WEBVTT - Bloomberg Surveillance: Oaktree Capital Management's Howard Marks

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News.

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<v Speaker 2>We'll begin this hour with our top story, No news

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<v Speaker 2>is good news, stocks edging, KaiA as Sham, and Powertow's Congress.

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<v Speaker 2>He's expecting rate cuts this year, even as a strong

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<v Speaker 2>economy keeps the FED on hold for now oh trees.

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<v Speaker 2>Howard Mark's writing this in his latest MAMO. I find

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<v Speaker 2>it interesting that the current stock market rally began as

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<v Speaker 2>a result of optimism powered by consensus thinking that was

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<v Speaker 2>generally off target. Investors motivated by their belief that the

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<v Speaker 2>FED would pivot to dubbishness and start cutting rates in

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<v Speaker 2>twenty three.

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<v Speaker 3>That was wrong.

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<v Speaker 2>We'll get into consensus in just a moment. The legendary

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<v Speaker 2>Howard Marx joins to surround the table. Howard, good morning

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<v Speaker 2>to you. Good mine, fantastic MAMO. Really enjoyed the read

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<v Speaker 2>earlier this year, Easy Money. You reflect on the easier

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<v Speaker 2>times fueled by easy money, lunning investors into a false

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<v Speaker 2>sense of intellectual superiority. I want to know, and I

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<v Speaker 2>think Lisa wants to know too. Have we fully realized

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<v Speaker 2>the pain associated with some of the loans, some of

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<v Speaker 2>the things we did ten years ago.

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<v Speaker 4>No, clearly not it's early. The economy is still good.

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<v Speaker 4>That keeps shaky loans aloft.

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<v Speaker 3>The maturities.

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<v Speaker 4>You know, any company that was not asleep at the

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<v Speaker 4>switch pushed off its debt maturities in twenty twenty one

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<v Speaker 4>twenty two, when rates were still close to zero, pushed

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<v Speaker 4>them off. So the maturities start for real in twenty five.

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<v Speaker 4>There are not substantial maturities this year. And you know

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<v Speaker 4>there are three ways you can default. You can breach

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<v Speaker 4>a covenant that specifies levels for your financial statements, you

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<v Speaker 4>can fail to make an interest payment, or you can

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<v Speaker 4>fail to meet a maturity. Well, the eager lenders let

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<v Speaker 4>companies exclude covenants in recent years, so you can't do that.

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<v Speaker 4>Interest rates mean that the coupons are low. Interest coupons

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<v Speaker 4>are low, so it's hard to miss one of those.

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<v Speaker 4>And in a positive climate, you can borrow.

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<v Speaker 3>To make your interest payments.

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<v Speaker 4>So we're really talking about maturities which have been pushed

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<v Speaker 4>off to next year. And if you get maturities spiking

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<v Speaker 4>in a weak economic period or week for certain groups,

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<v Speaker 4>that's when you get defaults.

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<v Speaker 3>They're still running low.

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<v Speaker 1>A lot of people have come on the show Howard

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<v Speaker 1>and said that this market is discerning. It's not necessarily

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<v Speaker 1>just buying everything with abandon It isn't exuberant, There isn't euphoria.

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<v Speaker 1>There's sort of a separation of those zombies or those

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<v Speaker 1>that are likely to default in twenty five, that can't

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<v Speaker 1>survive until twenty twenty five of those that can't. Do

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<v Speaker 1>you agree with that?

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<v Speaker 3>I generally do? You know?

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<v Speaker 4>This is not the crazy markets are few and far between.

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<v Speaker 4>When you get a real soaring bullmarkt, a bubble, or

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<v Speaker 4>a crash, those are when they stop being discerning. And

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<v Speaker 4>as we say, throw out the baby in the bath water.

