Howard Marks (Trades, Portfolio) has managed what few people have been able to do: success in investing over a period of many decades and over a wide range of different market environments.
Marks was a buyer of stocks during the early weeks of the market crash back in March. Now that some time has passed, however, he is less sanguine about the prospects of a rapid recovery in asset prices. In a recent interview with Alpha Exchange, Marks gave his views on the Federal Reserveâs recent emergency actions to stabilize the economy.
Here to stay
Over the last 25 years or so, the Federal Reserve and other central banks have become a lot more involved in managing market cycles. Quantitative easing and negative interest rates used to exist only in fringe theories; now they are an accepted presence in economic life and donât look like they will be leaving us any time soon.
Whether they have made economic life better is up for debate. On one hand, central bank action gave us the great bull market of the 2010s. On the other hand, it has created a combustible mixture of cheap debt and excessive risk-taking that put the economy into a precarious position that made it susceptible to downturns. Marks says:
âEach episode of [Federal Reserve] activism has perhaps achieved its objective, but at the same time increased the dependence of the economy on more of the same. So now weâre in a position where the economy is unusually dependent on the actions of the government and the Fed.â
Marks says that, in theory, the government can "simulate" the proper functioning of the economy through fiscal stimulus by sending money to unemployed workers, giving cash to shuttered businesses and pretending like everything is continuing as normal. However, the problem with this is:
âGDP is goods and services. So what do we do without goods and services? And if we go into that condition of âsimulatingâ the operation of the economy - which is almost where we are today - whatâs required for it to resume its operation?â
Questions that investors need to be asking themselves
Emergency measures have a tendency to become permanent. Central bank bond buying programs were supposed to be a temporary stopgap measure to save the global financial system in 2009, but now they are a permanent fixture. The Federal Reserve recently announced that it would begin buying bond ETFs, which raised a host of other concerns.
For example, bond investors usually do extensive research on the creditworthiness of the companies they are investing in. Will the Fed create a credit research environment to determine which corporate bonds to buy? Or, if the goal is to stimulate the economy by simply injecting more cheap money, perhaps the Fed doesnât want to know which bonds are undervalued. Will companies become dependent on the Fedâs bond purchase program? Will that create the conditions for the next crisis? I think these are all fundamentally important questions that investors should be considering as we continue to move forward.
Disclosure: The author owns no stocks mentioned.
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