By David Enna, Tipswatch.com
What a week. I made a point to watch President Trump’s tariff announcement on Wednesday live and yes, it was a shock. Beyond the politics, I felt the United States was pushing the world into a new, and probably dangerous economic era.
Obviously, I was not alone. Just before Trump spoke, the S&P 500 index closed Wednesday at 5669. Friday, it closed at 5075, a drop of 10.5% in two days.
Friday morning, I was taking my morning walk when I happened to hear Bloomberg’s best contrarian anchor, Lisa Abramowicz, interviewing Oaktree Capital’s Howard Marks about the state of credit and world markets in the aftermath of the tariff decisions.
This was a fascinating and insightful interview, especially since Abramowicz simply let him talk. Marks, 78, is a noted author, credit expert and financial theorist who publishes “memos” detailing his market insights. “When I see memos from Howard Marks in my mail,” Warren Buffet once said, “they’re the first thing I open and read. I always learn something.”
His company focuses on high-yield debt, an area I know little about or care to follow. But Marks has some great insights into U.S. markets. Here is the interview:
And here are some highlights from the interview:
Marks: You know, obviously the state of the world, which equity prices depend on, is completely in flux and has been radically changed. Most investors think for the worse. That’s why prices are down. The question, of course, is whether they’re down too much, just right or not enough. And almost nobody can say.
Abramowicz: How do you start to even measure something like a potential paradigm shift, like the tariffs that were announced earlier this week?
Marks: Well, first of all, of course, measure is the wrong word because that suggests some quantification, which is impossible. There’s nothing to measure. …
This is the biggest change in the environment that I’ve seen probably in my career. You know, we we’ve gone from free trade and world trade and globalization to this system, which implies significant restrictions on trade in every direction and a step toward isolation for the United States.
I believe that the last 80 years since World War II have been the best economic period in the history of mankind. And one of the major reasons was the growth of trade. …
There was a 25-year period which I cited in one of my memos ten years ago in which the cost of durables in the U.S. went down by 40% in inflation-adjusted terms. That kept a lid on inflation here. It made goods available cheaply to all Americans. If we don’t have world trade, we don’t have that benefit. …
The tariffs are designed to encourage production at home. But who could imagine that that most things produced in the United States will be as cheap as they are coming from abroad. In other words, things will cost more. … There were financial benefits from globalization, including keeping a lid on inflation.
And so, you know, tariffs are an increased cost. Somebody has to pay them. And, you know, most people think the consumer will pay them.
Abramowicz: You’ve thrived during your almost five-decade career during times of dislocation. Is this a time of dislocation to play or not to?
Marks: Well, it’s a time of dislocation. Everybody has to judge for themselves whether the reduction in asset prices so far is right, inadequate or excessive. If it’s excessive, you should jump in with both feet. If it’s inadequate, you should wait until things adjust further. And it’s impossible to make that judgment qualitatively. …
Normally, we think we know what’s going to happen in the future. We normally assume the future will look mostly like the past. We extrapolate. And usually it works because the world doesn’t change that much. But the world economy and the world order beyond the economy, meaning geopolitics and international relationships, has been shook up like a snow globe by the events of the last days. And nobody knows what it’s going to look like. Nobody knows.
And today, whatever your forecast may be, you have to say the probability that I’m right is lower than ever. Because the probability that we know what the future is going to look like is lower than ever.
Abramowicz: Do you still think that the US is the best place to invest?
Marks: It’s I think it’s probably still the best place, but it’s less best than it used to be.
Thoughts
I try very hard to keep Tipswatch.com focused on policy and economics, not politics. And I define myself politically as “an observer,” but of course I have opinions. This was a dangerous week for the U.S. economy and the nation’s role in the world, especially if you care about the U.S. dollar’s status as the world’s reserve currency.
I think the case can be made for some logical retaliatory tariffs in cases where the United States — the richest nation on Earth — is being abused. But because we are so rich, and so consumer-oriented, we will always run trade deficits with many nations where products can be produced at lower cost.
I am sure some readers will agree, some disagree. Please keep comments focused on the issues, not name-calling or taunting. Thank you for reading.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
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