Why Howard Marks Says ‘V-Shape’ Has Too Positive A Connotation

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One of the world’s biggest distressed-debt investors said a V-shaped recovery belief has too positive a connotation at a time governments across the world offered massive fiscal stimulus and central banks lowered interest rates to near-zero to revive economies that came to a standstill after the coronavirus outbreak.

Usually, a ‘normal’ upcycle occurs because things are going well in the economy, causing decision-making and psychology to become increasingly optimistic and eventually euphoric. Corporates expand and stock prices rise. Eventually, productive capacity exceed what is needed and stock prices exceed underlying value, Howard Marks, co-chairman at Oaktree Capital Management, which has a $19.2-billion portfolio linked to distressed debt worldwide, said in his latest memo. When these trends outstrip the fundamentals and became unsustainable, he said, the result is a downturn. Often, a recession triggers a market correction.

But this time, it’s different. This correction, according to Marks, was caused by an “exogenous, non-economic development”, the Covid-19 pandemic. The recession, rather than being the cause, was the result.

“This downcycle can’t be fully cured merely through application of economic stimulus. Rather, the root cause has to be repaired, and that means the disease has to be brought under control,” Marks said.

And even with the disease controlled, an economic stimulus is unlikely to reverse all the damage, he said. That’s because large firms will continue to automate and streamline. A large number of smaller businesses, such as restaurants, bars and ships, will never re-open, implying millions of people will not be rehired into the jobs they formerly held, Marks said. “For this reason, the expectations with regard to economic recovery have to be realistic.” So, the “V-shape”, according to him, has too positive a connotation.

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