Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Thank you so much to our Bloomberg radio and TV audience.
Speaker 2: We are incredibly lucky right now to get a chance
Speaker 2: with a man on the thirtieth anniversary of the firm
Speaker 2: he co founded, oak Tree Capital Management, which has since
Speaker 2: grown into the world's biggest distressed debt investor. Mark joined
Speaker 2: us on a day of turmoil, after putting out a
Speaker 2: memo about a month ago where he wrote, the bottom
Speaker 2: line is that credit presently offers a better deal than equities,
Speaker 2: even if today's spreads. Credit isn't a giveaway today, but
Speaker 2: it offers a healthy absolute returns and is fairly priced.
Speaker 2: Howard joins us right now. Howard, you wrote that a
Speaker 2: month ago. The world has changed. We have seen the
Speaker 2: market sell off. We have seen tariffs implemented that are
Speaker 2: the highest levels that we've seen going back one hundred years.
Speaker 2: Does your thesis still hold?
Speaker 1: The yields on credit are still very healthy, and in fact,
Speaker 1: credit yields a little more now than it did six
Speaker 1: weeks ago when I wrote that memo. Then iiO bonds,
Speaker 1: for example, we're yielding around seven point two today they're
Speaker 1: close to eight, which means they went down in price,
Speaker 1: producing a higher prospective return. Of course, the stock market
Speaker 1: is well down since then. I don't know, fifteen sixteen,
Speaker 1: seventeen percent. I haven't done the math yet, and it
Speaker 1: keeps moving. But you know, obviously the state of the world,
Speaker 1: which equity prices depend on, is completely in flux and
Speaker 1: has been radically changed. Most investors think for the worse.
Speaker 1: That's why prices are down. The question, of course, is
Speaker 1: whether they're down too much, just right, or not enough.
Speaker 1: And almost nobody can say.
Speaker 2: How do you start to even measure something like a
Speaker 2: potential paradigm shift like the tariffs that were announced earlier
Speaker 2: this week.
Speaker 1: Well, first of all, of course, measure is the wrong
Speaker 1: word because that suggests some quantification, which is impossible. There's
Speaker 1: nothing to measure. But how do you gauge? How do
Speaker 1: you think about the changes? And this is the biggest
Speaker 1: change in the environment that I've seen, probably in my career.
Speaker 1: You know, we've gone from free trade or world trade
Speaker 1: and globalization to this system which implies significant restrictions on
Speaker 1: trade in every direction and a step toward.
Speaker 3: Isolation for the United States.
Speaker 1: I believe that the last eighty years since World War
Speaker 1: Two have been the best economic period in the history
Speaker 1: of mankind, and one of the major reasons was the
Speaker 1: growth of trade. And I think that we have truly
Speaker 1: had a rising tide that lifted all boats, and trade
Speaker 1: was a big part of that. And everybody in the
Speaker 1: audience should understand the role of trade. Every country, for example,
Speaker 1: does some things better and worse, and worldwide welfare is
Speaker 1: maximized when every country does the things that does best
Speaker 1: and cheapest, and then sells them to the countries that
Speaker 1: need them, which do other things and sell them to
Speaker 1: other people.
Speaker 3: That's how trade works.
Speaker 1: And well, I don't know if it's politically correct, but
Speaker 1: the good news is that the Italians make the pasta
Speaker 1: and the Swiss make the watches. But if we stop
Speaker 1: world trade and the Swiss have to make their own
Speaker 1: pasta and the Italians have to make their own watches,
Speaker 1: the world will probably be well, maybe arguably, people in
Speaker 1: both contries will be a little worse off.
Speaker 3: That's what we're talking about here, and we should not.
Speaker 1: Underestimate the benefits that we've gotten from globalization. And among
Speaker 1: other things, there was a twenty five year period which
Speaker 1: I cited in one of my memos ten years ago
Speaker 1: in which the cost of durables in the US went
Speaker 1: down by forty percent in inflation adjusted terms. That kept
Speaker 1: a lid on inflation here. It made goods available cheaply.
Speaker 3: To all Americans.
Speaker 1: If we don't have world trade, we don't have that benefit.
Speaker 1: And the tarifts are designed to encourage production at home.
Speaker 1: But who could imagine that most things produced in the
Speaker 1: United States will be as cheap as they are coming
Speaker 1: from abroad. In other words, things will cost more.
Speaker 3: If that's the.
Speaker 2: Case, does that mean that you see the inflationary regime
Speaker 2: as being something that is more persistant or reversal of
Speaker 2: what we saw the disinflation of the globalization.
