Howard Marks , Oaktree Capital, explains why high-yield bonds are less vulnerable to rising interest rates than other classes of fixed income, with Oscar Schafer, Rivulet Capital chairman. Howard Marks, chairman of Oaktree Capital, explains why now is not the time to be “either aggressive or highly defensive” as a lot of uncertainties remain over a tapering of central bank action.
Howard Marks CNBC Interview and computer transcript below
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bonds a terrible investment right now. high-yield bonds less vulnerable than other classes of fixed income. here with more is our guest host oscar schafer continues with us. i don’t want to overstate you’re disagreeing with buffett kwraous you’re not i don’t think really, are you? no, that’s right. high-yield bonds are less value initial. spreads are way down on those too now.spreads are fair relative to history. history have been very favorable in relative terms. turn it into a discussion about stock.like lee cooper man. we would not be that interested in the stock market if rates weren’t zero. but they are zero. the best house in a bad neighborhood will get a lot of play. they will not be excited about it. it is what it is. as warren said, stocks arefairly priced, reasonably attracted. bonds selling at the lowestyields in history. would you still hang on bill gross’s every word? because, again he said the great 30-year bond/bull market is over. you can only say it so many times. going to be right one of these times. i do have — i borrowed some money in 19830. and i have a slip on my wall saying the rate is 22.75.that tells me they have a lot more to go up and down. that wasn’t a rate from a loan shark? three-quarters over prime. we had something called prime over time. howard, you said the betterthe returns in the past, all other being equal the less like hi they will in the future. bonds have been done much better than stocks. by definition, doesn’t it imply less going forward? i think that’s very much. when you get to a level like this and you stay at it for this long and you’ve got people issuing paper with very lowyields. when it’s been this long; there a huge dislocation somewhere that will have a negative adverse effect when it finally comes home to roost? do you think it will really hurtinvestors get accustomed to rates so low. the old saying, we’ve been down so long looks up to me. 5% on high yield bonds sounds attractive to people. there’s something funny aboutthat. five used to be the spread now it’s the yield as my partnersheldon says. and i think you have to worry when rights are as low as they are, people under ts take more aggressive behavior, bullish pwe haoeufr because they have to to get yields. they are accepting lower quality, higher quantities ofpaper. there’s a headline in the wall street journal we’re on track to have the most ipos in history. investor behavior tells uswhat’s going on in the market, tells us whether we should turnaggressive or defensive. ross once said if the 10 year goes to its average it will go down 20%, 25%. itd to believe. that’s only going back to average. what do you think? well, the math is what it is. i’m sure wilbur is right. will we go back to the averageis another question. i think they will keep rates for a long time.with a nonbooming economy there’s a low demand for money.and so that’s a truism. but not necessarily what’s going to happen. given the fact that the fed is targeting unemployment, 6.5. and considering technology is replacing labor it’s going to be a long time before they get there. and the labor force couldkeep going down and down and down. could never get to 6%.should be 20. well, there’s reasonably the structural level ofunemployment. it may be higher than in the past. i worry personally about where people who are not educated are going to find jobs in the future. and in the past it was much easier.what do you think the national unemployment rate might be?whati said higher than 5.5. you can get easy credit. you can get drunk on easy credit. once you do you start doing things drunk people do. it’s an open bar. say it’s 10:00. how many drinks have we had? back in ’06, ’07, my partner and i turned cautious about the markets because we found ourselves going into each other’s office and saying, look at this deal. can you believe this deal got done? it’s crazy. yeah. we’re not there yet. drinks?done any shots? we’re a little tipsy. no jaeger phaoeufter shots.people should start thinking about not driving. can i have one more drink for the road? he said the great the prudence with which we must conduct our own affairs. so the behavior of other investors should influence ours. investors are not behaving — on so it’s not like david hasselhoff with the hamburger on the floor. do you remember that? you said you realized you should get off the road. it’s impossible to do theright thing at the right time. i will settle for the former. high yield.if rates go up, you’re screwed. if companies go out of businessyou’re screwed. but there’s something in between the two. 5% for a crappy company. you have the double risk. double rate and if there’s a recession. that’s why you get twice the return. 5%.what do you like better?