It is reasonable for investors to approve the possibility of higher inflation, but not to significantly invert asset allocations in response to macro expectations that may or may not prove accurate, distressed debt specialist and Oaktree Capital co-founder Howard Marks has written in a memo titled “Thinking About Macro” to his clients.
According to Marks, one of the key investment philosophies of his asset management firm is to not base their investment decisions on macro forecasts.
“Since the Tech Bubble burst in 2000, however, the market has appeared to think mostly about the economy, the (US) Federal Reserve and Treasury, and world events. That’s been even more true since the Global Financial Crisis in 2008,” Marks wrote in the memo.
In the recent past, to support the economy and its participants during last year’s covid-19-related shutdown, the Fed, US Treasury and Congress took drastic action to prevent a global slowdown that could have rivalled the Great Depression.
These steps are widely expected to result in accelerating inflation.
“The debate rages on regarding whether today’s inflation will prove permanent or transitory. There’s a great deal riding on the answer since higher inflation would doubtless lead to higher interest rates and thus lower asset values. But in my view, it’s impossible to know the answer. (There you have it: important, but not knowable.) There are intelligent people on both sides of the argument, but I’m convinced there’s no such thing as ‘knowing’ what the outcome will be,” Marks argued.
The American investor is also of the opinion that even the Fed doesn’t have the exact idea on how inflation will pan out.
Moreover, according to Marks, not only do the markets not know what is coming, but also often behave in ways that make little or no long-term sense.
“While markets are usually good “observers”, hyper-attuned to current developments, they sometimes seem to view events through either a positive or a negative lens (and to oscillate between the two), as shown above. Further, they’re rarely good ‘predictors’, in the sense of knowing what comes next,” he wrote.
Marks, however, said that it would be reasonable for investors to make some adjustments at the margin in response to the risk of inflation.
According to Marks, one of the most important requirements for success in investing is self-assessment.
“What are your strengths and weaknesses? If you invest on the basis of your macro views, how often have they helped? Is it something you should keep doing or discontinue?” he wrote.
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