Speaker 1: Well, I think so there were financial benefits from globalization,
Speaker 1: including keeping a lid on inflation. And you know, if
Speaker 1: we hadn't bought our TV sets and appliances from abroad
Speaker 1: in that twenty five year period at declining prices, what
Speaker 1: would inflation have been And the answer is considerably more,
Speaker 1: maybe not two, but maybe three four five. And so
Speaker 1: you know, tariffs are an increased cost. Somebody has to
Speaker 1: pay them, and you know, most people think the consumer
Speaker 1: will pay them. There's some possibility that the importer or
Speaker 1: the exporter will pay them or the government of the
Speaker 1: exporting country.
Speaker 3: But it's an increased cost.
Speaker 1: The proceeds from which we'll go to the government, and
Speaker 1: you know, will society be better off as a result.
Speaker 2: When you're measuring how to decide the risk and reward
Speaker 2: of given asset classes in this type of environment, that
Speaker 2: could go in a multitude of different ways. How do
Speaker 2: you understand where there's value, what a return is that
Speaker 2: would justify a risk at a time when you know
Speaker 2: potentially you could get seven, eight percent, nine percent with
Speaker 2: credit with stocks that have delivered more than ten percent
Speaker 2: for the past number of decades.
Speaker 1: But going forward, I want to respond first to your
Speaker 1: last sentence. Stocks have delivered an average of ten percent
Speaker 1: a year for the last hundred years, but not when
Speaker 1: the PE ratio was nineteen, and the PE ratio today
Speaker 1: is probably nineteen. The average return has been sixteen, So
Speaker 1: we can say that when the PE average, when the
Speaker 1: PE ratio averages sixteen, the return average is ten. But
Speaker 1: when the PE ratio is nineteen. My guess is, if
Speaker 1: you look at history, if you bought the the S
Speaker 1: and P when the PE ratio is nineteen, historically you
Speaker 1: probably made let's say one to six percent a year
Speaker 1: or two to seven percent a year someday, but's certainly
Speaker 1: not ten. And so you know, what you pay matters,
Speaker 1: and the price of the S and P is elevated
Speaker 1: relative to historic levels, so you shouldn't expect historic returns.
Speaker 2: Whereas in credit, one of your arguments is you can
Speaker 2: expect to get that return because the default risk isn't
Speaker 2: as great as some of the excess spreads.
Speaker 1: And what you're getting in all in Yale, well, you know,
Speaker 1: with credit is a new fangled word for fixed income
Speaker 1: or which was a new fangled word for bonds. In
Speaker 1: nineteen seventy eight, I was moved at City Bank from
Speaker 1: the equities department to the bond department. Nobody talked about
Speaker 1: fixed income or credit. But with or bonds or fixed
Speaker 1: income or credit, what you see is what you get.
Speaker 1: You can read on the piece of paper what the
Speaker 1: promised return is. And then the only thing you have
Speaker 1: to wonder about is will I get it? That is
Speaker 1: to say, will the issue or default or will they
Speaker 1: keep their promises? And by the way, they promised you interest,
Speaker 1: they promised you to pay your money back at the end.
Speaker 1: That if they don't keep the promise, they lose the company,
Speaker 1: so they have a lot of incentives to pay. I've
Speaker 1: been in non investment grade credit for forty seven years,
Speaker 1: and in our experience, roughly ninety nine percent of our
Speaker 1: issuers have paid as promised.
Speaker 2: You've thrived during your five decade career, almost five decade career,
Speaker 2: during times of dislocation. Is this a time of dislocation
Speaker 2: to play or not to.
Speaker 3: Well?
Speaker 1: It's a time of dislocation. Everybody has to judge for
Speaker 1: themselves whether the reduction in asset prices so far is right, inadequate,
Speaker 1: or excessive. If it's excessive, you should jump in with
Speaker 1: both feet. If it's inadequate, you should wait until things
Speaker 1: adjust further. And it's impossible to make that judgment qualitatively.
Speaker 1: You use the word measure before I pushed back.
Speaker 3: A little bit.
Speaker 1: There's no place you can look, there's no analysis you
Speaker 1: can do to determine whether today's asset prices are right
Speaker 1: for the environment ahead. Now there never is. It's always conjecture.
Speaker 1: It's always guesswork. That's in theory why the greatest investors
Speaker 1: are great because they make those judgments better than most people.
Speaker 1: It's excessively hard today because today we have no idea
Speaker 1: what the future is going to be. Normally we think
Speaker 1: we know what's going to happen in the future. We
Speaker 1: normally assume the future will look mostly like the past.
Speaker 1: We extrapolate and usually it works because the world doesn't
Speaker 1: change that much.
Speaker 3: But the.
Speaker 1: World economy and the world order beyond economy, meaning geopolitics
Speaker 1: and international relationships has been shook up like a snow
Speaker 1: globe by the events of the last days, and nobody
Speaker 1: knows what it's going to look like.
