No Labels National Co-Chairs Chris Stadler and Howard Marks Discuss Weathering the COVID-19 Economy

Monday, August 10, 2020 - Howard Marks is the director of Oaktree Capital Management and Chris Stadler is a managing partner at CVC Capital Partners. They look at the economy under COVID-19 and how it might react in the near and long-term.

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Howard Marks and Chris Stadler are the National Co-Chairs of No Labels.
Howard Marks and Chris Stadler are the National Co-Chairs of No Labels.

Howard Marks and Chris Stadler are the National Co-Chairs of No Labels. Howard is the Director and Co-Chairman of Oaktree Capital Management, a global investment management firm with headquarters in Los Angeles. Chris Stadler is a Managing Partner at CVC Capital Partners, based in New York. Today, they will discuss the recent changes, trends, and developments in financial markets.

Howard Marks and Chris Stadler focus a lot on the disconnect between the stock market and the economy. As they note, the Federal Reserve and the Treasury Department have infused the market with unprecedented stimulus, which was necessary to keep the economy afloat but has also inflated the price of various assets. But as Marks notes, the markets have the ability to go from flawless to hopeless and back again very quickly, so expect plenty of volatility ahead.

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In this Episode

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Why are the Markets Strong?

Chris Stadler:
Howard, I know we've talked about this a bit, and it's been a bit of a head scratcher. Why do you think markets are so strong relative to the economy, and do you feel they've gotten ahead of themselves?

Howard Marks:
Well, first of all, Chris, I want to say how glad I am to be doing this with you today, both partner again as a national co-chairs of No Label, but also engaging in this dialogue today, and good to take the position of asking the questions here. You're not chopped liver yourself [inaudible 00:01:02]. I can tell you why I think the market has bounced so much. I can't tell you why those things happened in every case, but there are factors in a number of categories. Number one, the most people... Let's say, the Fed and the Treasury are throwing incredible arsenal of weapons at the problem. And they have indicated that they're going to do everything they can think of, and they're going to do it without limitation as to amount and duration, essentially.

Two days ago, for example, Powell said he's not even thinking, about thinking about raising rates. So it looks like rates will stay lower, for longer et cetera. The Fed has been buying trillions of dollars of securities, and the Treasury has been using trillions of dollars of support. The mantra nowadays is you can't fight the Fed. What the Fed wants to happen will happen. If it wants interest rates to be low, rates will be low. If it wants the markets to be strong, the markets will be strong, and people believe that. Now, it's not necessarily absolutely true. There are doubts about it, but right now it's accepted. So hyperactive fed and Treasury.

Most people conclude that that will produce an economic rebound. Now for months, people have been talking about a V-shaped recovery and they mostly still are. I don't think it's going to be a V, in the sense that, well, we know that this quarter is going to be terrible. And then we know that the third quarter will show an improvement because already we're opening. And so more businesses will be open, and more people will be working. More people will be traveling, more people will be driving. There'll be more of everything. So there's no question about the fact that we're going to have a serial, what we call a quarter over quarter improvement. It will still be down year over year, the third quarter of '20 will be anemic relative to the third quarter of '19. But it'll look good relative to the second quarter of '20.

So from now on out, there'll be every quarter, we'll get better. Now, how fast will it get better? As I said, Chris, I don't think we're going to have a V, I think we're going to have what I would call the check mark. Down, and then up for a long time. Gradual, maybe fits and starts, certainly the air is not going to go back into the balloon at the rate it went out. And I think that in 2021, GDP and earnings will probably not be up to the 2019 level. It will probably take, I would say, at least until 2022. But the point is that most people today are granting that there will be an economic recovery, and they're happy to look across the valley.

And they're not being too precise, in my opinion, about how long the valley is going to last. I think that the recovery will be gradual. First of all, if each of the each of the people on this call should ask themselves, "Well, when are you going back to work? When are you going to get on a commercial airplane? When are you going to get in the subway and go to work, or on a bus? And when are you going to go to a restaurant and so forth?" My own belief is that people who have the choice, will not be rushing back to the office, or to the store. And so I think that the recovery will be gradual. I heard Hank Paulson the other day, and he knows as well as anybody. And he said that half the people who are out of work today will be back at work this year, half. And a fair number of the jobs that were lost will never come back. And a fair number of small and medium sized enterprises, which account for most of the growth in the US economy will never reopen.

