Howard Marks: The Strategies That Have Worked Best Need To Change

During his recent OakTree podcast, Howard Marks explained why the strategies that have worked best need to change in the current environment. Here’s an excerpt from the podcast:

Marks: I feel quite strongly about this. I’m not somebody who usually has strong macro opinions, but this time I do. Anybody who came into the investment or financial world since 1980, 43 years ago, which means most of the people working today have only seen a climate in which interest rates were either declining or ultra low or both.

And that has a specific effect on the economy, on the markets, on asset values, on bond prices, and on investor behavior. And it’s profound. But the thing is that the people who I’m talking about probably think that what they’ve lived through is normal. When you live through something for 40 years, you tend to say, well that’s normal, but it’s not.

And the one thing I’m confident of is that interest rates are not going to decline by another 2000 basis points. In 1980 I had a loan personally at 22 and a quarter percent. And in 2020 I was able to borrow at two and a quarter percent. So rates went down 2000 basis points.

Not going to happen again. There’s no room for it. And then I don’t think that the Fed wants rates to be as low as they normally were in what I consider the most suspect period, which was ’09 through ’21. So for that 13 years, the Fed funds rate was zero most of the time and ultra low for the rest of the time.

Not normal.

But the very low interest rates created an easy money environment in which it was easy for companies to do well. It was easy for them to finance, it was easy for them to avoid default and bankruptcy. Everything was easy. And that’s not the way it normally is in the investment world.

That’s changing too. So I think that the world ahead will be very different from the 13 year period I’m talking about and from the 40 year period of the interest rate decline. And if the environment changes, then it makes sense to me to think that the strategies that work best will change.

It was Einstein who said that insanity is doing the same thing and expecting a different result. But I’d like to modify that to say that maybe insanity is doing the same thing in different environments and expecting the same result. Because the environment in which you’re acting has a big influence.

You can listen to the entire discussion here: