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Oak Tree Capital

Oak Tree Capital - Memo to From Re Oaktree Clients Howard...

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© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Tell Me I’m Wrong My readers treat me well. They indulge my penchant for dissecting the past, and they send kind messages of encouragement. To repay their generosity, I’m going to venture into somet hing I usually avoid: the future of the U.S. economy. This memo won’t be about the future in general, just the elements I find worrisome. As I see it, every investor is either predominantly a worrier or predominantly a dreamer. I’ve come clean many time s: I’m a worrier. By saying that, I absolve myself of having to describe the whole future. I’m going to cover the negatives , starting with the immediate and ending with the systemic (some of the latter repeats themes from What Worries Me, August 28, 2008). For the other side of the story, I’d suggest you consult the optimists who seem to be in charge of the markets these days. The Near Term One thing is indisputable: the rally in financial markets worldwide has outpaced the fundamentals . At the beginning of 2009, most onlookers expected a generally weak economy and were concerned that the behavior of consumers and banks would remain conservative. They were 100% right, and fundamentals are still tenuous. And yet, the rally has exceeded all expecta tions of which I’m aware. Market participants have grasped at slender green shoots : things that are declining but at a slower rate, or that have stopped getting worse, or that have begun to improve, albeit anemically (e.g., “At some of the nation’s larg est lenders, the number of consumer loans that are going bad is starting to level off.” The New York Times , January 21). Most of the good news falls into those categories; little or nothing has blown anyone’s so cks off. We haven’t seen much economic new s that’s overwhelmingly positive, d espite the fact that (a) today’s comparisons are against very weak periods a year ago, (b) our exports have been made cheaper by a dollar that’s 10-20% lower, and (c) there’s been an enormous amount of government stimulus. The gains being reported are often in tenths of a percent, and the other day my drive-time radio commentator said, Hirings are almost equal to firings. That doesn’t tell me we’re in the midst of a strong recovery, or on track for one. In particular, most companies’ sales remain quite weak. The economy is generating very little growth at the so-called top line on which Gross Domestic Product is based. Rather, the profit gains being reported have been aided in large part by cost cutting. But cost cutting and productivity gains are nice-sounding ways of saying companies are getting by with less labor. Thus t he employer’s productivity gain can be the employee’s job loss. It doesn’t bode well for
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© Oaktree Capital Management, L.P.
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