저자: Investing Wizdom · 외국인
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The yields on credit are still very healthy and in fact credit yields a little more now than it did uh 6 weeks ago when I wrote that memo. Then high yield bonds for example were yielding around 7.2. Today they're close to eight which means they went down in price producing a a higher prospective return.
Of course the stock market is well down since then. I don't know 15 16 17%. And I haven't done the math yet and it keeps moving. But um you know obviously the the state of the world which equity prices depend on is completely in flux and uh 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 or not enough. and and and uh almost nobody can say. How do you start to even measure something like a potential paradigm shift like the tariffs that were announced earlier this week? Well, first of all, of course, measure is the wrong word because you that suggests some quantification which is impossible.
There's nothing to measure. But how do you gauge? How do you think about the changes? And you know this is this is the biggest change in the environment that I've seen probably in my career. Uh you know we went we've gone from uh free trade and or world trade and globalization uh to this uh system which uh implies uh significant restrictions on trade in every direction.
uh and a step toward isolation uh 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. uh and one of the major reasons was the the growth of trade and I think that we have truly had a rising tide that lifted all boats and and trade was a big part of that and everybody in the audience should understand the role of of trade.
Every country, for example, does some things better and worse. And worldwide welfare is maximized when every country does the things it does best and cheapest and then sells them to the countries that need them, which do other things and sell them to other people. That's how trade works. And uh well, I don't know if it's politically correct, but the good news is that the Italians make the pasta and the Swiss make the watches.
But if we stop world trade and and the Swiss have to make their own pasta and the Italians have to make their own watches, the world will probably be well maybe arguably people in both countries will be a little worse off. That's what we're talking about here. and and and uh we should not underestimate the benefits that we've gotten from globalization.
And among other things, there was a 25-year period which I cited in one of my memos 10 years ago in which the the the cost of durables in the US went down by 40% in in in in uh risk in in inflationadjusted 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.
And you know, the the tariffs are designed to encourage production at home. But who could imagine that uh 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. If that's the case, does that mean that you see the inflationary regime as being something that is more persistent, a reversal of what we saw the disinflation of the globalization?
Well, I think so. There were financial benefits from globalization, including keeping a lid on inflation. And you know, if if we hadn't bought our uh TV sets and appliances from abroad in that 25- year period at declining prices, what would inflation have been? And the answer is considerably more. Maybe not two, but maybe three, four, five.
And so, you know, tariffs are an increased cost. Somebody has to pay them. And uh you know most people think the consumer will pay them. There's some possibility that the importer or the exporter will pay them or the government of the exporting country. Uh but uh it's an increased cost. Uh the proceeds from which will go to the government and you know will society be better off as a result?
when you're measuring how to decide the risk and reward of given asset classes in this type of environment that could go in a multitude of different ways. How do you understand where there's value? What a return is that would justify a risk at a time when you know potentially you could get 7 8% 9% with credit with stocks they have delivered more than 10% for the past number of decades.
But going forward, I want to respond first to your last sentence. Stocks have uh delivered an average of 10% a year for the last 100 years, but not when the PE ratio was 19 and the PE ratio today is probably 19. The average return has been 16. So we can say that when the PE r average when the PE ratio averages 16, the return average is 10.
But when the PE ratio is 19, my guess is if you look at history, if you bought the P the S&P when the PE ratio is 19, historically, you probably made let's say 1 to 6% a year or 2 to 7% a year, something like, but certainly not 10. And and so uh you know, what you pay matters and the price of the S&P is elevated relative to historic levels.
So you shouldn't expect historic returns. Whereas in credit, one of your arguments is you can expect to get that return because the default risk is an as great as some of the excess spreads and what you're getting in allin yield. Well, you know, with with credit is a a new fangled word for fixed income or which was a new fangled word for bonds.
In 1978, uh I was moved at City Bank from the equities department to the bond department. Nobody talked about fixed income or credit. But um with debt or bonds or fixed income or credit, what you see is what you get. You you can read on the piece of paper what the promised return is. And then the only thing you have to wonder about is will I get it?
