Money and Finance

Excerpts from Howard Marks at the 2013 Goldman Sachs Financial Services Conference

Via ValueWalk:

First, I would like to commend you for asking about tapering without asking when it is going to happen, because this is a question I get most often and the question I think has the least relevance. If you thought it was going to rain tomorrow, you would carry an umbrella and you wouldn’t sit around saying, well, it’s going to rain at 12 or 2. And I think that’s what people are doing with tapering.

I don’t think tapering is that big a deal, only in the sense that I am convinced that it is probably going to happen. I think it should happen. I think that we need a free market in money in order for the free market to do its job of allocating resources, which it does so relatively well. And of course, we don’t have a free market in money now. So I hope we will taper, and I don’t think it is going to mean that much because I think rates, in part, have already adjusted. Before Bernanke said what he said about tapering in May, I think the 10-year was at 1.5%; now, it is at 2.8%. It went up to 3% and backed off to 2.8%.

And so, I think the world has had a chance to adjust to the idea. It is already acting in large part as if the tapering had started. The psychological impact has been there, and we can all sit around and say to ourselves, well, what would rates be today if the tapering weren’t going on? What would be the natural rate of interest today?

And I don’t think that business is so strong or the demand for capital is that strong, and I don’t think that inflation is that high, that the natural rate of interest today would be much higher than it is today. So maybe the 10-year would be between 3% and 4%. I don’t think it would be over 4%. So what that suggests is that if they start tapering, rates will go up some, but not so much.

The impact on Oaktree is — will not be great. First of all, we are not what I would call a bond house or a traditional fixed-income firm. We are an opportunistic credit investor, alternative credit. Interest rates are not the main determinant of value in the things that we traffic in. So, number one. Number two, where we have bonds, and the main place is in high-yield bonds where — which is probably about 20% of our assets or a little more, they have a very moderate duration, between 4 and 5, I think. So the price doesn’t change that much with a moderate change in interest rates.

And then, we have a lot of equity exposure. In many of our portfolios where we buy debt, after restructuring we convert it into equity. In many places, we buy equity; we do private equity — buy control of firms. We have some listed equity portfolios.

So basically, the traditional bondholder hates prosperity, because in prosperity, interest rates go up and he loses money. Oaktree likes prosperity, because the credit worthiness of our holdings goes up, the value of our equity type holdings goes up. So we are not — it is not something that preoccupies us or something we are very concerned about.

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