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New – Howard Marks On The State Of The Markets And The Economy @Wharton Global Forum 6/15/18

Howard Marks, co-chairman of Oaktree and Jon Gray, president and chief operating officer of Blackstone will reflect on today’s economy, markets, and opportunities for the future at the Wharton Global Forum in New York Friday morning.

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Howard Marks On The State Of The Markets And The Economy

Transcript

First of all I want to echo what John said that the beauty of our funds is that they're closed end funds. I like to think of our investors as handcuff volunteers. And the point is they can't count running shoes that are seldom underfoot son Andrew Marxist class of 0 9 Pat Penn is my mentor and he once said Dad think if if you see a chart of a stock that that that's great 20 year charge made a ton of money and you say man I wish I had that stock you have to say to yourself think of all the days you would have had to talk yourself out of selling and with our structures and our product they have less likelihood of selling and the long term compounding works better. I think the second thing is that the truth is that our products don't mark to market. So whether it was real or illusory we didn't look so bad in the crisis. And then number three I think the biggest single thing is that when the central banks reduced the risk free rate so much to stimulate the economies and bail out the financial institutions it rendered the returns on mainstream stocks and bonds unpalatable. And you know a pension fund which needs seven and half an endowment it needs 7 1/2 now knows today they can't get it from stocks and bonds and it has forced money into this so-called alternative. I saw signs for our benefit. So I want to I want to get to that.

I mean I think from a societal standpoint the specter of long term returns in publicly traded markets is a massively important thing. So let's return to that. But I also promised that we we ask you to sort of opine on big things in the world and the obvious one to start with is how long can the boom last. I know you know there are some obvious things to say. I mean so obvious they probably shouldn't be said I'll give them in ten seconds long slow recovery doesn't look like a V looks more like a U. Lots of cheap money out there. But assets seem really expensive so that you know that that sort of says that something like a boom should feel a little bit fragile. How are you both feeling about that how long how long can it last. I mean this return to growth in the U.S. and the strength of U.S. dollar mockable things I think is a feature of this year. So I think it's hard to put a date on it. I would step back and say I think quirt are pretty important inflection point that we've basically for almost a decade now been in an environment of low inflation low rates and low growth particularly here in the U.S. and that it's clear now the U.S. economy is starting to accelerate that we're seeing particularly after the tax cut increased capital expenditures increased confidence increased hiring growth starting to trend towards 3 percent. So all of that is actually pretty positive as well. The fact that housing is not out of whack lendings not out of whack. That's all I'd say on the good side. The challenge is so can I just stop.

So the the the stimulus if that's what it was from the tax cuts last year it came off whatever it was eight or nine years of recovery already but you saying because the recovery was quote unquote anemic. The the the stimulus hasn't been inflationary it still had positive effects on the real economy. Well the stimulus to date because there were so much leverage things were so slow investing was slow we didn't see the kind of inflation plus I think technology is disintermediation and taking a lot of inflation out of the system. So where are we going though was besides just what's happening in the economy going positive what we have is it's negative now which is bigger deficits. We have you know inflation showing up in commodity prices wage inflation approaching 3 plus percent potentially. And so the Fed starting to move towards tightening they did again yesterday. And so investors you say well gosh this makes me nervous about what multiples are going to be. It makes me nervous about owning fixed income. So I think we have a mixed picture. We actually I think the economic picture is probably better than most people realize. I think the challenge is what's the interest rate inflationary picture going to look like and in that environment. I think he can't just go out there and sort of buy anything. You have to become much more selective in what you do because you know for a number of years you pretty much bought anything multiples expanded you've got a little bit of growth that was fine. Today if we're actually going to see multiples come in bond rates move up selectivity and owning things.