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<v Speaker 4>Most of the time markets are sane, especially a market

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<v Speaker 4>like this which is being buffeted by good news and

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<v Speaker 4>bad news at the same time. So yeah, I think

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<v Speaker 4>we're in the middle ground. I've been saying for a

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<v Speaker 4>long time that we're in what I call the zone

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<v Speaker 4>of reasonableness. And I don't think there's anything much to.

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<v Speaker 1>Do zone of reasonableness, and I want to get into that.

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<v Speaker 1>There's not much to do but a zone of reasonableness.

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<v Speaker 1>For there's a strong consensus, and you pointed to and

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<v Speaker 1>John Ladwi this idea that consensus last year was completely wrong.

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<v Speaker 1>So this year you said there's a feeling that smacks

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<v Speaker 1>of goldilocks thinking, how do you work with that as

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<v Speaker 1>an investor?

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<v Speaker 4>Okay, I don't think the consensus is necessarily not wrong.

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<v Speaker 4>I just think that most people can improve upon it.

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<v Speaker 4>That's really the criterion. You know what I learned in school,

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<v Speaker 4>the efficient market ipocesis. Markets are efficient. That doesn't mean

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<v Speaker 4>they're right. That just means that most people can't improve

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<v Speaker 4>upon the market's consensus judgments.

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<v Speaker 3>So now tell me your question.

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<v Speaker 1>Well, I guess that I am wondering where are we

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<v Speaker 1>in the cycle and the credit cycle.

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<v Speaker 4>Well, following from Jonathan's question, you know, Buffett says it

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<v Speaker 4>best when the tide goes out, we find out who's

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<v Speaker 4>been swimming naked.

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<v Speaker 3>Nothing.

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<v Speaker 4>The tide hasn't gone out. We're still in generally salutary period.

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<v Speaker 4>Economy functioning well, earnings pretty good, interest rates coming down recently,

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<v Speaker 4>money available. So under those conditions you don't have a test.

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<v Speaker 4>The question is which companies and industries do okay when

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<v Speaker 4>conditions get tougher, can.

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<v Speaker 2>We work through some of the more quotes in this

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<v Speaker 2>Mammo as well, there's this great line and you've said

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<v Speaker 2>it's an old line, but I still love it. The

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<v Speaker 2>worst of loans made of the best of times. This

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<v Speaker 2>quote from you. I love Hieke's word malinvestment because of

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<v Speaker 2>the validity of the idea behind it. In low return times,

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<v Speaker 2>investments are made that shouldn't be made, Buildings are built

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<v Speaker 2>that shouldn't be built. Can we talk about buildings that

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<v Speaker 2>were built that shouldn't have been built? Is that an

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<v Speaker 2>error of focus for you at the moment as you

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<v Speaker 2>think about prospective weakness down the road.

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<v Speaker 4>Well, I think that commercial real estate office buildings in

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<v Speaker 4>big cities in particular are a focus area.

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<v Speaker 3>For investment people.

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<v Speaker 4>The post pandemic behavior of people not going to the

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<v Speaker 4>office so regularly calls the sector into question, as does

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<v Speaker 4>AI and the question.

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<v Speaker 3>Of how many employees.

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<v Speaker 4>You know you're going to have a Am I going

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<v Speaker 4>to be talking in five years to a machine over there?

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<v Speaker 3>I don't know. Maybe you are right now, there you go.

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<v Speaker 2>Maybe this is aim right now at Lisa top.

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<v Speaker 4>Of me as always, So, I mean, there are questions

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<v Speaker 4>about real estate. But on the other hand, most people

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<v Speaker 4>won't touch real estate with the ten football, and they

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<v Speaker 4>may be underestimating the intrinsic value. So that you know,

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<v Speaker 4>Jonathan It's important that everybody you understand. The question is

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<v Speaker 4>not is everything going great in a sector or is

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<v Speaker 4>it going terribly in a sector? The question is do

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<v Speaker 4>prices in that sector reflect the reality overestimated or underestimated.

