Howard Marks On What Investors Should Worry About

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<Q>: I do.

<A – Howard S. Marks>: And I got a note from the bank every time the rate changed and I have the one that says the rate on your loan is now 22% in the quarter. And that was all brought on by high inflation. That’s was Volcker came in, that’s what he squished by withdrawing money and that – and the other thing we – you should mention is, of course, that his doing so hurt the markets in the short-run but set the stage for the greatest bull mark in history. Now, I’m not necessarily making an analogy and anytime I get a question that starts with could, then I say yes, because in this world anything can happen. The main thing I would say is that inflation I find extremely mysterious. Nobody knows how it gets started and it was clearly demonstrated in the 1970s that once it gets started, nobody knows how to end it. Same for deflation as the Japanese have demonstrated and so…

<Q>: However, Howard, debt has become a much more significant factor?

<A – Howard S. Marks>: Debt is a very significant factor today. We’re living in a largely unlevered world then. So, the answer is yes. I mean lots of – there are so many uncertainties out about there – out there that’s really the underlying reason for my caution. And the removal, the tapering could be an elegize to Walker’s decision to withdraw liquidity. And there is every reason to believe that if the tapering occurs that the market – that the economy will grow less than it otherwise would have. I’d like to believe that if they time the withdrawal of the tapering right and if they do the tapering for the simple reasons, the economy is doing better than the economy will still do okay even without the stimulus. So – but I mean this little discussion that we’re having just illustrates how uncertain the world is and how important I think it is that we behave with caution. I put out – you mentioned the equities, I put out a memo in I think March called the Outlook for Equities, in which I listed something like five factors arguing strenuously that equities were attractive and seven factors or eight factors saying that they – just as strenuously that they were overpriced. So, nothing is obvious.

<Q>: Thank you.

<Q>: I have the mic over here.

<A – Howard S. Marks>: Yeah.

<Q>: Two questions; one, what’s your outlook on interest rates and how it is impacting your positioning and there is a hedge question too, as there is a headline in the journal today hedge fund fees cut back on fees. Do you have a view on that issues sustainability of fees and alternatives?

<A – Howard S. Marks>: Okay, well, number one, you obviously didn’t get the memo where I said I’m not a forecaster, but having said that I mean my personal expectation, Oaktree Capital Group LLC (NYSE:OAK) does not base it’s investment actions on macro forecast. Having said that, my personal view on interest rates is that they will probably raise although I don’t think dramatically because the economy is not that dynamic and there is not much inflation. So, those are the two factors that usually call for high rates and we don’t see either of those.

As for hedge fund phase, is anybody here work for hedge funds? Anyway, I wrote a memo on hedge funds 10 years ago, that was the only one. And I said there that I predicted the average hedge fund will grow 6% or 7% a year. It will return 6% or 7% a year, which are the coming years and then eventually people will get tired of paying two in 20 to get 6% or 7%. And I think they probably have made about 6% or 7% a year over the last decade, but nobody seems to have gotten tired of paying two or 20.

Although I haven’t read the journal story yet this morning and maybe they will tire of it. If you went back – I was – there is a guy name, Rick Rees, he was with Cumberland, which was a good hedge fund. I met him over the summer. I hadn’t seen him in 40 years and I said 50, but he corrected me. But if you went back 40 years or even 30 years, the number of people I knew who got 20% of the profits, you could count on one hand. And now thousands and thousands of people get 20% of the profit. And I believe that for a client to give a manager 20% of the profits, that is the safe to give a manager the return on a fifth of his capital, the manger should be exceptional.

And I think that there aren’t that many exceptional people. There aren’t 10,000 exceptional people in this industry. And so my answer to you on fees is that the exceptional will continue to deserve carry and presumably we’ll get it and the unexceptional will not.

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