The latest from Oaktree’s Howard Marks is a must read. Unfortunately though, Marks is not particularly optimistic about the future. As the headline states, he’s more uncertain than he ever has been. That’s saying a lot for a guy who has masterfully navigated from pretty tough environments over a long and successful career managing money. Here are some highlights (or lowlights I guess).
On the general macro outlook:
“It’s my belief that we’re going to see relatively sluggish economic growth in the US for a prolonged period of time. My expectations for other developed nations, given their specific issues, are even less positive.”
On credit trends:
“Few debtors can tap the capitals markets to the same extend they could five or ten years ago.”
On confidence:
“Consumers were traumatized by the crisis of 2008….It could require significant healing before these influences abate.”
On potential bright spots:
“Potential economic pluses for exist, and they tend to be overlooked in downcast periods like today. These include the incipient housing recovery; the possibility of energy self-sufficiency;the fact that US manufacturing has slimmed down and our Chinese competitors have seen costs rise; and the fact that the US still leads in higher education, creativity and entrepreneurship.”
The whole letter is very good. Read it here.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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I was looking for an analysis of claims in the article. Since I tend to think as a circuitist, the loops occupied my thoughts.
There is one loop for the organic economy, where Joe pays Maria who pays John; this loop is money used by people to trade their output. This is very important as division of labor allows surplus productivity, which in turn allows civilization. Another loop is Government spending into the money supply (used by Joe, Maria and John) and then taxing away from that supply.
A third loop is inserted between Joe, Maria and John. This loop is the trusted banker who shifts money from account to account. When Joe buys Maria’s stuff and vice versa, the bank shifts the money across accounts, especially if using Checks or the like. This banker loop has also been turbocharged with credit money creation. This creation disturbs the market Maria and John and Joe use by attaching its credit to the market. At the same time it attaches its credit to the market, or organic economy, it creates offsetting debt claim. In other words, money is used for trading our output, and banker money (credit) inserts itself to that role.
The credit claims (mortgages, SIV, bonds, etc.) are driven contractually while the organic economy is driven by prices/commodity levels/ animal spirits. The legal contract on the claims requires interest service, and the claims grow due to the exponential mathematics behind interest function with time.
Non Bank Actors and other financial entities, as well as the reserve system banks, went on a credit expansion binge, especially since 1971. Credit can drive an economy for a time, especially if the “claims” are wiped out with periodic asset forfeitures/grabbings. Credit money works also for a time if the organic economy grows to service the claims.
I didn’t see an analysis of the claims in the article, which are an overhead that keeps growing by virtue of their contract obligations. We have to deleverage, and that is hard to do when inexorable mathematics wants the claims to grow faster than new credit money can be created to destroy said claims. Not to mention that new credit money has additional claims created simultaneously upon new loan creation.
I think we may be in a new economic regime where the overhead is too large. Ideally we transition to debt free money (100% reserve such as Chicago plan) to buy off the debt claims. Or, if we keep our debt money system, the claims will have to be legally wiped out, much like we did with left over Nazi claims after WW2. How to do that? I don’t see the organic economy improving until debt deflation goes away. If austerity and more grabbing to service the claims is the answer, then…. that would not be good.
The global economy is very fragile right now with Europe and China and India all slowing. It wouldn’t take a whole lot to tip the world economy into a global recession. But it is also possible that the combined efforts of all the world’s central bankers could ignite the animal spirits of global investors to go “risk on” and start a mini boom going. So which one will it be? Your guess is as good as mine, what the hell do I know?? I agree with the author that things are more uncertain now than I’ve seen in more than 35 yrs of watching markets.
I tend to be wary when Marks, Grantham, Shilling, Klarman, Dalio etc. write memos like these. Go to Oaktree Capital if you would like to access his memos dating every quarter for over a decade. They are very insightful.
Another good quote in the letter right after bit on Europe:
” The U.S. fiscal situation is less acute, less immediate, and easier to duck given that we can print the world’s reserve currency…but little better. In fact, in some ways it is more dangerous because the problems are more back-end loaded and perhaps less overt.”