Howard Marks, Co-Chairman, Oaktree Capital.
David A. Grogan | CNBC
Billionaire investor and Oaktree Capital Management Co-Chairman Howard Marks is worried to hear investors say “this time it’s different” or openly wonder if the historic bull market and economic success “can only get better forever.”
In a 12-page letter sent to Oaktree clients on Wednesday, Marks questioned nine financial theories he’s heard in recent meetings, including the notion that central banks policy can lead to evergreen market success and that economic recessions can be consistently delayed.
Here is the full list of hypotheses Marks scrutinized as written in his letter:
- There doesn’t have to be a recession.
- Continuous quantitative easing can lead to permanent prosperity.
- Federal deficits can grow substantially larger without becoming problematic.
- National debt isn’t worrisome.
- We can have economic strength without inflation.
- Interest rates can remain “lower for longer.”
- The inverted yield curve needn’t have negative implications.
- Companies and stocks can thrive even in the absence of profits.
- Growth investing can continue to outperform value investing in perpetuity.
“The nine propositions reviewed above all represent variations on ‘things can only get better forever,'” Marks wrote. “If they’re the ideas guiding investors today, that should be considered worrisome.”
Though it’s always difficult to predict the timing of an economic downturn, Marks said that he’s always been confident that a recession is on the horizon at some point.
“We’ve always had economic cycles, and I believe we always will,” he wrote. “Eventually, favorable developments will lead people to engage in behavior premised on excessively optimistic assumptions, and eventually the over-optimism of those assumptions will be exposed and the excesses will correct in a period of negative growth.”
“Very soon, the current recovery is bound to become the longest in U.S. history,” he continued. “However, I believe the odds are that it’s closer to the end than the beginning. … The recovery is likely to go on longer, but perhaps not much longer.”
Marks, known for his prescient investment calls, correctly warned about the 2008 financial crisis and the dot-com bubble implosion. Oaktree Capital had $119 billion of assets under management as of March. Marks has a net worth of $2.1 billion, according to Forbes.
Do we want the Fed preventing recessions?
While Marks went on to cast doubts on the popular idea that the Federal Reserve and other central banks are capable of postponing a recession, he also questioned whether delaying the inevitable was a good idea.
“When I hear people talk about the possibility that the Fed will prevent a recession, I wondering whether it’s even desirable for it to have that goal,” Marks wrote.
He continued: “Are recessions really avoidable or merely postponable? And if the latter, is it better for them to occur naturally or be postponed unnaturally? Might efforts to postpone them create undue faith in the power and intentions of the Fed, and thus return of moral hazard? And if the Fed wards off a series of little recessions, mightn’t that just mean that, when the ability to keep doing so reaches its limit, the one that finally arrives will be a doozy? “
Such skepticism comes in stark contrast to the confidence exuded by the likes of venture capitalist Chamath Palihapitiya. An early Facebook stakeholder and investing presence across several industries, Palihapitiya told CNBC at the time that entities like the Fed have used tools like quantitative easing to orchestrate a pacified economy.
“I don’t see a world in which we have any form of meaningful contraction nor any form of meaningful expansion,” he told CNBC in April. “We have completely taken away the toolkit of how normal economies should work when we started with QE. I mean, the odds that there’s a recession anymore in any Western country of the world is almost next to impossible now, save a complete financial externality that we can’t forecast.”
Though perhaps a tempting philosophy for the many investors who’ve spent the past decade cashing in on the prolonged uptrend in hot technology companies unburdened by interest rates, Marks warned that it’s easy for stock prices to climb far beyond realistic earnings forecasts.
“Tech and venture investors have made a lot of money over the last ten years. Thus there’s great interest in tech companies … and willingness to pay high prices today for the possibility of profits far down the road,” he acknowledged. “There’s nothing wrong with this, as long as the possibility is real, not over-rated and not over-priced.”
“The issue for me is that in a period when profitless-ness isn’t an impediment to investor affection — when projected tech-company profitability commencing years from now is valued as highly as, or higher than, the current profits of more mundane firms — investing in these companies can be a big mistake,” he said.