Howard Marks: "Is It The Fed's Job To Keep Market Dislocations At Bay Forever?"

Howard Marks, co-founder of Oaktree has emerged as the latest (billionaire) voice to criticize the Fed (after Carl Icahn did it earlier in the day) for cutting interest rates last month, according to an interview with Bloomberg TV. Marks believes that more monetary stimulus will simply boost asset prices further, which will just serve to widen the income inequality gap. To which, we and anyone can only respond: he is absolutely correct.

Sure, it's a relatively simple concept, but then again so is not racking up $22 trillion in debt and catalyzing debt bubbles that, depending on sector, are approaching or have already eclipsed levels seen before the 2008 Great Recession. 

Marks opens his latest memo to clients, dated July 26, asking, "...is it the Fed's job to sustain expansions and keep market dislocations at bay ad infinitum?"

With the bull market now passing a decade-long with record low unemployment, Marks says the economy simply doesn't need the Fed's help. He argues that the rate cut last week will make it harder for people with less savings, and also lenders, to earn decent returns.

Oaktree's Marks on Loans, Distressed Investing, Fed Policy

 

Marks said: "The process of lowering the rates causes assets to inflate. There will be more wealth piled up by the people who have assets and it'll be harder for people who just have a little bit of savings to make a return."

He continued: "We stimulate the economy when it's doing poorly and we want to wake it up from the doldrums. We generally don't stimulate the economy after ten good years. We usually accept that there will be an ebb and flow to the cycle and there might be a justified recession. We have the lowest employment rate in 50 years and you usually don't stimulate at those times."

"I don't think it should. I don't think the Fed's job is to make sure there's never a recession," he continued. "If I ran the Fed what I would do is when the economy is roaring, I would try to cool it off so there's not too much inflation. When it's really weak I'd try to stimulate it. In between, I'd leave it alone."

His timing for speaking out and blaming the Fed appears spot on. The likelihood of a US recession in the next year has risen to 35% in August from 31% previously. Trade tensions continue to fuel uncertainty and the yield curve appears to be forecasting that a recession is inevitable.

But the market has been strong enough that opportunities to find distressed investments are still slim. Marks says that capital markets continue to be supportive of companies that need rescue financing or refinancing. Oaktree's distressed fund was raised in 2015 and is now only about a third invested.

"The fact that we're roughly 30% invested after this time shows you that the going is slow in distressed. This is not the kind of climate in which good healthy companies with good businesses get into distress," Marks said. 

"There is some distress in areas like retail and energy, but these are industries with their ups and downs," he continued.