Surveillance: Market Attitudes with Marks (Podcast)

He is successful. He is a philanthropist, and Lisa bramwits we know for certain as a member of the board of Trustees of the Metropolitan Museum of Art, the met Gala is Howard Mark's fault. Yes, well, we actually very much appreciate it for us who have spent many, many

hours at the metropolit Museum of Ark. There also is this question of investor psychology, and Howard Marks is co chair and co founder of oak Tree Capital and Frankly Uh, one of the co founders of the entire distress debt market, really understands how psychology can drive what is perhaps the best philosophy going forward, and he writes the fabulous memos UH from time to time as latest Bullmarke at Rhymes.

Howard thank you so much for being with us. I want to start with trying to understand investors psychology and as a student of history, where are we right now in terms of bullish or bearish? UM. I think that UH attitudes were quite there bullish UH prior to a few months ago. UM, with the exception of a brief UH respite during the pandemic. We've been in a bullish climate since, uh, since the end of the global financial

crisis in oh nine. Not wildly bullish, UH, not so certainly, not what I would call euphoria, but optimistic, and that has been crimp. Now. You know, a lot of the big name stocks are all fifty seventy eight percent. The whole market is off. I guess that probably uh from the high. So I would say that UH attitudes are

more balanced today. But UH, you know, when when there's euphoria, when there's optimism, when there's greed, when there's risk tolerance and so forth, that's a very difficult climate for the value investor to find bargains. UH. So we're happier today than we were six months ago. I don't know if we're going to be happier six months from now. That is to say, that the bargains will be more pronounced, but at least the as they say, the bloom is

off the rose. At a time of such incredible uncertainty, how do you position seeing value now but also preparing for seeing more value in six months. You know, one of the six tenets of Oakrias investment philosophy, which we established when we started in April of and I've never changed a word, and I believe in thoroughly, is that, uh, we're not market timers and and and that means mostly two things. We never sell to raise cash to prepare

for a decline. Uh. And we never say it's cheap today, but it will be cheaper in six months, so will wait. If it's cheap today, we buy it. If it's cheaper and six months more, we buy more. Uh. And I think that that works much better than an assertion that we know where the market will be in six months. This is really important at a time when so many pensions and institutional investors have been shooting for that seven

and a half to eight percent bogie. We talked about that extensively in the past five to six years, This idea that that seemed completely unachievable in an era of quantitative easing, Suddenly high yield bonds have an average yield of more than seven percent. Is this the best period that you have seen for pensions to actually hit their bogies for more than a decade. Well, I think that's right in in in in the well, of course many have hit their bogies. Uh, it just didn't look in

advanced like they would. But the stock market and many other things have surprised on the upside for the last ten years. Um. But now, as you point out one of our big activities as high yield bonds, and a year ago they were yielding in the threes of percent. One deal was even done in the twos. That's not a very high yield for high yield today, as you say, they yield in the sevens. So a pension fund that needs seven or seven and a half can make use

of high eel bonds and everything. You know. See when everybody gets concerned when prices decline, but if you flip that over, the flip side of price deterioration is increases in prospective returns. So now the prospective returns are on many asset classes are higher than they were just a little while ago, and Uh. Again, a much better climate

for the bargain hunter. Some people would counter this by saying inflation takes a lot of the value out of those returns that basically, on a real basis you're still not getting very much. How do you counter that as a long term investor by saying, you know what, at this point, it's worth it to get higher returns, even if on a real basis it's not necessarily that much more. Well, you're right in that we're not talking about an increase in real returns. Were increasing to a man increase in

nominal returns. Most most pension funds and other organizations reckon their need for return in nominal terms. Uh. But um, you know, I mean that is a challenge. Uh. And uh, nobody knows what inflation is going to do. Uh. I think I heard out of one year your previous guests say that, you know, some of the inflation factors will probably subside in the next few months, which means all things being uh, an increase in real returns. How much are you trying to game out where inflation is going

to go over the next six to twelve months. Considering the fact that I know that you do not time the market or look at a sort of day to day price swing kind of issue. But this really does determine how important some of these returns will be going forward. Uh, yes it does, but uh, I don't think there's anything to be known on that subject, and I'm sure we

don't know it. Uh. You know. And another uh tenant of our investment philosophy they're only six we're going to touch on two today, is that we our investment decisions that are not based on macro forecasts. Macro forecasts are very important. The only problem is they're rarely right and and uh and more importantly, uh, any one forecaster is rarely right more often than the others. So we don't make our decisions on that basis. We are what's called

