Too Much Money Chasing Too Few Deals: Oaktree's Marks

the biggest distressed debt fund in the world. And he joins us here in our eleven three oh studios And Uh, Howard, thank you so much for being here. You just wrote a new memo, the seven worst words in the world. What are they for an investor? Too much money, chasing too few deals? And we're there right now. Well, I think that where you know, life in the investment world is not black or white, as although many people try to say that, Uh. The environment is not the worst

for investing anyone has ever seen. It's also far from the best. UH. And if you draw a dividing line down the middle, I would say we're in the vicinity of too much money chasing too few deals. Howard Marks, you are the author of mastering the market cycle, getting the odds on your side, and that caused me also to reread your I guess we can come. We call it a famous memo about the race? Can we call it the race to the bottom that basically called the

collapse and stocks and financial assets. You say, now that we're closer to what two thousand six, does that kind of ring a bell? Is that what echoes in your mind when you look at current conditions? I think it's fair to say, Uh, you know, conditions are not as bad even as two thousand six. The banks are not as heavily levered as they were. Uh. There is no analog in the investment world today to the subprime mortgages in their um magnitude infallaciousness. We don't have so many

levered entities out there waiting to melt down. Uh. But what we do have is a lot of money chasing not too many deals. That causes the prices to be a bit up, which produces lower prospective returns and greater risk. Howard, when you say that there's not a direct analog, I think about some of the ways that this time is different than in two thousand five two six, and one of them is the flood of cash and to direct lending funds and let direct lending firms and away from

the big banks. Uh. You had a quote referencing this, what the wise man does in the beginning, the fool does in the end. How do you see this ending? Well? If if too much money is the seven worst words in the world, what wise man doesn't the beginning the fool does in the ends is the most important single investment adage. Every trend which gets recognized in the early

days by the intelligent few and profited from. When those profits become visible, everybody else wants to jump on the bandwagon too, even though prices may now be the higher than they should be. And when everybody jumps in at the end, Uh, that's a little on the late side. So I guess that my question is where are we with that and what's going to be the consequence? Well, direct lending is is one of the areas that has been very popular. Popular popularity is the enemy of the

investor who wants to make a lot of money. Obviously, if you buy things or do things that are extremely popular. You should you're you're, you shouldn't expect to be getting a bargain. A lot of money has flooded into direct lending.

I say in the memo that in the last five years there have been about three d and twenty new direct lending funds, of which eight five were first time funds, as compared to the previous five years, in which there were about eighty direct lending funds, of which seventeen were first time funds. So obviously a lot more funds, a lot more money, a lot more rookies, UH doing their first direct lending funds. Those are not the elements that make for great results. A lot of debt outstanding right now.

What's your call on distress debt? Well, at the present time, UH, you know, the the the distressed debt business is UH pretty snoozy. Uh. In this kind of environment technical definition, In this kind of environment with UH, with a very strong economy and a very accommodating capital market, you're unlikely to get much distress and the companies that get into

trouble are are likely to deserve it. Now, we believe and hope that the large amount of lending and perhaps less care just lending which is taking place today may result when the economy weakens in a cascade of the stress debt. And and we hope to be busy right now, we're pretty much working on old deals much more than new. When you say you hope to be busy, does that mean that you're putting aside a lot of cash to

swoop in should there be more distress. We organized a standby fund for distress debt investing UH in eight and a half billion. That's our second largest fund in history, I think, probably the second largest fund in the history of the sector. And we have done very little with that so far. It's it's largely just sitting on the shelf in reserve. But you know, you have to pre raise your money. In our business, nobody goes in at

the bottom. Well, but but two investors pushed back. Then do they say, all right, we were hoping to swoop in. It hasn't happened. To forget it. Our investors, I will our very patients. Uh. They we don't make claims for being able to time this stuff, and so uh. And I think the investors realized that it's desirable to have a commitment for the stress debt a commitment to oak Tree for that moment, but we don't claim to know when it will come. You know, they haven't put up

the money yet. It's just commitments. We haven't charged any fees. So I think our investors will be happy to be patient. Do you see investors currently playing the game a hot potato? I think, well, you know, in in uh, in private equity, Uh, we still see uh, the the trend towards what the British call passed the parcel, and you call hot potato.

You know, you make an investment, it does well, it appreciates. Uh. Maybe the fund that made the investment is coming to the end of its life that maybe the managers would like to realize they're carried interest in the profits, so they sell it onward to some other fund which is early in its investment life and wants to start putting money to work. I think that's the technical definition of hot potato. Throughout your memo, you were saying that in

this environment. You're not saying that there's a bond bubble or that we're headed toward an imminent and catastrophic crash by any means, but just saying that in this period of elevated demand and incredible liquidity, people have to lower their returns expectations and be cautious. And I'm just wondering from your perspective. We've talked about this before, returns going forward? Has that Has your view on that changed at all? Um? Exactly, Lisa, UM.

