There was a brief period when in the days just after the covid crash, Oaktree's iconic founder Howard Marks - perhaps due to lack of more productive outlets - was publishing memos faster than people could read them. Then, he kinda faded away - perhaps because he was too busy cramming down his fellow investors in creditors fights involving covenant-lite loans - but re-emerged again last week when his latest memo "Coming into Focus" was published after a two months hiatus from writing.
We won't do a book report - to be fair, the note wasn't original at all and was largely a repeat of what Marks has said in the past, as his view is increasingly convergent with that of this website and other skeptics who warn that there won't be a happy ending (he himself admits so in the conclusion, saying "the odds aren’t on the investor’s side, and the market is vulnerable to negative surprises. This is how I described the prior years, and I’m back to saying it again") - but we do want to highlight the one section in which Marks talks about the ramification of the economic and markets rescue that was unleashed by the Fed and Treasury, and their implications: as Marks writes, "by dramatically lifting the markets, the Fed may have caused some people to believe that it will always do so – that there’s a "Powell put" that can be counted on to keep things humming."
Marks concludes, "if investors believe the Fed can always be counted on to keep the markets aloft, that will encourage dangerous behavior. And, anyway, it seems like an impossible task and, in my opinion, a questionable goal for the Fed."
He is, of course, correct in his assessment that traders now believe that even a small dip in stocks will bring out the Fed - which is why there have barely been any dips since March, and he is also correct that this is an "impossible task"... but it won't stop the Fed from trying.
In any case, the question of the Powell Put was also the topic of a recent interview between Marks and Bloomberg's Erik Shatzker, in which the Bloomberg anchor asked the Oaktree investor if "what is that is Jay Powell's master plan: no more cycles."
Marks' response is that "this can't be achieved" and that he doubts that Powell "believes that he can eliminate cycles." To this, Shatzker's response cuts to the chase for the distressed investor who has benefited greatly from the Fed's generosity, and points out that while United Airlines' debt should trade at 60 cents, Shatzker observes that "thanks to the Fed it's trading close to par", and asks if it is possible "that the Fed will never allow any investment grade debt to trade down to 60 cents ever again."
A meandering response from Marks followed, during which he recalled that Obama allowed GM and Chrysler to file for bankruptcy in 2009 - although one can counter that it did so by flipping the waterfall priority of bankruptcy claims on its head, as creditors were hit while labor unions came out relatively unscathed, the point being the very concept of bankruptcy is no longer applicable when an entire sector - such as airlines - is seen as too big to fail (something we know very well is already the case with banks courtesy of the 2008 financial crisis). Marks did concede that airlines (and cruise lines) could be smaller, and that since bankruptcy is one way of discharging owners contracts, this is one way of radically shrinking the sector. And yet, with the Fed refusing to even consider this possibility, it remains unclear just how the US economy can ever right-size itself, and we may have a paradox where completely worthless companies have their bonds trading at par even as the companies themselves go insolvent.
The interview then veered into the topic we discussed two weeks ago when we pointed out how the surge in covenant-lite deals over the past decade have now lead to a "leveraged loan panic" and where Oaktree has emerged as one of the biggest players of the "open warfare" in pre-bankruptcy restructurings of cov-lite loans (which usually involves cram downs of other distressed investors). Addressing this issue, Marks said that investment firms have a duty to their clients to stick up for their interests and maximize returns, so they can’t “go easy” on other creditors in distressed negotiations.
Echoing exactly what we said two weeks ago, Marks said that amid the scramble for yields, issuers removed virtually all covenant protections, and thus creditor defenses, which has made it "easier for aggressive people to pursue recoveries for themselves at the expense of other people." Aggressive people like Oaktree, which as we noted previously had primed other creditors in the case of Trimark and Boardriders.
There is more in the full interview...
... While Marks' full note is below (pdf link) and worth the read: