization to one characterized by significant restrictions and a tendency towards economic isolation, particularly in the United States. This change marks a departure from the trade practices of the past 80 years.
• 04:30 - 06:30: Evaluating Investment Risk and Return The economic boom post-World War Two is highlighted as an unprecedented period in human history, largely attributed to the expansion of trade. The speaker underscores the concept of a 'rising tide lifts all boats,' indicating that the benefits of this trade growth were widespread. The importance of understanding trade's role is emphasized, with a note on how different countries have varying strengths and weaknesses in this context.
• 06:30 - 08:30: Uncertainty in the Global Economy The chapter discusses the concept of global trade and how worldwide welfare is maximized when countries specialize in producing goods and services that they excel at and then trade these with other nations. This trade ensures that every country can benefit from the efficiencies of others, leading to an overall improvement in global productivity and welfare. It uses the illustrative example of Italians making pasta and the Swiss making watches to highlight the advantages of specialization in trade. The chapter warns against halting world trade, as it would lead to inefficiencies like the Swiss making their own pasta and Italians making their own watches, which is counterproductive.
• 08:30 - 10:30: Investment Opportunities in the Current Market The chapter discusses the potential state of the world, arguing that people in some countries may be slightly worse off due to certain circumstances. It emphasizes the undeniable benefits of globalization over the years. The chapter highlights a specific instance of economic benefit where the cost of durable goods in the U.S. decreased by 40% over a 25-year period, as mentioned in a memo from a decade ago.
• 10:30 - 13:30: United States as an Investment Destination The chapter discusses the role of international trade in maintaining low inflation in the United States by making goods cheaply available to Americans. It points out that without world trade, this benefit would be lost. The imposition of tariffs aims to boost domestic production, but it raises concerns about the potential increase in costs for domestically produced goods compared to those imported, suggesting that prices might rise as a result.

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

• 00:00 - 00:30 Marks joined us on a day of turmoil after putting out a memo about a month ago where he wrote, The bottom line is that credit presently offers a better deal than equities. Even at today's spreads. Credit isn't a giveaway today, but it offers a healthy, absolute returns and is fairly priced. Howard joins us right now. Howard, you wrote that a month ago. The world has changed. We have seen the market sell off. We have seen tariffs implemented that are the highest levels that we've seen going back 100 years. Does your thesis still hold? The yields on credit are still very
• 00:30 - 01:00 healthy. And in fact, credit yields a little more now than it did six weeks ago when I wrote that memo. Then high yield bonds, for example, were yielding around 7.2. Today, they're close to eight. Which means they went down in price, producing a higher prospect of return. Of course, the stock market is well down since then. I don't know, six, 15, 16, 17%. I haven't done the math yet and it keeps
• 01:00 - 01:30 moving. But, you know, obviously the the state of the world, which equity prices depend on, is completely in flux and has been radically changed. Most investors think for the worse. That's why prices are down. The question, of course, is whether they're down. Too much just right or not enough. And almost nobody can say.
• 01:30 - 02:00 How do you start to even measure something like a potential paradigm shift, like the tariffs that were announced earlier this week? Well, first of all, of course, measure is the wrong word because that suggests some quantification, which is impossible. There's nothing to measure. But how do you gauge how do you think about the changes? And, you know, this is. This is the biggest change in the environment that I've seen probably in
• 02:00 - 02:30 my career. You know, we we've gone from free trade and world trade and globalization to this system, which implies significant restrictions on trade in every direction and a step toward isolation for the United States. I believe that the last 80 years since
• 02:30 - 03:00 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. And I think that we have truly had a rising tide lifts all boats and and trade was a big part of that. And everybody in the audience should understand the role of trade. Every country, for example, does some things better and worse, and
• 03:00 - 03:30 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. And well, I don't know if it's politically correct, but the good news is that the 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,
• 03:30 - 04:00 the world will probably be well, maybe arguably, people in both countries will be a little worse off. That's what we're talking about here. And and and we should not underestimate the benefits that we've gotten from globalization. And among other things, there was a 25 year period which I cited in one of my memos ten years ago in which the the the cost of durables in the U.S. went down by 40% in in in
• 04:00 - 04:30 in inflation adjusted terms. That kept a lid on inflation here. It made goods available cheaply to all Americans. If we don't have world trade, we don't have that benefit. And, you know, the tariffs are designed to encourage production at home. But who could imagine that that most things produced in the United States will be as cheap as they are coming from abroad. In other words, things will cost more. If that's the case, does that mean that
• 04:30 - 05:00 you see the inflationary regime as being something that is more persistent, a reversal of what we saw, the disinflation of the globalization? Well, I think so. There were financial benefits from globalization, including keeping a lid on inflation. And, you know, if if we hadn't bought our TV sets and appliances from abroad in that 25 year period, declining prices,
• 05:00 - 05:30 what would inflation have been? And the answer is considerably more. Maybe not two, but maybe three or four or five. And so, you know, tariffs are an increased cost. Somebody has to pay them. And, you know, most people think the consumer will pay them. There's some possibility that the importer or the exporter will pay them or the government of the exporting country. But it's an increased cost. The proceeds from which will go to the
• 05:30 - 06:00 government. And, you know, will society be better off as a result? When you're measuring how to decide the risk and reward of given asset classes in this type of environment, that could go in a multitude of different ways. How do you understand where there's value, what a return is that would justify a risk at a time when, you know,
• 06:00 - 06:30 potentially you could get seven, 8%, 9% with credit, with stocks, they have delivered more than 10% for the past number of decades. But going forward. I want to respond first to your last sentence. Stocks have delivered an average of 10% a year for the last hundred years, but not when the p e ratio was 19. And the p e ratio today is probably 19. The average return has been 16. So we can say that when the p e f
• 06:30 - 07:00 average, when the p e ratio averages 16, the return average is ten. But when the p e ratio is 19. My guess is if you look at history, if you bought the the S&P, when the p e ratio was 19, historically, you probably made, let's say, 1 to 6% a year or 2 to 7% a year Sunday, but certainly not ten. And and so, you know what, you pay matters and the price of the S&P is elevated relative to historic levels.