I mean, you know, debt today offers modest returns. Interest rates are still close to the lowest in history. The yields breads above those base rates are not that high. They've come down as demand has has picked up. UM. So you know, returns, while sounding generous compared to other markets, are still low in the context of history. UM. And so I don't think people should be uh that excited about the prospective returns. And as you say, I think

the most important thing is to exercise caution. So what returns are feasible to expect? It depends on the asset class. Hi, your bonds pay about six uh, not a king's ransom, but but better than treasuries. Uh. Direct lending might be able to produce returns in the high single digits if it's not levered um and and that sounds even better. Of course, you give up your liquidity, you get that you uh perhaps lend to uh less well tested companies and you enjoy less diversification, so you pay a price

for the excess returns. But you know, um, the old Jim Morrison song been down so long it looks like up to me. I think that's how people feel today. About eight or nine percent the US thirty year treasury has reached its highest level and yield. Since you speak about three things when you look at investing, recent history, human emotion, and asset pricing. We talked a little bit about recent history. Tell us about human emotion and asset pricing.

You know him. One of the best things about the market today in general is that we do not see a prevalence of euphoria. The people in the media, we don't hear them saying, oh, this is your last best chance to get in on the market before it goes to the moon. The book Doubt thirty six thousand has not been reissued. That's all good. We want to see levelheadedness.

What the challenges is that even people, even though people aren't thinking bullish, they're acting bullish, are dropping their caution to move out the risk curve to take on riskier assets in the hope that they can provide decent returns in a low return world, and it is their behavior that affects the condition of the market, and that's why

we're calling for caution. I'm wondering, since you're firm does so much on the ground research of companies, you have an incredible view into the U. S economy, and I'm wondering, do you think that people are overly confident in its strength right now? I think when you when you say it's strength right now is great in the economy is very strong. Uh. The question is is it's sustainable? Is

the performance of a sign of a future trend? Or is it a highly stimulated result of the tax bill, in which case favorable comparisons will become their difficult Uh. You know I always say that doctors rarely give shots of adrenaline to healthy patients. Uh. Will the tax bill produce over stimulation of the economy, necessitating the Fed increasing rates further in order to prevent inflation? And will that

have a negative effect on economic growth? I have a very strongly held view, and that is we'll see as as the author of Mastering the Market Cycle, does the popularity and interest in bitcoin and marijuana related stocks ring a bell. You know it does, PIM and I wrote a memo in July of seventeen mentioned bitcoin, got a

lot of attention for that. I don't want to invade against bitcoin or against pot stocks, but the and I want to point out is that the ability to have an asset like Bitcoin on other coins and have Bitcoin go up nineteen x last year should put people on notice that this is a climate in which speculative behavior is taking place. It is that that these kinds of phenomena like you mentioned do not occur in cautious, skeptical, disciplined,

risk averse markets. And you know, the best, the biggest, the easiest money in the investment business is to buy when people are skeptical, discipline, risk averse, and even terrified. Nobody would say that's today, well done. Thank you very much for being with us. A pleasure. Howard Marks He is the co chairman of oak Tree Capital. He is the author of the new book Mastering the Market Cycle, Getting the Odds on Your Side. The topic now is trade,

and our guest is Robert Lawrence. He is the Albert Williams Professor of Trade and Investment at the John F. Kennedy School of government at Harvard University. He is also a senior Fellow at the Peterson Institute for International Economics, and he previously served as a member of the Council of Economic Advisors under President Bill Clinton. Robert Lawrence, thank you very much for being with us. Will this new trade agreement, as far as you know it, will it

increase employment in the automobile industry? I think it could, although it's not perfectly clear because there are some positive effects and some potentially negative effects. So so I would say I would expect some moderate effect on the auto industry's employment in the US. Do you think, Professor Lawrence, that on the whole this is a a sort of bent more toward free trade or more toward protectionism. I

think it's it's it's bent more towards protection. But we we kind of has escaped a bullet because it's not a certainty. NaSTA has now been renewed, and there were many people who were worried about that. Um it has been improved in certain respects, in the sense of things like the digital economy are now included, labor and environment are treated within the agreement. But I would say there's a lot of constraints more constraints being placed on the

auto industry. They've raised the amount of value added required to qualify for NaSTA. So there are a number of measures which are less free trade, if you will, what it's a but, but it's not. I don't think it's

