The renowned investor Howard Marks, co-founder of Oaktree Capital, has expressed concerns about the return to a low-interest rate environment. Marks believes that this environment could lead to detrimental investment behavior, similar to what was seen between the Great Financial Crisis and the outbreak of the pandemic.
In a memo, Marks explained that the natural rate, which reflects the balance of supply and demand for money without central bank interference, should guide capital allocation decisions. However, he pointed out that the financial market has not operated freely since the 90s due to the Federal Reserve’s “activist” approach, which involves pumping liquidity to prevent potential problems.
With inflation dropping, investors are expecting the Federal Reserve to slash interest rates again. While this could impact both the equity and bond markets, Marks warned against expecting near-zero rates. He highlighted the problems that arose from the easy-money era before the pandemic.
Marks quoted the late investor Charlie Munger, saying, “Maybe we have a new version of Lord Acton’s law: easy money corrupts, and really easy money corrupts absolutely.” He explained that while lower borrowing costs can spur economic growth, they can also accelerate growth too quickly, leading to inflation. This, in turn, could prompt the Fed to implement a stricter policy, discouraging economic activity and creating financial mismatches.
Low rates also have the potential to inflate asset prices and encourage riskier investments, possibly leading to asset bubbles. Additionally, people who do not invest in stocks earn less on their savings, exacerbating wealth inequality.
Marks’ warning comes at a time when the Federal Reserve’s monetary policy is a hot topic of discussion. Last year, Peter Schiff criticized Fed Chair Jerome Powell’s inflation outlook, emphasizing the role of excessive government spending in driving inflation above the Fed’s 2% target.
Wall Street banks had to recalibrate their 2024 interest rate forecasts following a dovish pivot from the Fed, indicating potential rate cuts. The Fed’s December meeting minutes also suggested that interest rates are likely at or near the peak of the cycle.
It is important to consider Marks’ concerns about a return to a low-interest rate environment. This discussion around the Federal Reserve’s monetary policy will continue to shape the investment landscape. Investors should remain cautious and evaluate the potential risks and rewards of investing in such an environment.