bottom up investors. We invest on the basis of micro, not macro companies, industry securities, and we feel there, through hard work and skill, we can get an edge. So where are some of the industry some of the areas that you're actually seeing deep value? You know, Uh, they are much more spread around than they were before. Uh. You know, some growth names are are offering much better value than they did a year or two ago. Down But you know, we continue to find opportunities throughout the

investment universe. Uh. Um and UH you know, the prosaic industries are also offering good, good value. When you talk about the global investment picture, I know, over the years, especially as the US yielded less and less and yet less in real terms and phenominal terms, you looked overseas, in particular to China as a potential area of perspective return. Has that changed as yields have gone up in the US and frankly the economy has slowed so substantially in China. Well.

On the one hand, we have a preference for investing in the US. UH. You know, UH, the US in most regards has the best economy in the world, and it has an excellent UH environment for rule of law, for being able to predict the outcome when uh, when various UH stakeholders rights come into conflict. That's very important to us, especially you mentioned our business in distress debt investing. That's very important if you're going to buy distress credits to be able to predict how will be treated by

the law. UM. On the other hand, um uh from time to time other parts of the world all for better bargains. Uh, we have the best in the US, but the best usually doesn't come cheap. So and third, on the third hand, we like to have some diversity in our portfolio. So you know, we've been in sting in places like China and India UH in the last couple of years and and absolutely will continue to do so.

When I hear people say, you know, I've made my living for the last fifty years investing in the things other people said, we're uninvestable, high yield bonds, distress dead, emerging markets, uh, etcetera. And when I hear people say that China is uninvestable to me, uninvestable says maybe there are some bargains there if if everybody else is boycotting that sector, how fully invested are you? Are you always fully invested? We strive to be fully invested. Again, we're

not market timers. Market timers say, well right now we want cash. We strive to be fully invested. Our clients hire us to invest in our asset class, not to time the market. UM. And again, if better bargains arise, I'm always confident that we'll be able to raise more money to take advantage. About three years ago when we were talking about what prospective returns seemed plausible or realistic on on some sort of safe for reliable basis. You said five to five and a half percent. You have

a good memory. Where are we now? I think we can make seven to seven and a half. I mean, I'm not telling you, I'm saying an institutional portfolio. At that time I was talking for the Metropolitan Museum of Art, where I chaired the Investment Community Committee, and I talked the expectation down to five five and a half as you say, or I think we came out of I

think the committee as a whole came out at six. Today, I think an institution like the MET or another pension fund and downmin etcetera can make seven seven and a half. Of course, you have to be willing to go into alternatives to do it, but most people are willing. What kind of alternatives you know? The big class classes are private equity, private debt, Then there's the stress debt, there's real estate UM and UH specialized forms of an vesting UM.

The important thing is not which sectors. The important thing is which manager. You know. In the public asset classes like stocks and bonds, we call them beta markets, because most of the return is determined by the performance of the market, and which manager you have means a little plus or a little minus. In the alternative markets, there isn't that gravitational pull towards the market. Return is really market to pace it. What really managers matters is whether

you're manager is highly skilled and disciplined or not. And uh, that's why we call them alpha markets skill markets. Do you think that your peers are taking undue risk or not enough risk? Um? Some of each. Of course, there's a there's a disparity, you know, there's there's a range, and piers do different things. Um. The point is an area like private lending, where we're very active, has been darling in the past a decade. A lot of money and a lot of managers and a lot of funds

have moved into the area. Buffett always puts it best. When the tide goes out, we find out who was swimming without a bathing suit. When when economic and financial conditions become more difficult, we find out who made good credit decisions and who made bad ones. We'll see what's the historical precedent for this moment, for this moment, Oh, you know, it's very hard to to to find one that fits exactly. Um. You know, we've never had this

externality of the pandemic. There hasn't been a war going on in a long time and an important international conflict, uh with with the threats this embodies, We've never the US never had an economic rival like China before. We've never really had an economic rival since World War two. Uh. But and of course we have uh historically low interest rates we've had. We had interest rates went down by what we call two thousand basis points, that is to say,

twenty percentage points from eighty two two two. Uh, and that was a big tail wind. So these conditions are are not reminiscent of any that I've lived through. But I think the important thing for your purposes and hopefully your audience's purposes, is that I think that are are taken as a whole. I think conditions are fairly normal today in terms of how you should manage your money and the risks you should take. And to me, that's the key decision. Howard, thank you so much for taking

