Stephen Renna: Welcome Howard. On behalf of everyone at the CRE Finance Council, thank you for participating in this feature interview. The first question I have is what is your view on the major economies around the world? The United States economy is growing modestly while Europe and Asia seem to be slipping towards recession. What is the investment environment that each economy presents? Howard Marks: Well, as you say, all of the economies of the world are behaving quite sluggishly. And the US, which looks like the best house on the bad block, of course is probably the envy of the world in terms of returning to hoped-for levels. I don’t think we are going to get back to where we used to run, and I don’t know if anybody is. I think we are going into a slower period than the decades we are used to, but I’m not an economist, this is just my leaning. I think the superior recovery of the US is attributable to the measures coming out of the crisis that were taken by our leaders; Paulson, Geithner, and Bernanke, and the provision of more stimulus early, whereas Europe tried austerity to reduce debt and deficits. In short, the wealthier countries of Europe imposed more of a stringent approach than we followed. It is interesting that they are declaring stimulus measures, as is Japan, just as we are taking ours off. I don’t get into the precise question of whether or not Europe or other countries are going to see a recession, I consider it sufficient to say that their economies are functioning in a sluggish manner. Stephen Renna: As you mentioned, there is a lot of stimulus in all the economies around the world from central banks pumping liquidity into the markets. They don’t appear to be backing off even in the United States. So from a value investor perspective, is all of this stimulus ultimately more of an opportunity or more of a challenge? Howard Marks: In theory, you have opportunity while companies and assets benefit from the stimulus. But that assumes, number one, that it works and, number two, a certain agility in selecting the ones that will experience gains and getting out. In general, I think this stimulus poses risk, because to the extent that stimulus is kind of artificial — not natural — then you have to wonder about what happens when it stops. So I think that it is one of the things to be cautious about. And of course, the other is that stimulus is like medicine. It’s good to get medicine, but it’s bad to need medicine. So the fact that Europe is stimulating is not a good sign, it’s a bad sign, it means that they have a malady. CRE Finance World Winter 2015 18 Stephen Renna: One of the tools of stimulus is interest rates. The Federal Reserve is holding benchmark interest rates at near-historic lows. What is your view on the Fed’s interest rate strategy? And when rates eventually rise, do you think this is going to have a negative effect on bonds such as long-term treasuries? Howard Marks: Well, rates up/bonds down is not a matter of opinion. If rates go up, bond prices will go down, period. On the other hand, if you want to find unanimous sentiment, ask investors in the summer of 2013 whether or not interest rates would go up. 100 percent would have said yes. And they went down. So much for unanimity and so much for forecasting. We don’t know what is going to happen with rates, period. Having said that, it is reasonable, to think rates will go up primarily because it is reasonable to think that rates have been held artificially low. So my best guess is that rates will go up a little –but only a little, because I don’t think either the economy or inflation is strong enough to call for a very large increase. I don’t think we are going to see hyper-inflation or sky rocketing interest rates anytime soon, but I also don’t believe I can see the future. Stephen Renna: As part of the stimulus, you hear a lot of people talking about the asset bubbles. What is your view on asset bubbles? Do you see a bubble in any particular asset class? Howard Marks: Bubble is a troublesome word. The term “bubble” has — to some people — specific connotations such that I would rather not use it. One of the reasons I don’t like to use it is that I don’t think there is a broad agreement on what a bubble is. To me, a bubble is extreme over confident psychology. And I don’t think we have that. I could be wrong, of course. But what I think is that due to the central banks’ low interest-rate policies, people have been forced to move into risky asset classes in order to get the kinds of returns they seek. So, people who are not satisfied with the piddling results on money market instruments, treasuries and high grades have had to go into other asset classes to get the returns they want. The movement of that capital has lifted prices in those asset classes, and in some of them, very substantially. So I don’t know; to me a bubble is something very specific: irrational optimism and I don’t find people who are that optimistic. As I said in one of my memos, I don’t think people are thinking that bullish, they are just acting bullish. And they are acting bullish because they have to in order to get the returns they want. I described them at the time as handcuffed volunteers. CREFC Exclusive Interview with Howard Marks Stephen M. Renna President & CEO CRE Finance Council Howard Marks Co-Chairman and Co-Founder Oaktree Capital
CREFW-Winter Edition
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