Oaktree Capital Management co-founder Howard Marks says that investors should see the drop in oil prices as more proof that markets are irrational and macro forecasting all but impossible. Instead of trying to guess which way prices will go from here, he’s looking for the securities (high yield debt in particular) that are getting unfairly pummeled by investors heading for the door.
“For the last 3 ½ years, Oaktree’s mantra has been ‘move forward, but with caution.’ For the first time in that span, with the arrival of some disarray and heightened risk aversion, events tell us it’s appropriate to drop some of our caution and substitute a degree of aggressiveness,” Howard Marks writes.
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Oil, like gold, is hard to put a price tag on: Howard Marks
Howard Marks mentions a meeting of prominent investors last August, hosted by Byron Wien of The Blackstone Group, where the consensus view was that American shale and weaker growth in Chinese demand would be offset by stronger EM demand for oil, keeping prices steady for now and pushing them toward $120 in the next few years. But he isn’t castigating anyone for missing the coming price drop. He also brings up his own speculation that domestic production could give US manufacturing a competitive advantage over other countries.
The point is that oil, like gold and other commodities that don’t directly generate cash, is extremely hard to put a price on. In theory the floor should be set by the highest variable cost necessary to meet demand, and the total cost curve should more or less set long-term prices, but if it were that simply the market wouldn’t have been taken by surprise.
“If you think markets are logical and investors are objective and unemotional, you’re in for a lot of surprises,” writes Marks.
Oaktree waits for disarray instead of betting on macro predictions
The reason Howard Marks brings up all of these incorrect predictions is that, more than he believes in any of his macro predictions, he thinks investors should have some humility about their own ability to call events and then invest accordingly.
“Most people easily grasp the immediate impact of developments, but few understand the second-order consequences… as well as the third or fourth,” writes Marks.
As for Oaktree, any time there is chaos in distressed debt and high-yield corporate bonds, Howard Marks and his team will be looking for deals. Instead of betting on macro predictions, he’ll look for the fundamentally attractive deals left behind by emotional investors. With deep experience in distressed debt, this is just the kind of environment Oaktree has been waiting for.