In one of his famous “memos” released on Wednesday, Howard Marks (Trades, Portfolio), co-chairman of multibillion-dollar asset management firm Oaktree Capital, discussed the market’s continued path to recovery in the wake of the Covid-19 pandemic.
The paper, titled “Time for Thinking,” began with an overview of his writing over the past several months, in which he initially released one memo per week for six weeks and “a total of ten over 18 weeks.” Since his last memo in June, the guru’s pace has slowed as “most of us are struck by the sameness of our days” and he has been able to ruminate on the present circumstances.
Marks then went on to discuss the ongoing health crisis and how it has affected the economy as well as our daily lives. He wrote:
“In the absence of a vaccine, the only way to deal with the outbreak was to prevent those who had contracted the disease from spreading it to others. In order to do so, the authorities decided it was necessary to put the patient into a coma. Thus the economy was shut down to minimize interpersonal contact. Stores, restaurants, schools, places of worship, and entertainment and sports venues were ordered closed, travel was restricted, and people were told to work from home whenever possible. As we all know, the U.S. economy was largely frozen, causing 54 million Americans to file for unemployment benefits since March 21 and second-quarter GDP to shrink by an annualized 32.9%, three times the greatest quarterly decline in the 70 years of recorded quarterly history. (Please see the end of this memo for postscript in which I discuss the significance of that reported 32.9% decline.)
The comatose patient – the economy – required life-support, and the Fed and Treasury supplied it. They rushed in with trillions of dollars to keep the patient alive: payments to individuals and households; grants to distressed industries; general business loans and tax relief; loans to small businesses; aid to states, hospitals and veterans’ care; and guarantees for money market funds and commercial paper. These are sometimes described as stimulus programs, but that’s a misnomer: they were support payments designed to replace cash that normally would have circulated throughout the economy.”
Marks then goes on to lament about how a lack of action led to the virus spreading in regions that had previously been unaffected, what the long-term repercussions are and then pondered upon what shape the market is in currently.
He also presented a bullish case for the U.S. economy’s recovery, providing an overview of main arguments made and the merits behind them. He concluded, “I don’t know whether these bullish arguments are absolutely correct or merely have gained luster thanks to their having driven the 46% gain of the S&P 500 over the last four months. Regardless, I want to share the bull case as a public service and because it has obvious merit . . . and certainly has won out thus far.”
The value investor ends his missive with a quote from Charlie Munger (Trades, Portfolio) in regard to unraveling the mysteries of the market: “It’s not supposed to be easy. Anyone who finds it easy is stupid.”
Read Marks’ full memo here.
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