During his latest memo titled Easy Money, Howard Marks discusses what he sees happening going forward.
His key takeaways are:
- The Fed is expected to cut rates in 2024: Based on the “dot plot” and market consensus, the Fed is likely to lower interest rates three times in 2024, bringing the fed funds rate from 5.25-5.50% to 4.60%
- Current optimism might be excessive: Marks cautions against “Goldilocks thinking,” where everyone expects a perfect, soft landing. Overly optimistic consensus can lead to disappointment if it’s not accurate
- Marks’ own prediction: While acknowledging it’s just a guess, he expects the fed funds rate to average between 3.0% and 3.5% over the next 5-10 years, higher than most current projections
- Oaktree’s approach: They invest based on individual companies and securities, not macro forecasts, but with awareness of the current economic environment
Here’s an excerpt from the memo:
Finally, what will we see moving forward? It now appears that sometime in 2024, the Fed will declare victory against inflation and begin to reduce the fed funds rate from today’s somewhat restrictive 5.25-5.50%.
The current “dot plot,” which summarizes the views of Fed officials, shows three 25-bps rate cuts in 2024, bringing the rate to 4.60%, and then more cuts in 2025, taking it to the mid-3s. However, today’s consensus thinking among investors seems to be considerably more optimistic than that, anticipating more/earlier/bigger rate cuts.
While on the subject of consensus thinking, I’ll point out the following:
• Eighteen months ago, it was near-universally accepted that the Fed’s aggressive program of rate
increases would result in a recession in 2023. That was wrong.
• Twelve months ago, the optimists who launched the current stock market rally were motivated by
their belief that the Fed would pivot to dovishness and start cutting rates in 2023. That was
wrong.
• Six months ago, there was a consensus that there would be one more rate increase in late 2023.
That was wrong.
I find it interesting that the current stock market rally began as a result of optimism powered by consensus
thinking that was generally off target. (See the second bullet point just above.)
At present, I believe the consensus is as follows:
• Inflation is moving in the right direction and will soon reach the Fed’s target of roughly 2%.
• As a consequence, additional rate increases won’t be necessary.
• As a further consequence, we’ll have a soft landing marked by a minor recession or none at all.
• Thus, the Fed will be able to take rates back down.
• This will be good for the economy and the stock market.
Before going further, I want to note that, to me, these five bullet points smack of “Goldilocks thinking”: the economy won’t be hot enough to raise inflation or cold enough to bring on an economic slowdown.
I’ve seen Goldilocks thinking in play a few times over the course of my career, and it rarely holds for long. Something usually fails to operate as hoped, and the economy moves away from perfection. One important effect of Goldilocks thinking is that it creates high expectations among investors and thus room for potential disappointment (and losses). FT Unhedged recently expressed a similar view:
Yesterday’s letter suggested that we think the market’s current expectation of solid growth and six rate cuts seemed likely to be wrong in one direction or the other: either strong growth will limit the Fed to close to the three rate cuts it currently forecasts, or growth will be weak and there will be as many cuts as the market expects. In this sense, the market does look to be pricing in too much good news. (December 20, 2023)
I don’t have an opinion as to whether the consensus described above is correct. However, even granting that it is, I’ll still stick with my guess that rates will be around 2-4%, not 0-2%, over the next few years.
Do you want more specificity? My guess – and that’s all it is – is that the fed funds rate will average between 3.0% and 3.5% over the next 5-10 years.
If you think I’m wrong, ask yourself whether you’d put your money on a different half-point range. (Before readers protest my uncharacteristic descent into forecasting, I’ll point out that, at Oaktree, we say it’s okay to have opinions on the macro; it’s just not okay to bet clients’ money on them. We invest with an awareness of current macro conditions, but our investment decisions are always based on bottom-up analysis of companies and securities, not macro forecasts.)
You can read the entire memo here;
Howard Marks Memo – Easy Money
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