a momentous change. And the effect on US farmers, for example, with the Canadian dairy market, yes, well, there are slight improvements, but if you look at the numbers involved, their their minuscule, so so um, again it's kind of um, it's a change, but the amount of additional dairy that that we're going to be able to sell in Canada is going to be increased, but the quota is on the you know,

less than ten percent more. Professor Lawrence, I want to get your your thoughts on what this new agreement does for the US. Is a path forward with China. Some people are saying it actually sets a precedent and give some sort of view into President Trump's trade policy. Do you agree with that? Well, I think it has elements that are aimed at China. You know, there's a there's quite a remarkable provision which says that if if the Canadians try to all the Mexicans try to negotiate a

free trade agreement with with China. Now the United States has the right to withdraw from NaSTA. In other words, we eat they're they're using this agreement has trying to put leverage on China and to constrain its opportunities. UM. It's also in Canada not very popular because it's seen by some as an intrusion on Canadian sovereignty and their

ability to conduct their trade policies. UM. By and large, it is sort of closing the US market and the North American market somewhat to Chinese who might want might have wanted to have sell more cars in the United States, something that they aren't doing much now but potentially in the future. But on the other hand, you know, the tariffs on UH steel and aluminum remain in place, and um, that's going to make it less attractive for American auto

manufacturers to produce cars for the Chinese market. And then we also have the tariffs against our cause the Chinese are lowering their tariffs in general in automobiles, but not against US. So I would say on that front, and it hit had unless we get rid of those tariffs with with China and get out of that war. Um, we're actually and that's where I think some of the negative effects of the NAFTA will come. We're not encouraging the auto firms to use the US as a base

for production for exports. You're referring to that section too. Three to the tariff protections. Correct, Yes, we have tariffs on steel and illuminium in the name of national security. There's also the threat that in the future we could

um put additional tariffs on automobiles the name of national security. Now, what the what the Mexicans and Canadians have gotten out of this agreement is they're going to be side letters in which at least their current volumes aren't going to be subject to those Paris, Professor Lawrence, I'd love your thoughts just going forward about what this negotiation process has done to the political good will between the US and Mexico and Canada. UM. I think it's the it's a

good question. I think are in general, are feelings of closeness to to UM to the Canadians, their their feelings of closeness to US, I think are have been damaged as a result of this. I think you know, they've got the sense that it's it is America trying to put America first. But I think they're also heaving a sigh of relief that things aren't as bad as they could have been. The the trade pact that is set to be voted on by Congress, do you believe it's

a template for U s trade negotiations with China? Not really, um. I think the kind of questions, the really tough questions that we're going to face with China, aren't really dealt with in this trade agreement. One dimension where I would I would I would say it's it's kind of a template is that currency of the were included in this agreement, and I think if we ever had an agreement with China, we'd want to cover currency and currency manipulation. So in

that sense, we've done something. But the big problems with China that relate to the protection of intellectual property and the false transfer of technologies to China, and how do we deal with state owned enterprise as in China, those aren't really dealt with in this agreement because they're not problems that we have with the with the Canadians or the Mexican Professor Lawrence, Just to sort of wrap up one thing that's been on my mind is whether President

Trump wants a trade agreement with China. And there was a news report out yesterday about rising tensions in in the South Seas between Chinese warships and US warships. How do you see this whole thing evolving and and sort of what's the compass. I'm very worried about that. Um. I mean, I think he would like a trade agreement with China in which they totally surrender, and he's playing

for that one and absent that. By that, I mean they agree to give up a lot of their industrial policies, which are the the core element of their development strategy. And I don't see that as very likely. And I think that's all aim at ly what he would like to see happen, or certainly people who are advising him

would like to see happen. And so I believe that these tariffs are going to remain in place for a long time, unfortunately, and I think it's going to be damaging too to our trade, uh to to our to our economy and and and to the Chinese economy. Professor lawrenced just quickly, what have we learned as part of the negotiating style of the U. S. Trade representative Visa v. Mexico and Canada. And what can we take away from

this example. Well, I think both in this case and in the case of the Korea agreement, um, they they they use it. They weighed the big stick. But when the time comes, actually, uh, you know, President Trump had called this the NaSTA, the worst agreement, you know, he'd ever seen. But in fact what he ultimately agreed to in the case of both the Korea and this new agreement with Canada Mexico is a is a modification. Professor Robert Lawrence, thank you so much for being with us.

