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we never know where we're going but we sure as hell ought to know where we are we're no longer in an easy money environment if it's the change I think it is then what you should have in your portfolio going forward can be very different from what it has been this is Howard marks co-founder of oak tree Capital Management and one of the greatest investors today it's no wonder he's built a net worth of over $2 billion he's known for his investment memos and has recently been commenting on a phenomenon called the big change referring to everything that's happening in the USA right now in today's video we'll talk about this big change in the USA and Howard's view on these events for the coming years let's start by explaining what happened in the last decades everyone got used to almost zero interest rates and easy access to credit Marx talks about how he believes this low period lasted so long that people forgot what normal interest levels were the FED discovered something called quantitative easing or the buying of bonds and um it it really did a great job of saving the economy on both occasions but it loaded up its balance sheet with debt but logically these times would end one day the pandemic arrived and with it came economic crises in various sectors there was a high level of money Printing and the low inflation caused the FED to need to raise interest rates and that's exactly what Howard talks about these rates are quite normal now and over the last 20 years we've been conditioned to believe that low interest rates were normal but some something important in Howard's memo is that most of these problems we're facing are precisely because in the past we got used to thinking that interest rates of 2 to 3% were normal but when we expand the FED funds rate over a long period of time we can realize that 2% was never an average but an extremely low interest rate and uh you know between zero and two is uh an emergency measure and you know rates were the FED funds rate was Zero much of the probably the majority of the time in the 09 to 21 period and that's inappropriate it's it it it it stimulates you you can't live on a shot of adrenaline every morning for 13 years and it it does uh uh subsidize borrowers and penalize lenders and Savers in Howard's view a rate of 2 to 4% is what would be viable for the FED to establish but now interest rates are higher than that reaching up to 5.55% and one of the main reasons for this is because the Federal Reserve is very concerned that inflation is not under control in summary we had this long period where interest rates were very low this ended up becoming a pattern we got used to and now rates are returning to a more normal level now we're taking a hit for being overleveraged the mortgage business is taking on too much debt anyway we're paying the price now for staying so long with a low interest rate for so long so that's our problem but one thing Howard is more concerned about is how this is affecting the government we can't forget that while we have mortgages and companies have loans another major player is the government itself and they don't get any special treatment when borrowing money they also need to pay with interest and they also feel the squeeze when interest rates rise because they need to roll over debts at much higher interest rates in fact the US government may be in a bigger problem than ours Howard said we saw people getting very comfortable carrying debt when we were at a low interest rate over the last 20 years now take a look at what the US government has been doing in that time in the last 20 years the US government has been running a consistent deficit year after year and this means they've had to borrow more and more each year just to plug the hole now look at what happened to debt levels since that last Surplus year the debt pile naturally grew very fast especially in recent years in response to the pandemic and that's made everyone look at the USA's debt problem several reasons for that but this period's been quite odd because we then had the pandemic which led to the strengthening of balance sheets for both corporates and hous holds off the back of a monster fiscal transfer and a question I think that liser and I hear a lot Howard is where is The Leverage now where is The Leverage now well we know that the Leverage is in the government that the the government has taken on a lot of Leverage as as part of its uh rescue mechanism uh we had two serious problems the global financial crisis to kick off that low rate period you're talking about and then the pandemic to to bookend it and in both cases uh the FED discovered something called quantitative easing or the buying of bonds and um it it really did a great job of saving the economy on both occasions but it loaded up its balance sheet with debt quantitative easing is the process of the government selling many bonds to the central bank known as the fed or borrowing even more although this has helped economically in the past it creates a big debt problem for the government especially because the government still needs to pay that debt to the fed when it matures in addition there's another point that is worrying and that is not under the government's control inflation the government accumulated a large pile of debt during the low rate period of the last two decades when the pandemic happened and the Federal Reserve intervened to support the government it simply spent spent spent this means that the government got much more indebted and now this debt pile is a threat for two reasons one because the government can't pay because they have a deficit and two because when debt matures periodically they need to roll over meaning turn an old loan into a new one which is much more painful at high interest rates because it means the government needs to spend more money just to maintain that debt which takes even more money out of their pockets that they were using for other things and consequently it increases inflation this is the problem the US government finds itself in now how do you frame that how do you think about that well first of all I don't invest in sovereigns uh and the trouble is that in sovereigns other things matter uh you know uh they they don't when we look at companies we ask will do they make money will they make money will they be able to pay their debt yeah B governments don't make money they're not expected to make money and they pay their debt by running the printing press so that's a very different function if they've absorbed basically The Leverage that existed elsewhere yeah and they are less exposed to the challenges of companies that you would invest in are you thinking of a much longer cycle as a consequence um well I don't think I don't think governments can keep us a loft forever you know Howard's and people's main concern at the moment is this governments helped us a lot during the pandemic but it came at a high cost with very high inflation which we now have to deal with through higher interest rates to give a good impression in difficult times the government had to spend money they didn't have for that they turned to the Federal Reserve to sell some but now the FED no longer wants to buy government bonds because it is an inflationary action and now the FED is focused on stopping inflation so they raise interest rates and do not reinvest in treasury bonds when the old ones mature therefore Howard is correct in saying that the Federal Reserve and the government cannot in quotes play with these rates and that something really needs to change the same opinion that Rayo has that the problem really starts at the source so it's not a great situation in some views but keeping that in mind the last excerpt I wanted to reproduce for you is some advice from Mr Howard Marx so that we as investors can observe with all the problems of relatively High interest rates that probably won't fall much in the near future can investors look for good Returns the the only thing I'm sure of is that if if interest rates are higher the people who invest in credit instruments which is what we do uh are buying in at higher yields and invariably will have higher returns than they have in the recent past so so today's rates are not high historically but they're certainly higher than we had from 09 through 21 which means the Returns on credit as we've seen all this turbulence excites Howard as he says he invests in credit tools so as interest rates rise and become higher investing in loans becomes more profitable interest rates are higher which means you receive more interest on borrowed money and this makes it harder for stocks to thrive and consequently for companies due to lack of funding I advise you to watch the video I made last week about Warren Buffett's vision for 2024 where he gives similar advice what do you think think of all this economic repercussion that's happening if you enjoyed the video don't 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