Speaker 3: Nobody knows. I dare say, if you tell me that
Speaker 3: you the what our rules will be.
Speaker 1: Six months ago, six months from now, I'll bet you
Speaker 1: you're wrong.
Speaker 3: This is in flux.
Speaker 1: And if you think it's in flux, then by definition
Speaker 1: you know know what the future holds. And then even
Speaker 1: if you know what our country's going to do and
Speaker 1: it's going to be that way six months from now,
Speaker 1: we don't know what other countries are going to do, what.
Speaker 3: The ramifications will be.
Speaker 1: And so you know, I always inveigh against forecasting. I
Speaker 1: don't believe in macro forecasting, my owner, other people's and
Speaker 1: we know much less today than usual.
Speaker 3: Now. People who who like to run their lives according
Speaker 3: to forecasts.
Speaker 1: They say, well, this is going to happen in the future,
Speaker 1: so I'm going to do this, And this is going
Speaker 1: to happen in the future, so I'm going.
Speaker 3: To do that.
Speaker 1: What you really need, if you like to work with forecases,
Speaker 1: you need two things, not just a forecast. You need
Speaker 1: the forecast, but you need an estimate of the probability
Speaker 1: that your forecast is correct. And today, whatever your forecast
Speaker 1: may be, you have to say, the probability that I'm
Speaker 1: right is lower than ever, because the probability that we
Speaker 1: know what the future is going to look like is
Speaker 1: lower than ever.
Speaker 3: And that's how I feel.
Speaker 2: Is this a time to be fearful or greedy?
Speaker 3: You know what you have to say.
Speaker 1: Bloomberg's offices, you have to think in terms of your neighbor.
Speaker 3: The department store, Bloomingdale's. Bloomingdale's.
Speaker 1: Bloomingdale's just put everything on sale. Prices have come down
Speaker 1: for the S and P eight percent in the last
Speaker 1: two days and much more in the last six weeks.
Speaker 1: It's on sale. That should encourage people to think about buying.
Speaker 1: Will they go down further? Nobody knows. Are the prices fair?
Speaker 1: Nobody knows, But everybody runs from the market when prices
Speaker 1: go down because they think it connotes risk. It's just
Speaker 1: stuff going on sale, And of course it takes well
Speaker 1: I was going to say a pro, but it takes
Speaker 1: a pressing pro of which there aren't many to know whether, as.
Speaker 3: I keep saying, the discounts.
Speaker 1: Are adequate or appropriate. But certainly you have to look.
Speaker 1: And it doesn't make any sense to say, just a minute,
Speaker 1: I did XYZ when the price was one hundred. Today
Speaker 1: the price is ninety, So I'm going to boycott it.
Speaker 1: That doesn't make any sense on its face. You have
Speaker 1: to take a hard look.
Speaker 2: Do you still think that the US is the best
Speaker 2: place to invest?
Speaker 1: I think it's probably still the best place, but it's
Speaker 1: less best than it used to be, because I think that,
Speaker 1: you know, if you think about the things that made
Speaker 1: it the best place, one of them was the rule
Speaker 1: of law, that may be less the fact today. One
Speaker 1: of them was the predictability of outcomes that may be
Speaker 1: less today. One of them was, well, the worst thing
Speaker 1: about it investing in the United States for many years
Speaker 1: has been our fiscal situation, our deficits and debts, and
Speaker 1: the US has behaved like somebody who has a golden
Speaker 1: credit card where there's no credit limit and the bill
Speaker 1: never comes, So of course you can spend more than
Speaker 1: you make.
Speaker 3: And that's and.
Speaker 1: If somebody has a golden credit card, well what would
Speaker 1: you do? Well, you might buy a nice car, but
Speaker 1: what the hell, you might as well buy all the cars.
Speaker 3: Because the bill's not going to come.
Speaker 1: And that's the way we've behaved, and that's the way
Speaker 1: Washington has spent money. But can the events of the
Speaker 1: recent days change that. Can they cause there to be
Speaker 1: a credit limit? Can they cause a bill to be
Speaker 1: presented at some point in time? And if the answer
Speaker 1: to either of both of those questions.
Speaker 3: Is yes, that's a real risk.
Speaker 1: If people don't like the dollar, don't like investing in
Speaker 1: the the United States, don't want to hold an unlimited
Speaker 1: number of treasuries. If we just make people mad and
Speaker 1: say the US is still a great credit, but I
Speaker 1: don't want to hold their debts because look how they're
Speaker 1: treating me, the fiscal situation will be very complicated.
Speaker 2: Howard marks, We have to leave it there. That was
Speaker 2: oak Tree Capital co chairman Howard Marx. Thank you so much,