That is to say, will the issuer default or will they keep their promises? And by the way, they promised you interest. They promised you to pay your money back at the end. that if they don't keep the promise, they lose the company. So, they have a lot of incentives to pay. I've been in in non-investment grade credit for 47 years, and in our experience, roughly 99% of our issuers have paid as promised.
You've thrived during your five decade career, almost five decade career, uh during times of dislocation. Is this a time of dislocation to play or not to? Well, it's it's a time of dislocation. Everybody has to judge for themselves whether the 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. Um, and it's impossible to make that judgment qualitatively. You used the word measure before. I pushed back a little bit. There's there's no place you can look. There's no analysis you can do to determine whether today's asset prices are right for the environment ahead.
Now, there never is. It's always conjecture. It's always guesswork. That's in theory why the greatest investors are great because they make those judgments better than most people. It's excessively hard today because today we have no idea what the future's going to be. 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 the world economy and the world order beyond 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. Um, nobody knows. I I dare say if you tell me that you what the what the what our rules will be six months ago, six months from now, I'll bet you you're wrong. This is in flux. And if you think it's in flux, then by definition, you don't know what the future holds.
And then even if you know what our country is going to do, and it's going to be that way six months from now, we don't know what other countries are going to do, what the ramifications will be. Um and so you know um I always invey against forecasting. I don't believe in macro forecasting my own or other people's and we know much less today than usual.
Now people who who like to run their lives according to forecasts they say well this is going to happen in the future so I'm going to do this and this is going to happen in the future so I'm going to do that. What what you really need if you like to work with forecast is you need two things. Not just a forecast, you need the forecast, but you need a an estimate of the probability that your forecast is correct.
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's going to look like is lower than ever. And that's that's how I feel. Is this a time to be fearful or greedy? Um, you know what you have to say?
Bloomberg's offices. Uh, you have to think in terms of your neighbor. Um, uh, the department store, Bloomingdales. Bloomingdales. Bloomingdales just put everything on sale. Prices have come down on for the S&P uh 8% in the last two days and uh much more in the last six weeks. It's on sale. That should encourage people to think about buying.
Will they go down further? Nobody knows. Will are the prices fair? Nobody knows. But everybody runs from the market when prices go down because they think it conotes risk. It's just stuff going on sale. And of course it takes uh well I was going to say a pro but it takes a precient pro of which there aren't many to know whether as I keep saying the the the discounts are adequate or appropriate.
But certainly you have to look and and and it doesn't make any sense to say just a minute I I did XYZ when the price was 100 today the price is 90 so I'm going to boycott it. That doesn't make any sense on its face. You have to take a hard look. Do you still think that the US is the best place to invest?
It's I I think it's probably still the best place, but it's less best than it used to be because I think that um you know uh if you think about the things that made it the best place uh one of them was the rule of law that may be less the fact today. One of them was the predictability of outcomes that may be less today.
One of them was the uh well the worst thing about investing in the United States for many years has been our fiscal situation, our deficits and debts and the US has behaved like somebody who has a golden credit card where there's no credit limit and the bill never comes. So of course you can spend more than you make and that's and if somebody has a golden credit card uh well what would you do?
where you might buy a nice car, but what the hell? You might as well buy all the cars because the bill's not going to come. And that's the way we've behaved. Uh and and that's the way Washington has spent money. But can the events of the recent days change that? Can they cause there to be a credit limit?
Can they cause a bill to be presented at some point in time? And if the answer to either or both of those questions is yes, that's a real risk. If people don't like the dollar, don't like investing in the United States, u don't want to hold an unlimited number of treasuries, if we just make people mad and say, "The US is still a great credit, but I don't want to hold their debts because look how they're treating me." The fiscal situation will be very complicated.
Howard Marks. We have to leave it there. That was Oak Tree Capital co-chairman Howard Marks. Thank you so much.
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