We're gonna have to leave it. They're really illuminating an important conversation. The Albert L. Williams, Professor of a Trade Investment in John F. Kennedy School of Government at Harvard University, also a senior Fellow at the Peterson Institute for International Economics, as well as a former member of the Council of

Economic Advisors for President Clinton. Just this week we heard from the President of the European Commission, Jean Claude Junker, saying, we have to do everything to avoid a new Greece this time in Italy crisis. Here to tell us about it is Ferdinando Giuliano. Here's our Bloomberg opinion editor based in Rome, and he joins us. Now, Ferdinando, thank you

very much for being with us. Maybe just spell out for people who have not been following the back and forth in Italian politics, who are the players and how

did they get into so much trouble. So the players are the two populist parties, the Five Star Movements and the League, which after the March the fourth election, decided to team up and form these uh coalition of strange bedfellows, because remember the two parties run against each other at the election, but then decided to form this anti establishment government and their economic program, which was published in mid May,

included spending commitments which topped a hundred billion euros according to independent estimates. So that started freeing out the bond market and you started seeing Italian bond deals going up in UH May June, and then it's really been a roller coaster with the finance minister, technocrat Giovann Tria, trying to reassure the markets that the deficit and the debt will be under kept under control. Now, remember Italy's public debt is one of the largest in the world, over

one hundred and thirty percent of cross domestic products. So investors are watching very closely. So on the one hand, we have the finance minister. On the other hand, we have the leaders of the two parties really want to make good on their promises because they want to deliver change and bring growth. And at the moment we are at the crunch point because the deficit targets for the next year in the forthcoming year need to be published.

Well they really had to be published last week, but we'll be published within hours or days, and investors are watching very closely to understand how toward extend these parties will really continue with their spending pledges and we'll put them into practice. You know, it seemed like there are this good news overnight out of Italy, right we had a sort of announcement that there was a plan to

reduce the deficit. The problem was it also came with increasing stimulus, and at first the markets thought, oh, this is good news, and then based on where bondyields are, they came down a little bit. But I mean, they're not buying it. Does this make sense to you? Their latest plan. Well, the plan at the moment is, as you said, you know, very hard to believe. Today we had the Finance Minister saying he's targeting at two point

four percent um depthicit for next year. However, it also made clear that the deficit, the structural depthicity without any additional measure, would be two percent of GDP, and he wants to do raise investment by another not point percent of GDP, So that takes us already to two point

two percent of GDP. Now we have just a little margin, which is around three point five billion to really make good on all these promises, lowering the pension age, some sort of income support scheme for the poor, lower taxes which these parties are throwing around. So it's at the moment it's very hard to square how you can keep the deficit under control make good on your promises at the time when the Italian and European economy really seemed

to be slowing. Ferdinando the Commissioner for Economic Affairs, Pierre Moscovici, has released part of a text of a speech that he gave at the o E c D in Paris, saying, quote, like the Hungarians, Italians also opted for a decidedly euroskeptic and xenophobic government that on migration and budgetary issues, is trying to get rid of European obligations. I mean, do

you agree with that? Well, I wrote I wrote a column just yesterday which basically said that the European Commission should really avoid making these such such remarks, using such such you know, this kind of tone. And the reason is because actually the two parties, the League in the Five Star movement that thriving on this rhetoric from Brussels, because it's very easy for them to just, you know, portray these bureaucrats, European bureaucrats as the really enemies of

the Italian people. The people are trying to stop them from making good on all their lavish promises. So I think, you know, a much better strategy for Europe would be to obviously apply the rules. I mean, there are some rules which say high that country should really try to bring this stept down during an upturn. And at the moment we're not in a recession. The economy is growing,

so that's the time to do it. But at the same time, really leave it to investors, because investors are already nervous they're watching this very closely, and there will be a lot of pressure on Italian government to you know, reigning this crazy spending pledges. So frankly, I think these comments are not particularly helpful. They only make the populists look stronger. Far better to keep, you know, stick to the rules, apply the rules, but let's let the markets

really do the job. Yeah, Fernando Julianna, thank you so much for being with us. Fernando Giuliano is a Bloomberg Opinion editor in Rome watching this drama unfold. Of course, there have been an increasing number of comparisons between Italy and Greece, given the fact that their bond yields are now treating closer together than you're seeing with Germany, and uh,

I don't know, interesting times, interesting times. The New York Times reported a bombshell article about President Donald Trump's finances, basically saying he got a lot of his money from his dad, despite his claims that he was a self made million billionaire. Excuse me joining us now. Tim O'Brien, executive diver editor of Bloomberg Opinion, also um the author of the book Trump Nation, The Art of Being the Donalds.

