Howard Marks on Tariffs, Trade, and Economic Uncertainty

The Present Economic Moment and Tariffs

• 💡 Howard Marks, co-founder of Oaktree Capital, discusses the current economic climate, noting that credit still offers a better deal than equities, even with recent market selloffs.
• 🎯 He highlights that credit yields have increased slightly, offering higher prospective returns compared to six weeks prior, while stock prices have fallen significantly.
• ⚠️ Marks identifies the implementation of tariffs as the most significant change in the economic environment he has witnessed in his career, marking a shift from free trade to trade restrictions and a move toward US isolation.

Globalization and Its Benefits

• 🌍 The last 80 years, post-WWII, are described as the best economic period due to the growth of trade and globalization, which acted as a rising tide lifting all boats.
• 📈 Globalization maximized worldwide welfare by allowing countries to specialize in what they do best and trade, leading to benefits like reduced durable goods costs in the US by 40% (inflation-adjusted) over 25 years.
• 📉 The removal of trade benefits, such as cheaper imported goods, is expected to lead to increased costs and potentially a more persistent inflationary regime.

Valuing Assets in Uncertain Times

• 📊 Marks explains that stocks have historically averaged 10% annual returns over 100 years, but this is contingent on valuation; with current high PE ratios, future returns are likely to be much lower (1-7%).
• 🔑 In contrast, credit (fixed income/bonds) offers a promised return that is more predictable, with the primary risk being issuer default, which has been rare (around 99% of issuers paid as promised in his 47 years in non-investment grade credit).
• ❓ He emphasizes that judging whether current asset prices are adequate or excessive in this environment is impossible to quantify and remains guesswork, especially given the radical shake-up of the world order.

Navigating Dislocation and Uncertainty

• 🎢 While the current period is one of dislocation, Marks advises that judging whether price reductions are adequate or excessive is a personal assessment, with no definitive analysis available.
• 📉 He notes that the market is "on sale" but the probability of knowing the future is lower than ever, making forecasting exceptionally difficult and unreliable.
• 🇺🇸 The US is still considered the best place to invest but less so than before due to potential erosion in the rule of law and predictability, and a concerning fiscal situation with deficits and debts.
• ⚠️ A significant risk is the potential for the US fiscal situation to change if the country's spending behavior leads to a credit limit or if international confidence in US debt diminishes.