the time. Howard Marks, the co chair and co founder of oak Tree Capital. Eddie five, Bill Duntley, the former New York Fed President at with this this morning. Som has the headline of his new column, the FATS mild inflation forecasts need explaining. They do they need explaining. It is a brilliant note. I'll have it on Twitter. I'm sure John and Lisa will as well. William Dudley is a former president of New York found And of course we're writing for Bloomberger thrill that Bill Dudley could join

us this morning. Bill buried in your essay on inflation is a single sentence on what it means for the labor market. April of two thousand twenty and fourteen point seven percent unemployment rate. We're at four percent at the beginning of this year. We're now down to three point six percent. I need you to explain to our listeners and viewers why it's the Fed's job to move the unemployment rate, as you state, up above four percent. Well,

the labor markets the tightest basically it's ever been. And you can see that by the ratio of unfilled job relative to the number of people that are unemployed. It's that ratio is one point nine to one. UH in February was one point two to one. So we have a lavor market that's unpresidentally tight. The FED needs to loosen that up or wage pressures will accumulate and that will keep inflation above the feds two percent inflation objective.

The problem the FED has is that in the past it's been very, very difficult to push the unemployment rate up meaningfully without precipitating a hard landing. That's what the FEN is going to try to do this time, but extremely difficult to do. And they haven't really been as forthcoming, I think, in their forecast as as they need to be, because if you look at their last summary of economic projections, for example, the disinflation occurred almost immaculately. Uh, the FED

didn't really tighten very much. The unemployer right didn't rise, yet inflation came back to the defense two percent target, and it really beg the question what caused inflation to come down? I think the way you get inflation down is you need more slack in the U S lever market. That's not a friendly message from from the FED, but that's what's necessary at this point. And but I'll just

to put some numbers on that. As you say, kill PC A year run for the FED twenty two four point one, twenty three, two point six, and unemployment three point five and then three point five again. And many people have been asking the same question, Bill, you know the chance of right now, it's this conversation about a pause in September. How are you interpreting some of that conversation.

I wouldn't put too much stock on it. I think what's what's happening is the Fed's pretty convinced that they need to go into something close to neutral, and you know, expeditiously is the way that they put it um, and so that's what they're doing. The notion at some point they're gonna take it to pause and look around. Of course that's gonna happen at some point, but it's gonna be driven by the the economic data. I think that the commedy is gonna have enough momentum to keep the Fed.

The Fed will keep going UH into the fall markets priced to a peak in the federal funds rate of three. I think we're gonna get to their UH pretty easily, and the Federal probably actually have to push beyond that ultimately, Bill, what kind of unemployment rate are you looking for to indicate perhaps a tightening a loosening in the very very tight labor market. Well, the Fed's on forecast is that a neutral unemployee rateing is someone two percent of aitions

four percent. So I think you need to get the naployent rate up to at least four percent. The fact that we have so many unfilled jobs suggests that maybe the unemployer rate consistent with two percent inflations even higher than four percent. So I think we need at least get to four percent, and that's the problem. It's difficult to do that without participitating a full blown recession bill.

Did you take any message from the fact that President Biden met with FED Chair J Powell yesterday that there was this focus on the FED being the main driver for what happens with inflation going forward and the politicization of the Federal Reserve. Well, I think Biden was actually not politicizing the FED. Is basically saying the job is to control inflation, and I'm not gonna challenge the independence

of the FED to do that. In some ways, though, he's putting the burden now on the FED Reserve rather than on the administration. I viewed it as a political event, not an economic event. I don't think it changes what the federal is going to do or what the Biden administration is going to do. Bill, we had a one off medical event, a pandemic of our lifetime that got

us out to fourteen point seven percent unemployment. Can we cut any central bank slack and have them extend out the X axis and just take longer to get this done to repair off of this medical event. Well, if they take longer, the risk will be that inflation will stay higher uh, and then that will start to get embedded and higher inflation expectations, which will make their job a lot more difficult. The good news for the FED

right now is they're highly credible. Market participants expect the Fed will do the job and get inflation back down. Inflation expectations that the longer her term horizons are still very well anchored. If the Fed dawdles and then the risk is that inflation expectation become less well anchored, which will make it harder for the Fed to get inflation back down. But if your view hantening not softening based on coming daight to the this FED funds might end

up with a full handle and maybe not three. I don't think it's changed too much. I mean the good news that the Fed has things and end today in terms of market confidence, in terms of inflation expectations being well anchored. That's that's the good news. The bad news is, I think people are understanding how difficult this job is. What do you make of this idea that they can target job opening spell jolts data which is a little

bit dated, What do you make of that? Well? I think their story is is quite an optimistic one that they can take the monetary policy sufficiently to reduce the demand for labor without actually pushing up the unemployer rate. And meanfully, this is the tightest layer market I think we've ever had. Frankly, uh and it seems to me it's the type of layer market is tighter than it's ever been before that makes the job more difficult, not easier.