Also he has been sued by Donald Trump and one. So, uh, that's going to throw that out here, Tim, Why did you make of this New York Times piece? But what do we learn that was new? Um? Well, I think the main things in it that were newly so were the various structures his parents and his siblings invented to transfer as much of the parents money to the kids without incurring inheritance or gift taxes, which was a lot.

About a billion dollars went to the children. Under tax rules at the time when that happened, it should have been tax about a fifty rate, but because of various structures that the kids put in, uh, it only got taxed at about five. So instead of paying over five million dollars in tax is they've paid about a little bit over fifty. So is any of this illegal though a big portion of it's perfectly legal, um, including the you know, the sort of conduits that they used to

transfer the money. The piece of it that might be and is at least untoward and possibly illegal, is that they used bogus valuations on some of the assets that were being transferred, particularly buildings. They had an appraiser who appeared to have low ball the valuations on lots and lots of these buildings. However, those valuations occurred I think well over a decade ago, and Uh the appraiser said, Look, I don't have the paperwork anymore and statutes of limitations

have run. So I don't think that there's legal exposure here for the president. There may end up being a civil penalty. There's no I would be really I would bet you know, my own small wallet on the fact that there wouldn't be a criminal penalty. Um. I think the larger lesson from it, though, is it It does speak to how dependent Donald Trump has always been on his father, uh, to get launched as a businessperson, to fend off bankruptcy as a business person, and to just

get repeated help getting past his myriad mistakes as a businessman. Tim. In addition to your book on Trump, I know that you've also written about a book called the Lincoln Conspiracy, right I have? Yeah, is there any The reason I bring that up is because that takes a wider view of the kind of tenor of the time between the end of the Civil War and the First World War?

Can you describe based on what we know and also the revelations today from the New York Times, which, as you just described, may or may not be brand new. What do you believe to be the tenor of the inner circle of President Donald Trump? Well, then I think he's running a very chaotic administration. I think it it reflects the Trump organization, which was very chaotically run. It was essentially a cult of personality at the Trump organization, built around marketing him and his name. It wasn't a

Fortune five hundred company. It was a mom and pop boutique operation in Trump Tower that really served his needs. And he's essentially transferred that into the White House. Um, the White House is short on process, it's short on policy aspirations. It is long on public appearances and and emotional relationships with the Trump base. That works in a campaign, it doesn't work for running a federal government employs two

million people. One thing that I'm struck by. President Trump did respond to the New York Times article, slamming it for being boring in old news and saying that now of all stories in the New York Times are negative on him, and just because they're just sort of sour on getting the election call wrong. And I guess that I'm wondering how much any of this matters when it comes to how different populations in America view President Trump

and whether they support him or not. Well, you know, it's it's easy to sort of define his base as post industrial workers, male workers, white workers, and in fact, affluent Republicans were also a core support group for the president. And he's delivered things that that cohort wanted. He delivered uh, a massive tax cut, he has delivered deregulation. Um, he has populated the district courts. Um, those are things that's

meaningful to that group of people. Um. The blue collar workers who support them wat job supported him, want jobs. I am not convinced yet, um that they don't think he's going to fulfill that promise. But the clock is ticking on that. You know. You can look at places like Indiana where Trump and Pence made a big show of saving all those jobs that carrier and then months later those jobs disappeared. Uh. You know, there's fisher fishermen in the coasts of both Louisiana and and Connecticut who

have who are feel that they've been betrayed. You see these interviews in the press where they thought the president was going to deliver job growth them and they haven't seen it. So I think job growth, but that's gonna be a longer term, multi year phenomenon. Right now, I think it's base really likes him, and then the Republicans that are wealthy businessmen, they don't care about this other stuff as much if the policies are what they like.

Is that sort of those well, I mean, I think, I think I think it would appear that that those are pocketbook voters and they see the government. Both both of those constituencies see the government for different reasons as obstructionists or in the way they don't see a benefit from it. Trump speaks to both of those populations when he says governments the problem, um and uh. For affluent voters, they don't need government services as much. For blue collar voters,

they need those services, but they don't know what they're missing. All. I'm gonna throw you a little bit of a curveball here. But because of the nature of the investigation by the New York Times, do you think that the president is sympathetic to another round attax cuts? Wow? I mean, I think I think the president is sympathetic to anything that makes him look like he's winning, and he defines that very broadly. Um further, are two things that motivate everything

he does. A survival and being self aggrandizing. That's all you need to know, all right, Thanks very much. Tim O'Brien is executive editor for Bloomberg Opinion. He is, of course, the author of Trump Nation, The Art of Being the Donald. It's also the author of The Lincoln Conspiracy. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on

Twitter at pim Fox. I'm on Twitter at Lisa Abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio.