Below is the transcript of a CNBC Exclusive interview with Oaktree Capital Management Co-founder and Co-chairman Howard Marks. The interview was first broadcast on CNBC's Squawk Box Asia on 20 September 2019. If you choose to use anything, please attribute to CNBC and Tanvir Gill.
Tanvir Gill: The global macro environment as well as the investment climate. I'm joined by a very special guest; Howard Marks is Co-chairman of Oaktree Capital. He joins me right here for an exclusive chat. Howard, it's great to have you on the show. Thank you very much for your time.
Howard Marks: It's a pleasure to be here.
Tanvir: Yesterday, the Fed gave the markets what they wanted which is essentially a 25 basis point rate cut. Now typically the market perceives a rate cut to be a buy signal. But yesterday's market reaction was rather muted. What does that suggest?
Howard: Well number one. If events are anticipated then maybe the rise takes place on the anticipation not the event. Number two. You know there's a difference of opinion about whether a rate cut at this point in the cycle is a good thing or a bad thing. So I don't think that it's automatic that rate cut, market goes up.
Tanvir: But to your mind, is this rate cut a good thing or a bad thing? And does this rate cut have any effectiveness in the economic cycle as things stand right now what do the last two rate cuts the one in the previous policy plus yesterday mean for the economy?
Howard: The question is what is the Fed trying to accomplish? What should it try to accomplish? You know for 100 years it's been the job of central banks to control inflation. Then 30, 40 years ago they got a new job which was to support growth of the economy so that jobs would be created. But this idea of preventing the next recession is neither of those two things. And it is a job that the Fed seems to have taken on now and in his talk six weeks ago, Jay Powell talked about continuing the expansion that's not necessarily the Fed's job. I put out a memo on the subject as you know about a month ago called 'On The Other Hand' and I put it out on a Friday and that Sunday I happened to visit a friend who had a guest a Fed president and he said that there is a difference of opinion at the Fed as to whether they should be cutting at this point in time and that he didn't think so and he belongs to a group which thinks that it's the job of the Fed to create growth over time. And the idea of creating growth over time and jobs over time sounds like a very good one to me as opposed to creating growth and jobs every year.
Tanvir: But do you think the Fed needs to be proactive and had it not been for President Trump and his tweets plus the big fall in the markets last December, do you believe the Fed would have cut rates? Would they have given the markets these rate cuts?
Howard: Well I don't know a lot of people think that President Trump's influence on chairman Powell contributed to the rate cut. It may have been or not. Powell, Trump insists his independence but certainly Trump was beating on him to cut rates and he did. You know and that raises a very interesting question. Should the Fed cut rates to stop the stock market from going down which is different from the recession? You know. Ok. So you want to create jobs. Ok. Maybe you want to prevent recessions which I don't think you can do in perpetuity. But do you want to cut rates because the stock market's going down. I think that's totally illegitimate.
Tanvir: Because this rate cut seems more like something that's addressing the sentiment.
Howard: Yeah.
Tanvir: The need of the hour rather than having anything to do directly with protecting the economy.
Howard: Right. So you may say pandering to investors. I think that's right.
Tanvir: I'm not sure that's the Fed's job.
Howard: That's not the Fed's job. And by the way, our economy is doing pretty well and normally you would cut rates as we did 10 years ago to get an economy going. It stalled global financial crisis. Lots of declines. You want to cut rates to get it going. Ok. That's fine. Ten years later do you want to cut rates to extend an economic expansion which is the longest in history? Again some question, I question whether that's a legitimate goal.
Tanvir: Do you also question the strength of the U.S. economy and whether we are heading towards a recession? That's the big question. That's the question that the markets have been obsessing over.
Howard: Well number one Tanvir, people say to me, are we heading to recession? We're always heading to a recession. The question is this year, next year, or five years from now.
Tanvir: After 11 years that question is a pertinent one.
Howard: Exactly. But you know our economy I called that memo 'On The Other Hand' because you know we have different considerations. Our economy is doing pretty well. There are sources of strength mostly our consumer. There are pockets of weakness manufacturing. You know manufacturing having a lot of trouble being optimistic right now given the trade war. Our economy is the best performing in the world. The major economies. So I'm happy with it. And I don't think I'd be stimulating it at this point in time.
Tanvir: So the economy doesn't need rate cuts.
Howard: I don't think it does. Well again if your goal is to make sure we don't have a recession this year next year the year that maybe you want to cut rates. But I question that goal.
Tanvir: So then what about some of the Fed member board members essentially saying what twenty five? We need 50 James Bullard.