Super hard, Bill wonder for the catch up built downtly there they form in New York Fed President on the Path Forward and a really interesting piece on the Fence inflation forecast available on Bloomberg dot com and on the Bloomberg terminal on the Bloomberg Opinion column. Here's a note from our next guest, Tom. Back in April, we Lampoon to Washington Post opinion rights effort that obtuse observation that if it were not for that done inflation, Binan's economy

would be extraordinary. The writers who went on to say that Rubbin's logic was as intellectually robust as us, saying that if our grandmother had wheels, she would be a bus. That can only be the wonderful Stephen Short, founder and president of the Short Group. John his note, folks, is just the breath of fresh air within the petroleum business is Ed Morris City Group, who we just uh listen to talks about the macro economics of the moment. Stephen

Short is hyper defined. Steve, let me go to the single sentence of your note of us are simply getting poorer in this commodity surge? Will that trend continue? Absolutely? Tom So, real disposable income what we have to spend as falling in ten of the past their team months because of runaway inflation. Inflation, by the way, that all the smartest people in the world spent the better part of last year doing yeomen's work, making fools of themselves

every single week saying that, oh, inflation is transitory. Yes, if I don't have to eat, if I don't have to put the lights on, if I don't want to stink cool this summer. Yes, inflation not a problem. But what we're seeing now, Tom and always comes down to commodities and what we're looking at in the energy industry. Well we know that story. But what most people, especially the E. S. G. Crowd or the people that are taking the war against natural gas is the war natural

gas is a war on the American consumer. So what it has done to fertilizer prices. Of course, natural gas is a key feat stock into synthetic ammonia fertilizer. So we're putting fewer seeds into the ground this spring, which means we're gonna take fewer crops out of the ground in the fall. So the inflation has not peeped, right, I mean eat on the core level. But as far as energy and food, which is all was all inflation,

aspe and and Tom, this is the problem. Runaway inflation at the gas pumping out the grocery counter has been the UH lead indicator for recession of the last six recessions in the United States, beginning with Okay, Steve, I want to go to the hyper hyper detail of your note and your true expertise on distillates, Do you have any optimism we're going to invest given these higher prices? Well, as Winston Churchill once said about America, we always make

the right decision after we've tried every other decision. So I'm not quite sure we're there yet here on the East Coast. Of course, what has happened well over the past three years, we've cut a refinery capacity by so that guess lene production on the East Coast has held study.

But when you cut your capacity to make things out of crude oil, something has to get So while we've maintained the status call on guess line production, diesel production has fallen for to pent so right, diesel stocks for the first time ever in the East Coast are below nine million dollars. So we're looking at a dire situation in the diesel market, but we're not quite there. The smartest thing the Biden administration can do with regard to the energy crisis here in the United States is we

send the Jones Act. The Jones Act requires all interstate commerce water born be tagged on American flag vessels. Well, guess what, we don't have enough American flag vessels. You need to resend the Jones Act allow diesel guestling being manufactured in Houston to put that on foreign flag vessels, to bring it around the tip of Florida and get it into the East coast. That is the smartest thing to invest in a short term fixed regard to the longer term fixed, No, there is not a political will

at this point to invest in fossil fuels. Thereby, the long term structural in balance between some blind demand will remain. High prices there for have to remain. Tom Stephen, have you been surprised by how little pushback there has been on consumers with respect to reducing spending. There has been a reduction in real spending if you look generally at the trend. However, overall they continue to spend more, even as you see new records every day of gas prices. Yeah,

absolutely so. Now the calculus theater has changed because we have substitutes in the market I E. I, E V S. So it used to be consumers spending would drop off from guest line prices national average hit about three dollars and sixty three dollars and eighty cents natural guest line I'm excuting guest line on the NIMEX now is trading over four dollars a gallon, So the triple A average right now is about four dollars and sixty cents national average.