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<v Speaker 4>I've made a living buying things that nobody else thought

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<v Speaker 4>was a good idea. But if you buy them cheap enough,

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<v Speaker 4>they become a good idea. And you know, if you

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<v Speaker 4>have the right real estate in the right place. If

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<v Speaker 4>if you're differentiating and other people haven't, yep, then that's

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<v Speaker 4>the time for bargain hunting.

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<v Speaker 2>See for the story and the price of the story.

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<v Speaker 2>Can I ask if you like the price of the story?

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<v Speaker 4>You know there's not a lot of price discovery going

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<v Speaker 4>on in the real estate industry. There are very few transactions.

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<v Speaker 4>So when you say do I like the price of

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<v Speaker 4>the story, I don't see a lot of prices in order?

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<v Speaker 4>You know, I see all the people say, oh, worth anything?

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<v Speaker 3>But where will they trade it? Will?

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<v Speaker 4>If you know, if if the quoted price for a

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<v Speaker 4>New York office building is down fifty percent, let's say,

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<v Speaker 4>will any sense sell there?

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<v Speaker 3>Will all the buyers buy there?

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<v Speaker 4>If a lot of people are willing to buy and

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<v Speaker 4>nobody's willing to sell. That says to me, the real

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<v Speaker 4>price isn't down fifty, So we have to have price discovery, which.

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<v Speaker 1>It brings us to kind of the fact that the

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<v Speaker 1>tide hasn't gone out yet exactly, and that when the

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<v Speaker 1>tide goes out, then we're going to start to get

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<v Speaker 1>some real price discovery, because then there will be some

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<v Speaker 1>people left naked. You don't like to make rate projections.

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<v Speaker 1>You do have a model roughly in your head where

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<v Speaker 1>you say in the memo that you don't think that

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<v Speaker 1>rates are high, they're kind.

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<v Speaker 3>Of going high relative to my experience.

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<v Speaker 1>So if that's the case, you kind of game out

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<v Speaker 1>three to three and a half percent FED funds rate

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<v Speaker 1>over the next five to ten years. What then does

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<v Speaker 1>that mean for returns to smart generally? Does that mean

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<v Speaker 1>that they're better in credit and better in your world?

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<v Speaker 1>Or are they kind of worse because the overhang that

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<v Speaker 1>we've had of that easy money policies is going to

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<v Speaker 1>take a lot.

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<v Speaker 3>To work through. It's a complex question, but.

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<v Speaker 4>Those you know, we're at five or to five and

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<v Speaker 4>a half on the FED funds right now, that's uh

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<v Speaker 4>a measure determined to crimp the economy to uh uh

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<v Speaker 4>kill off the excess inflation. The target is two. We're

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<v Speaker 4>above two, cool off the economy until it moves toward

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<v Speaker 4>to By the way, in in f in t Pal's

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<v Speaker 4>remarks on Monday, he said we won't cut rates until

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<v Speaker 4>we see we're making progress towards two percent. I thought

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<v Speaker 4>that the we're toward was very important. He didn't say

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<v Speaker 4>until we're at two percent, So uh, I think that uh,

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<v Speaker 4>you know, if if in if inflation starts going you know,

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<v Speaker 4>uh three two in three quarters, two and a half,

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<v Speaker 4>maybe he'll start cutting. I don't know, but the the

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<v Speaker 4>the word two toward was important. The The only thing

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<v Speaker 4>I'm sure of is that if if interest rates are higher,

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<v Speaker 4>the people who invest in credit instruments, which is what

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<v Speaker 4>we do, UH, are buying in at higher yields, and

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<v Speaker 4>invariably we'll have higher returns than they have in the

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<v Speaker 4>recent past. So today's rates are not high historically, but

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<v Speaker 4>they're certainly higher than we had from nine through twenty one,

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<v Speaker 4>which means the returns on credit investing, fixed income investing,

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<v Speaker 4>bond investing, loan investing will be higher than those in

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<v Speaker 4>that period, which were you know, really poultry.

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<v Speaker 2>Always sypathol filam, think pretty. Howard marks