Howard Marks Rebukes Fed for Inflating Prices
Oaktree Capital Group Co-Founder Howard Marks says the Federal Reserve was wrong to cut rates last month. Why? Because more monetary stimulus will just boost asset prices further, making the rich richer without benefiting savers.
A U.S. economy in its 10th year of expansion, with record-low unemployment and healthy businesses, doesn’t need the Fed’s help, Marks said in an interview on Bloomberg TV. The central bank’s quarter-point rate cut last week — and any future reductions — will make it harder for people with fewer savings — not to mention lenders — to earn decent returns, he said.
“The process of lowering the rates causes assets to inflate,” Marks said. “There will be more wealth piled up by the people who have assets and it’ll be harder for people who just have a little bit of savings to make a return.”
The Fed lowered interest rates for the first time since the financial crisis on July 31 in a move aimed at supporting the economy in a time of low inflation, weakening global growth and trade tensions. The cut wasn’t the start of a lengthy easing cycle, but to insure against downside risks, Chairman Jerome Powell said. Officials also stopped shrinking the Fed’s balance sheet effective Aug. 1, ending a process that very modestly tightened monetary policy.
“We generally don’t stimulate the economy after ten good years,” Marks said. “We usually accept that there will be an ebb and flow to the cycle and there might be justified recession.”
Marks’ rebuke comes amid mounting signs the world is edging nearer to a recession. The likelihood of a U.S. recession in the next 12 months rose to 35% in an August survey of economists, from 31% forecast previously, as trade tensions fueled economic uncertainty. The yield curve indicates investors expected protracted weakness.
Still, the economy remains strong enough that opportunities for distressed investing are slim, according to Marks. Capital markets are supportive of companies that need rescue financing or to push out their debt maturities, he said. Oaktree raised its distressed fund in 2015 on a stand-by basis, which is now about a third invested.
“The fact that we’re roughly 30% invested after this time shows you that the going is slow in distressed,” Marks said. “This is not the kind of climate in which good healthy companies with good businesses get into distress.”
Non-bank lenders like Apollo Global Management are increasingly making inroads into a corner of finance long dominated by Wall Street banks. Apollo made its most significant move yet when it provided nearly $1.8 billion of debt to support New Media Investment Group Inc.’s acquisition of Gannett Co.
Marks said Oaktree doesn’t have the appetite to concentrate so much money on one deal. Based on the loan’s interest rate, of 11.5%, he said it’s fair to assume there’s “a lot of risk” in the debt, and that Apollo bid competitively.