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