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Thank you so much to our Bloomberg radio and TV audience. We are incredibly lucky right now to get a chance with a man on the thirtieth anniversary of the firm he co founded, oak Tree Capital Management, which has since grown into the world's biggest distressed debt investor. Mark 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 if 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 one hundred years. Does your thesis still hold?
The yields on credit are still very healthy, and in fact, credit yields a little more now than it did six weeks ago when I wrote that memo. Then iiO bonds, for example, we're yielding around seven point two today they're close to eight, which means they went down in price, producing a higher prospective return. Of course, the stock market is well down since then. I don't know, fifteen sixteen, seventeen percent. I haven't done the math yet, and it
keeps moving. But you know, obviously 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.
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 this is the biggest change in the environment that I've seen, probably in my career. You know, we've gone from free trade or 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 eighty years since 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 that lifted all boats, 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 worldwide welfare is maximized when every country does the things that 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, the world will probably be well, maybe arguably, people in both contries will be a little worse off.
That's what we're talking about here, and we should not.
Underestimate the benefits that we've gotten from globalization. And among other things, there was a twenty five year period which I cited in one of my memos ten years ago in which the cost of durables in the US went down by forty percent 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 the tarifts are designed to encourage production at home. But who could imagine 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 you see the inflationary regime as being something that is more persistant or 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 we hadn't bought our TV sets and appliances from abroad in that twenty five year period at declining prices, what would inflation have been And the answer is considerably more, maybe not two, but maybe three four 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 we'll go to the 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 potentially you could get seven, eight percent, nine percent with credit with stocks that have delivered more than ten percent for the past number of decades.
But going forward, I want to respond first to your last sentence. Stocks have delivered an average of ten percent a year for the last hundred years, but not when the PE ratio was nineteen, and the PE ratio today is probably nineteen. The average return has been sixteen, So we can say that when the PE average, when the PE ratio averages sixteen, the return average is ten. But
when the PE ratio is nineteen. My guess is, if you look at history, if you bought the the S and P when the PE ratio is nineteen, historically you probably made let's say one to six percent a year or two to seven percent a year someday, but's certainly not ten. And so you know, what you pay matters, and the price of the S and P is elevated relative to historic levels, 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 in Yale, well, you know, with credit is a new fangled word for fixed income or which was a new fangled word for bonds. In nineteen seventy eight, I was moved at City Bank from the equities department to the bond department. Nobody talked about fixed income or credit. But with 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 issue or default or will they keep their promises? And by the way, they promised you interest, they promised you to pay your money back at the end. That if they don't keep the promise, they lose the company, so they have a lot of incentives to pay. I've been in non investment grade credit for forty seven years, and in our experience, roughly ninety nine percent 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 whether 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 use the word measure before I pushed back.
A little bit.
There's no place you can look, 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. 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.
World economy and the world order beyond 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. I dare say, if you tell me that you 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 know 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.
And so you know, I always inveigh against forecasting. I don't believe in macro forecasting, my owner, other people's 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.
What you really need, if you like to work with forecases, 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 how I feel.
Is this a time to be fearful or greedy?
You know what you have to say.
Bloomberg's offices, you have to think in terms of your neighbor.
The department store, Bloomingdale's. Bloomingdale's.
Bloomingdale's just put everything on sale. Prices have come down for the S and P eight percent in the last two days and much more in the last six weeks. It's on sale. That should encourage people to think about buying. Will they go down further? Nobody knows. Are the prices 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 well I was going to say a pro, but it takes a pressing pro of which there aren't many to know whether, as.
I keep saying, the discounts.
Are adequate or appropriate. But certainly you have to look. And it doesn't make any sense to say, just a minute, I did XYZ when the price was one hundred. Today the price is ninety, 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 best place to invest?
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. One of them was, well, the worst thing about it investing in the United States for many years has been our fiscal situation, our deficits and debts, and the US 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, well what would you do? Well, you might buy a nice car, but what the hell, you might as well buy all the cars.
Because the bill's 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 of both of those questions.
Is yes, that's a real risk.
If people don't like the dollar, don't like investing in the the United States, don't want to hold an unlimited number of treasuries. If we just make people mad and say the US 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 oak Tree Capital co chairman Howard Marx. Thank you so much,