Howard: Well I think I think maybe only one other than the President. But look in every endeavor, there are pros and cons strong and weak. We have the Fed we have hawks and doves. So you know there are some people who think it's extremely important to prevent a recession and some people who think that recessions are naturally occurring and the ebb and flow of these things is inescapable. One of the problems of course is that if you mean we've cut now 50 and if somebody militates for another 50 and gets it and then a 50 after that then we're down to three quarters of a percent.
Tanvir: Pretty much nothing.
Howard: And if we have a recession. What do you do about it? You know we normally we cut rates to pull out of them. You want to have some room. I would. I would hope that that was one of the reasons for Yellen's program of rate increases and that it's a I believe it's a reason why we should not cut aggressively right now.
Tanvir: Why does the market fear the recession so much because as you pointed out a recession is inevitable. It happens in every economic cycle. This is the 11th year running for economic expansion. What does it tell you about market psychology?
Howard: Well one thing it says is that markets are short term oriented. You know everybody's become very short term oriented in the markets and they want the market to go up every day. And I don't think that's very realistic. What they should want is a healthy environment in which the market can go up over time.
Tanvir: And if that's the premise then do you believe that so far, easy monetary policy is already fueled the markets and skipped a few minI recessions to actually set the stage for a really big one hitting us where monetary policy tools will be rendered. Not helping useless essentially.
Howard: I mean. I'm not a forecaster so I can't tell you what's going to happen. I can't tell you what would have happened.
Tanvir: That's one of the things you've made in your memo.
Howard: Well I think that yeah. You know maybe we would have had some slowness by now if they hadn't stimulated. But I think I would guess probably not because of course the stimulus is a recent thing and the economy was doing reasonably well without it sluggish certainly I say of this economy it's not of fulfilling anybody's fondest dreams but it's doing ok.
Tanvir: Well in your memos as well I think this time it's different. You spoke about the inversion of the yield curve and how again investors panicked when that inversion hit us right. You're not a big fan of that as a warning sign what would be the red flag for you to essentially signal that things could be slowing down and that a recession would be around the corner?
Howard: Yeah. I'm not. I'm not that excited about the yield curve inversion. The mere fact that the short rate is higher than the long rate because nobody can explain to me its influence. You know they can say that most recessions have been preceded by an inversion. By the way that's different from saying that most inversions have preceded recession. But until somebody can explain to me why it should be influential then I'm not going to get too excited about it. You know I think that the key is job creation. And you know job creation is well we had a weak month. But it's still positive and you know I think that's the red flag.
Tanvir: What is a bigger risk for the U.S.? Economy because you believe the economy is holding up even the numbers looking supportive and a large part of the strength is coming in from the us consumer. So do you think externality is the U.S. run a trade war is the big worry and that's why policy makers want to err on the side of caution and do whatever it takes to protect the economy from that from that downside?
Howard: Maybe so but can you? You know and I think that is since the consumer is so important I think the question is it possible to get an external shock which takes the optimism out of the consumer you know. Is there a limit to how much debt they'll put on to accelerate spending from the future to the present? I think that's really the question.
Tanvir: You know it's something that's really jumped out at me out in one of your memos which you highlighted that in recent years, experience growth, low inflation, expanding deficits and debt low interest rates and rising financial markets all of which are incompatible indicators are all working together.
Howard: Yes.
Tanvir: Which one of these variables stands out to your mind and which one is I will mindful of most mindful of at this point?
Howard: I think the low interest rates are the outstanding characteristic of today's financial environment and have been for close to 10 years and you know as you say. The strong economy and the low interest rates are something we usually don't see. If we should happen to get inflation above today's level than you would think rates would go up. And you would think that higher rates could have a cooling effect on this economy.
Tanvir: I'm sure you've been asked this question a zillion times Howard. When do you feel the recession hitting the US Economy? You know Ray Dalio was here a few weeks ago and he put a chance of 40 percent essentially a 40 percent chance of there being a recession in the us before the presidential elections next year. Well is there a chance that you're putting out there.
Howard: Well I start every conversation by saying that I'm not a forecaster. Ray is. Ray has built his business on macro forecasts really and understanding the macro. You know it doesn't feel to me like a recession is imminent. I don't think we're going to go five years without it. So some time two years from now. Something like that. But as I say I don't put numbers on it
Tanvir: You don't. I know. Yes. And because we've had this conversation in the past is that we're in the ninth inning. This is a late cycle but the late part of the late cycle has also extended itself. Oh yes. All right. So where are we?
Howard: Why do we say we're in the ninth inning because there had never been an expansion that went more than 10 years. So when you get to nine years and nine months you tend to say well I think we must be near the end. But now we're past 10 years and it hasn't pumped out yet. And you know there's no rule which says we have to have recession after 10 years and templeton. I quote him in the memo. This time it's different. And even he says 20 percent of the time it is different. So we so we tend to say recession in part because of how long we've gone without one. But you know that doesn't mean there has to be one.