Given where futures are trading now, by the fourth of July, a guest LNE prices will be another twenty cents higher four dollars and eighty cents. I do have to believe, even though we've never had anything to mark this against, we will start to see that. But to you, yes, that it has been one of the positives. Consumers spending the last week came out last week, uh, stronger than expected. But the problem there is that there are we're waiting

for the other shoe to drop. Because the personal savings rate plunged to four point four percent, we are well below the thirty year nonrecession mean on savings and a sixty year non recession mean on savings. In fact, savings rates now is at the lowest point since so the bottom line re leases, we've run out of all the steamless money Americans are dipping into their piggy banks. It costs more to drive to your picnics to go to

the beach, so forth. So in the next quarter. Yes, I do expect to see consumer spending to tail off, which of course is a problem, giving that consumer spending these two thirds of the US economy and this therefore, this is why I'm still comfortable in saying, if the United States is not currently in recession, given these food costs, these uh energy costs, are falling income, we will be in a recession within the next six months. Stephen uses, I thank you, but um, that one was a little

bit depressing. Stephen, thank you though. Anyway, Steven Schalk at the show Growth, thank you, buddy. This is not a small matter. Lean forward and listened Global Wall Street. There's a guy up in Connecticut, runs a small shop who says cash is trash. Deborah Cunningham Joint federated when she's twelve years old. She's been doing this forever. She is the absolute dean of global Liquidity markets and c I O it federated Ermes c f A, Pittsburgh, and the rest of it is well, and Debora, you go after

Mr Dalio and you say cash is an asset. Discuss why cash is not trash? Well, Well, first of all, I want to know how I can get in on the trip to Vienna very in those emails. As far as you know, the cash markets at this point, as you mentioned earlier, we have been in a zero yield environment for the better part of fourteen years. Now at this point in time, it's not a healthy market. Seventeen

percent isn't healthy, but seventeen basis points isn't healthy. We are now getting back to a point from an economic standpoint, where we have an inflationary environment that is above the bare minimums one and a half to to and a quarter per cent in In that environment, we need short term yields that are above that, and we are getting to that, uh to that end result. As such, your cash is now a valuable um investment that no longer is just there earning your earning safety and and you know,

a minimal return. It is now not only earning safety, but also earning a viable return above where the inflationary rate is. We're getting there. We're not there yet, but certainly certainly above you know, sort of the zero bound where we have been locked for a very long rate of town and the heritage of this folks, for the Federative funds basically is a generalization. They invented the money

market fund, there's something that would equival with that. But they've been doing this in owning the high ground on short term paper for years. Deborah Cunningham talked to Leaguard in the CBS. John and I were talking about should we fear these initial rate rises from any major central bank? Well, I do think the e c B, as was mentioned before,

has some unique issues going on with it. Certainly Brexit complicated and you know, it was a factor that led into um some of the shortcomings of both the UK economy as well as the European economy in in broad terms. So I think that's a factor that still has to be dealt with in a way that we are not

subjected to here in the United States. Having said that, when you look at those economies, yes they're not as vibrant, they're not as um fulsome and certainly from a labor market perspective, they don't have the same um you know, numbers that we have along those lines of saying strange that we have and as such there are more challenges. And yet they should not be in a negative interest

rate environment. They should be at a point where there is cash you know there are cash earnings there as well. The economies for the most part are not in um any kind of danger of going into a recession, not

a large not not not a large growth environment. But when you're looking at you know, sort of steady and sure you may see some setbacks as you go from you know, minus five to zero to plus five to one, but there there that that that's part of what needs to happen in order to get out of the I think part of the malaise that they have been in in addition to Brexit, has been the negative rate environment has not done healthy fixed income alternatives that we're just

real quick here. I'm wondering whether they're actually seeing investors respond to this idea that cash is not trash, that it's a viable asset class and its own right with real yield. Is that something that you're seeing a creative shift away from riskier assets back into cash for the asset value. Yes, it's it's out of riskier assets, absolutely. It's also out of bank deposit assets because those um

don't follow the natural market rates. They're an administered rate, and so they remain in that zero bound for the most part. Um for most banks who don't want deposits, and it's certainly something that I think is a welcome um alternative for investors that don't want to take on a lot of risk, want to maintain a lot of liquidity, keep their powder dry, yet still earn a return in the process of keeping their cash invested. Debra, looking forward

to your parents in Fianna. Thanks for being with us, Debra. Kind of give that federates have makes This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg