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- Howard Marks, the co-founder and co-chairman of $122 billion Oaktree Capital, cites the worrisome nature of the four most dangerous words in investing: "This time is different."
- In a recent memo to clients, Marks explains the issues with central banks artificially preventing a recession through excessive quantitative easing.
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It’s safe to say that when Howard Marks writes a memo, the entire investing community leans in to take heed.
The billionaire co-founder and co-chairman of Oaktree Capital Management, which currently oversees $122 billion, garnered his prestigious reputation through an array of contrarian market calls during some of the most mercurial economic environments.
And, although Marks is highly opposed to forecasting, he articulates his opinions swiftly and clearly in terms of probabilities and best guesses. But the recent ubiquity of one phrase in particular seems to have Marks a bit apprehensive of the future: This time it’s different.
The prevalence of these four words — in relation to future economic and market performance — are the focal point of Marks’ new memo, where the investment sage identifies concepts being touted as "different," and backs up his philosophies with anecdotal and historical evidence.
One of the most interesting ideas Marks puts forward is centered around the length of the US’s economic recovery, and whether the Federal Reserve should artificially preserve the expansion.
Marks has a simple answer when asked if the US is headed for recession: "yes."
"I don’t think the US is about to emulate Australia’s 28-years-and-counting recovery. That I will bet on." he wrote.
Marks continued: "We’ve always had economic cycles, and I believe we always will. 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 … I believe the odds are that it’s closer to the end than the beginning."
Overzealousness in the marketplace tends to be corrected through the unobservable force of the "invisible hand" — a naturally occurring phenomenon that is a result of a healthy environment. So why would the Fed want to interfere with the natural course of the economy and prevent a recession if the market cycle takes care of itself?
"I wonder whether it’s even desirable for it to have that goal," Marks said. "Might efforts to postpone them create undue faith in the power and intentions of the Fed, and thus a return of moral hazard?"
He continued: "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?"
Simply put, Marks isn’t sold on the notion that central banks should artificially keep expansions going through excessive stimulation.
His view comes at an extremely apropos time, as the market prices in a 100% probability of a rate cut in July, against the backdrop of historically low unemployment and GDP growing in the 3% region.
It’s clear to see that Marks has his doubts about the current economic environment, but he’s never 100% definitive of his answers — always leaving room in his musings for the unknown.
Time will tell if the Fed’s efforts to quell recessionary fears will prove to be warranted, or if Marks’ skepticism surrounding the matter is sound.
Until then, be on the lookout for those four dangerous words, and proceed cautiously when you find them.
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