Tanvir: I want to touch upon the geopolitical risks which are on the market's mind right now. The big disruption in the oil market and the markets have settled down they've calmed down after what happened over the weekend. Is there still more risk left in this situation? Do you believe that things will perhaps de-escalate from here or is there a major concern on how things will unfold in the Middle East especially?
Howard: Yeah well. Look. The Middle East is a mess. The fact that one raid can do so much damage and upend the status quo so much shows you how exposed we are. I've been talking about geopolitical risks for a long time until this week. None of them really came to fruition. I mean the trade war on again off again threat not threat. But it never broke out into open hostilities as happened in Saudi Arabia this week. And you know what happened in Saudi Arabia the end of the line? There's no reason to think so. I mean if the people who did that want to do it again it can happen again.
Tanvir: Does that open more upside risk for oil?
Howard: If I don't watch the Fed I certainly don't predict the price of oil. But in the short run, yes I would think that you know but it's very hard to say what price for oil is consistent with what environment. Is the price today right? For days supply demand environment or too high or too low. It's hard to say where we're going.
Tanvir: Just last couple of question Howard; you're taking interest in the Chinese distressed debt market. What do you like about that space in the region?
Howard: There is a lot of distressed debt and there's not much supply in the world. We've been working there for four years gaining experience with it and the experience has been positive. We're working with Chinese partners. We believe that we can rely on the rule of law. We believe that the authorities in china understand the importance of having a functioning distressed debt market in order to permit the banks to recycle their otherwise moribund capital. So I mean I think that things are moving in the right direction and you know it's an activity that we would rather be in the vanguard of than play catch up in future.
Tanvir: What about the slowdown risk in China? Six percent. Premier Li Keqiang earlier this week said not happening maybe a challenge?
Howard: Yes.
Tanvir: China feeds a large part of Asia. Is that a big risk or your view with 14 trillion? Six percent five and a half percent five percent is not that bad.
Howard: I think that one of these days they'll have a slowdown. You know they've gone 20 years without a recession and their growth rate has been among the highest in the world. It's not going to go on forever. They have had an unusual spurt of growth with people moving from the farms to the cities, industrialization, strong exports, cheap labor, heavy availability of capital for capital investment. Some would say excessive capital investment. One of these days those factors will stop being sufficient. One of these days they'll have a recession. But again where do we say 10 minutes ago. It's a natural thing.
Tanvir: China recession china slowdown.
Howard: What's the difference?
Tanvir: I want to talk about your investment philosophy right now in this market. I don't want to get into specifics but you spoke about sanity in stocks. You spoke about emerging markets being underpriced. What's your top value call right now? I mean there's been a view on gold. I didn't know whether it's a value proposition or not but it's done really well.
Howard: That gold can't be a value proposition. It's impossible to put an intrinsic value on gold and that is the definition of value investing. Obviously gold did nothing for many years.
Tanvir: Five years plus.
Howard: No more than five you know it ran from a low priced triple digits in the crisis up to 1950 then it backed off to thirteen fifty and it stayed around 13 fifty for… I don't remember the numbers. I would say eight years. And then this year a few people got together and they say hey, wait a minute maybe gold is what we should resort to given the geopolitical uncertainties and you know the price of any asset is an indication of its popularity. So I think that gold had a spurt in popularity this year and people in some opinion coalesced around the idea that gold is good in times of uncertainty.
Tanvir: So then where is it? Where's the value according to Howard Marks?
Howard: You can't compute the value of other analysts have gone gold. Where is value? Well look. We do like the emerging markets mainly because most people don't. And in the investing business you find better bargains among the things that are unpopular than popular. And you know most of our strategies, credit, real estate and so forth. I think most things can be invested in reasonably these days as long as you're careful. You know our motto has been move forward but with caution and I think the caution part is a very important part of the equation.
Tanvir: Final question. I met you same time last year. In the last twelve months, we've had one major thing play out as a key story or key theme and that's been the Fed's pivot and that's largely been related to the U.S.-China trade or the fallout there. From now to twelve months hence, if I were to meet at the same time next year, what would change in the global economic environment?
Howard: You know if we're going to get along well you're going to have to stop asking me for forecast. You know I'm the one who says what does.
Tanvir: I'm just doing my job.
Howard: Who says we never know where we're going. We should assess where we are. I think we can figure out where we are what's going on around us in this market today and figure out whether this is the time to be aggressive or defensive and which asset classes are more or less attractive. But you know, I don't believe I know what the future holds and I spend my job on this and have been doing it for 50 years. Most people should not feel that they can make accurate guesses about the future. I sure don't.
Tanvir: Howard, we leave it at that thank you very much for your time.
Howard: Thank you.
END
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