• 07:00 - 07:30 So you shouldn't expect historic returns. Whereas in credit, one of your arguments is you can expect to get that return because the default risk isn't as great as some of the excess spreads. And what you're getting in all well, you know, with credit is a newfangled word for fixed income or which was a newfangled word for bonds. In 1978, I was moved at Citibank from the equities department to the Bond
• 07:30 - 08:00 department. Nobody talked about fixed income or credit, but with debt or bonds or fixed income or credit. What you see is what you get. You can read on the piece of paper what the promised return is. And then the only thing you have to wonder about is Will I get it? That is to say, will the issuer default or will they keep their promises? And by the way, they promise you interest. They promise you to pay your money back at the end, that if they don't keep the
• 08:00 - 08:30 promise. They lose the company. So they have a lot of incentive to pay. I've been in in non-investment grade credit for 47 years, and in our experience, roughly 99% of our issuers have paid as promised. You've thrived during your five decade career, almost five decade career during times of dislocation. Is this a time of dislocation to play or not to? Well, it's a time of dislocation. Everybody has to judge for themselves
• 08:30 - 09:00 whether the the reduction in asset prices so far is right, inadequate or excessive. If it's excessive, you should jump in with both feet. If it's inadequate, you should wait until things adjust further. And it's impossible to make that judgment qualitatively. You used the word measure before I pushed back a little bit. There's there's no place you can look.
• 09:00 - 09:30 There's no analysis you can do to determine whether today's asset prices are right for the environment ahead. Now, there never is. It's always conjecture. It's always guesswork. That's in theory, why the greatest investors are great, because they make those judgments better than most people. It's excessively hard today because today we have no idea what the future is going to be. Normally, we think we know what's going to happen in the future.
• 09:30 - 10:00 We normally assume the future will look mostly like the past. We extrapolate. And usually it works because the world doesn't change that much. But the the. World economy and the world order beyond the economy, meaning geopolitics and international relationships, has been shook up like a snow globe by the events of the last days. And nobody knows what it's going to look like. Nobody knows.
• 10:00 - 10:30 I daresay if you tell me that you what the what the what our rules will be six months ago, six months from now, I'll bet you you're wrong. This is in flux. And if you think it's in flux, then by definition, you now know what the future holds. And then even if you know what our country's going to do, and it's going to be that way six months from now, we don't know what other countries are going to do, what the ramifications will be.
• 10:30 - 11:00 And so, you know, I always inveigh against forecasting. I don't believe in macro forecasting, my own or other peoples. And we know much less today than usual. Now, people who who like to run their lives, according to forecasts, they say, well, this is going to happen in the future, so I'm going to do this and this is going to happen in the future. So I'm going to do that. But what you really know, if you like to
• 11:00 - 11:30 work with four cases, you need two things, not just a forecast, you need the forecast, but you need an estimate of the probability that your forecast is correct. And today, whatever your forecast may be, you have to say the probability that I'm right is lower than ever. Because the probability that we know what the future is going to look like is lower than ever. And that's that's how I feel. Is this a time to be fearful or greedy?
• 11:30 - 12:00 You know what you have to say in Bloomberg's offices. You have to think in terms of your neighbor. The department store. Bloomingdales. Bloomingdales. Bloomingdales just put everything on sale. Prices have come down and for the S&P 8% in the last two days and much more in the last six weeks.
• 12:00 - 12:30 It's on sale. That should encourage people to think about buying. Will they go down further? Nobody knows. Ah, the price is fair. Nobody knows. But everybody runs from the market when prices go down because they think it connotes risk. It's just stuff going on sale. And of course, it takes
• 12:30 - 13:00 a while. I was going to say a pro, but it takes a preseason pro, of which there aren't many to know whether, as I keep saying, the the discounts are adequate or appropriate. But certainly you have to look and and it doesn't make any sense to say just a minute, I did X, Y, Z when the price was 100. Today the price is 90, so I'm going to boycott it. That doesn't make any sense on its face. You have to take a hard look. Do you still think that the US is the
• 13:00 - 13:30 best place to invest? It's I think it's probably still the best place, but it's less best than it used to be, because I think that, you know, if you think about the things that made it the best place. One of them was the rule of law. That may be less the fact today. One of them was the predictability of outcomes that may be less today.
• 13:30 - 14:00 One of them was the well, the worst thing about investing in the United States for many years has been our fiscal situation, our deficits and debts. And the U.S. has behaved like somebody who has a golden credit card where there's no credit limit and the bill never comes. So, of course, you can spend more than you make. And that's. And if somebody has a golden credit card, what would you do? Well, you might buy a nice car, but what
• 14:00 - 14:30 the hell? You might as well buy all the cars because the bill is not going to come. And that's the way we've behaved and that's the way Washington has spent money. But. Can the events of the recent days change that? Can they 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.
• 14:30 - 15:00 If people don't like the dollar, 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 U.S. is still a great credit, but I don't want to hold their debts because look how they're treating me, the fiscal situation will be very complicated. Howard Marks, we have to leave it there. That was Oaktree Capital co-chairman Howard Marks.
• 15:00 - 15:30 Thank you so much. Back to you.