Fed’s ‘unprecedented’ coronavirus stimulus was right move, says Howard Marks, but adds, we haven’t had a ‘free market in money’ since 2008
Investors don’t have to achieve particular goals, they just have to outperform their peers, which is possible no matter the market conditions, Marks says
Who’s winning, the coronavirus or the fiscal and monetary response to its effects? It will take many quarters — possibly even years—to determine which force will grab the upper hand, said legendary investor Howard Marks on Monday. Meanwhile, there are opportunities for investors, and lessons for the central bank, he said.
The coronavirus crisis was “unprecedented in its power and it knocked the markets for a loop,” said Marks, co-chairman of Oaktree Capital Management, speaking as part of an online conference organized by the CFA Institute. Complicating matters was the decision by governments to “put the economy into a deep freeze to combat it,” which led to unprecedented market declines.
Marks strongly supports fiscal and monetary efforts to support the economy and markets, he said. He agrees with statements by policy makers who admit they’re trying every approach because they’re not certain what will work.
“Just because something can have an unforeseen negative consequence doesn’t mean it’s bad,” Marks said. “To not take these actions would be to permit the possibility of a depression.”
Still, Marks said, “I would say that since the Great Financial Crisis we have not had a free market in money,” referring to the 2007-09 recession that was sparked by mortgage-backed debt. The Fed’s efforts to stabilize the system have “driven down the price of money” and markets reacted in “unprecedented” ways in 2018 when the central bank, led by then-chair Janet Yellen, kept on a path of raising rates and the balance sheet.
That was too late in the cycle to start normalizing policy, Marks said, adding that he hopes that once the economy is out of the woods in terms of needing ultralow rates to respond to the current crisis, the Fed doesn’t take as long to act.
No matter the situation, there are opportunities for investors, Marks added. “Rates are what they are. The return environment is what it is.” Superior investors simply need to find ways to be better than their competitors.
One of his guiding principles is that deep discounts increase the margin of safety in a given investment. But, he acknowledged, “Every great investment begins in discomfort. If everyone else didn’t hate the investments, they wouldn’t be cheap.”
Everything about human nature “conspires” make us do exactly the wrong thing when it comes to investing, he noted. We get excited and want to buy when things are frothy, and depressed and wary of spending money at what he calls “the bubble-busted lows.” While we understand that it’s much preferable to buy low and sell high, sometimes being too early is just as bad as making a wrong call altogether, Marks said.