Howard Marks, co-chairman of Oaktree Capital, has warned that president Donald Trump’s tax cut could be overheating the US economy and that there was ‘too much money chasing too few deals’ in credit markets.
Both bond and equity markets have been hit by volatility in October and November due to worries over economic growth, rising interest rates and trade tensions between the US and China, among other factors.
Speaking at the Value Invest New York conference on Tuesday, Marks said these fears were all ultimately about a possible slowdown in economic growth and that this was unlikely to bite hard until the next recession, which he did not think was imminent.
He said strong economic growth numbers earlier in 2018 could have been boosted by the tax cut, an effect that was now wearing off.
'While we’ve had a couple of great quarters recently, there is the possibility that the economy was turbo charged by the tax cuts and [that] caused it to be overheating,’ he said, comparing the tax cut to a shot of adrenaline being given to an already healthy economy.
President Donald Trump’s tax reform plan, the $1.5 trillion Tax Cuts and Jobs Act of 2017, was passed by Congress and signed into law on December 22 last year. The tax reform plan, which dropped the corporate income tax rate from 35% to 21%, not only allows companies to pay about one third less in taxes than before but also gives incentives for companies to repatriate earnings from overseas back to the US. It took effect from January 1, 2018.
‘It risks causing the economy to overheat, which will result in the cooling off,’ Marks (pictured below) said.
‘If we were to have a few more 4% quarters, I think you would see the Fed raise rates even more than they would have, that would exacerbate the fact that in the credit markets, too much money has been extended in too many deals on weak credit schemes.’
Last Wednesday, Federal Reserve chairman Jerome Powell mentioned that the Fed funds short-term interest rate was ‘just below’ the neutral rate during a speech at the Economic Club of New York. The prepared remark led some market participants to believe that the central bank could slow its pace of rate hikes. However, Marks believes that the Fed will continue to hike rates going forward.
'I think interest rates will go up from here because they have been artificially low,’ he said.
Marks, who recently authored the book Mastering the Market Cycles: Getting the Odds On Your Side, also cautioned on the dangers of trying to make macroeconomic forecasts.
‘Everything that’s predicated on the future is unknowable,’ said Marks. ‘It’s a waste of time to fixate on the macroeconomics.’
He said investors could gauge the stage of the current market cycle by assessing whether they are in an upswing or downswing and by analyzing quantitative as well as anecdotal and behavioral indicators, but that the future was ‘a distribution of probabilities.’
Cold on gold
While many value investors at the conference had spoken bullishly on commodities such as gold, copper and aluminum and related stocks, such as precious metal mining companies and can makers, Marks said he categorizes gold to the group of assets that do not produce cash flow.
‘If you want to invest in gold kind of as a superstition or a religious belief…[you can]’ he said. ‘You can’t do it on the assumption that you are making a value investment because every value investment has to start with an assertion of intrinsic value. And I don't think you can put an intrinsic value on diamonds, oil, paintings, bitcoin or gold.’