Howard Marks' letters to Oaktree Capital investors have become as highly renown and anticipated by the investment community as those of Warren Buffett, particularly to denizens of the debt market. Oaktree runs about $50-billion in assets including high yield debt, convertible bonds, distressed debt, private equity, real estate, and about 1.2-billion in equities.
Marks' March letter is now available; in it Marks discusses the Fed and the government's plans to get the economy and the credit market functioning normally again, and what the likelihoods are in his highly-esteemed view.
Here are some excerpts:
The other day, my son Andrew - college senior and credit-analyst-to-be - asked whether I think Treasury Secretary Geithner is doing the right things. As has happened before, his question elicited a fatherly response that grew into this memo.
Solutions in economics aren't nearly as dependable as engineers' calculations, and there may not be a tool that's just right for fixing an economy. Of course, the toolbox offers lots of possibilities, including interest rate reductions; quantitative easing; tax cuts, rebates and credits; stimulus checks; infrastructure spending; capital injections; loans, rescues and takeovers; regulatory forebearances and on and on. But no one should think there's a "golden tool," such that solving the problem is just a matter of figuring out which one it is and applying it. Anyone who holds the problem solvers to that standard is being unfair and unrealistic. There are a number of reasons why, including these:
· Every situation is different, and none is exactly like any that has come before. That means fixed recipes can't work. Certainly this one has never been seen before.
· Most policy actions aren't all good or all bad. They merely represent imperfect compromises as to ideology, goals, problem solving and resource allocation.
· Economic problems are multi-faceted, meaning the solution for one aspect might not work on - and in fact might exacerbate - another aspect.
· Economies are dynamic, and the problems are moving targets. The environment changes constantly, rather than sitting still and waiting for a solution to work.
· The main ingredient in economics is psychology, and the workings of psychology clearly can't be fully known, controlled or fixed.
. . .The Bottom Line
There are so many moving parts to the current situation - and to its causes and what we hope will be its solution - that I've tried to boil things down to the essentials. In order to right the system and get the economy moving forward again, I think three main things have to be accomplished:
· Our economy and its component parts have to be delevered;
· The vast destruction of capital has to be dealt with; and
· Confidence has to be restored.
. . .Debt has to be reduced, and it's happening (other than at the federal level, of course). But the way it happens is usually unpleasant: bankruptcies, foreclosures and debt restructurings. "Debt reduction" sounds like a good thing, but it's likely to be accompanied by the painful loss of the assets that had been bought with borrowed money.
Many assets are worth far less than they used to be - that's one of the main reasons why the debt load has become unbearable and has to be reduced. Investors, consumers, homeowners and financial institutions will have to rebuild their capital as they - and the economy - attempt to again move ahead.
And confidence has to be rebuilt, too. The willingness to borrow, spend and invest will rebound only when people believe incomes and asset values will resume their growth.
To read the complete letter, click here.
Source: Howard Marks, Oaktree Capital
About Oaktree:
Oaktree was founded in April 1995 by Howard Marks, Bruce Karsh, Steve Kaplan, Larry Keele, Richard Masson and Sheldon Stone. These Oaktree principals joined together beginning in the mid-1980s to manage high yield bonds, convertible securities, distressed debt and principal investments.
Today, Oaktree is comprised of nine principals and over 530 staff members in Los Angeles (headquarters), New York, Stamford (Connecticut), Amsterdam*, Frankfurt, London, Luxembourg*, Paris, Beijing, Hong Kong, Seoul, Shanghai, Singapore and Tokyo.
About Howard Marks
From the rise of junk bonds to the dot-com collapse to today's economic crisis, Howard Marks has ridden the ups and downs of the financial markets.
From the day he began his professional career in 1969, Marks has been deeply immersed in sophisticated financial instruments. As the high-yield bond manager for Citibank starting in the late 1970s, he was one of Michael Milken's first customers. In 1985, he became chief investment officer of investment titan TCW Group Inc., based in downtown Los Angeles. And with several decades of experience under his belt, Marks set out on his own in 1995 and founded Oaktree Capital Management LLC with a handful of TCW executives.
The firm, which now boasts a $55 billion investment portfolio, has become one of the elite investment firms in the Western United States. In building Oaktree into an investment powerhouse, Marks has amassed his own fortune. On the Business Journal's annual list of the wealthiest Angelenos, Marks ranked No. 29 with an estimated net worth of $1.5 billion, though he acknowledges he's taken a major hit as a result of the financial crisis.
These days, the 62-year-old Marks is more interested in dispensing his wisdom on the markets than in actively managing portfolios. He oversees the direction of the firm, but spends a good deal of his time penning closely watched memos on the state of the financial industry. Marks recently met with the Business Journal in the firm's downtown offices to discuss his life, career and the chaos in the markets.
Read more: "Interview with Oaktree Co-Founder Howard Marks - Stephen's Posterous" - http://stephenlaughlin.posterous.com/interview-with-oaktree-co-foun#ixzz0AvAbB9aP