Chris Stadler:
I think that's a great point. And I think you and I have talked about this before, we certainly see it at the end of any expansion. When your revenues been going up, it's difficult thing to fire people and to optimize your business, and when revenue isn't flowing in, you generally don't do that. You don't make those choices. But then when you're forced to deal with less in an environment like this, then you realize you can be a lot more productive than you thought. I think those jobs are then sticky on the way back up.

Howard Marks:
Right. So anyway, number one, a powerful Fed and Treasury, hyperactive. Number two, an economic recovery, look across the valley. Number three, low interest rates, low interest rates stimulate economic activity, they make other things look attractive. So you look at maybe you used to have some money in cash, and you got 2%. And now you look and you say, "Oh, it's zero now, I have to find a new place for my money, maybe the stock market." Or you look, you maybe used to have some treasuries that paid 2%. Now you say, "Oh, the 10 year pay is a half a percent, or a tenth. I'm going to go out and buy some stocks, or I'm going to buy some... I can't live with the low yield on high quality bonds, I'm going to buy some low quality bonds."

So low quality bonds have been extremely strong. Everything is relative and comparative. And when you drop interest rates, the Fed, then everything else looks very attractive. When we buy companies, or when Chris buys companies, we look at something called the discounted present value of the future cash flows, and you discount them at a rate. So when interest rates go down, you discount them at a lower rate, which means that the discounted, present value is higher. So interest rates are important. And then there are psychological factors. This recovery started off... the low was reached on March 23rd. That was the day before the Fed announced its plans. Before it announced that it was going to announce its plans, and on the 24th, fifth, and sixth we had the strongest three days in the stock market in over 80 years.

You have to go back to To the 1930s, to have a stronger three days, and and people started to rush into the market, there's something called FOMO, the fear of missing out. When the party gets going, FOMO, the fear of missing out takes over from the fear on losing money, and everybody's afraid they're going to miss it. So they gang in, they jump on the bandwagon, and the bandwagon starts to go stronger. I think there there has been some of that. And we finally, there are even stories, a lot of the buying apparently has been done by what we call the little guy, not institutions, but but the little guy. And the story is that there are a lot of people out there who would be going to the casinos if they were open, but they're not or who would be betting on sports, if there were sports betting but there's no sports. So they need action, and they're taking their thousand dollar checks from the government, and they're buying stocks and options. And the market does to behave that way.

It was up in the 53 trading days after March, the March 23rd low, the market was up on 23 of them, 33 out of 53. And like 25 times the market was up more than a percent in a day, which is not that normal. So the market has been extremely strong. I have trouble... I mean, the point is, as of Monday night, which was the recent high, the stock market was almost back to its February 19th, all time high. And was almost up for the year. Now, if you described the pandemic, and if you described what would have to be done to the economy to fight the pandemic, you wouldn't say, "Well, stocks shouldn't be down." But they practically weren't as of Monday night, and to me that seemed irrationally positive. And I said on I said on CNBC a few weeks ago, I said, "The market's down 15% for the from the high and the world is more than 15% screwed up." But the point is that we have people who are ready to look past the bad, and consider it like a one time thing that's going away and incorporate the good.

The truth is that in the real world, things fluctuate between pretty good and not so hot, but in the markets, things go from flawless to hopeless and back. And as of Monday night, people were... on March 23rd, it was hopeless, and on Monday night, it was kind of flawless again. Then we had a slight small down day on Tuesday and Wednesday, and then a big down day yesterday, down 1800 on the Dow, back up 500 today, or 600 I forget... it's 500 I guess. It's fluctuating like crazy, but great investors... I'm going to stop talking in a minute... but great investors like Stan Druckenmiller, Stan Druckenmiller said around May 12th, and he may be the greatest investor who ever lived. He said it's the worst risk return bargain he's ever seen.

David Tepper, who's another fabulous investor said it's the second worst because he thought it was worse back in 1999 in the tech bubble, but the point is that a lot of highly disciplined, quality investors think things are too high, by the way. Druckenmiller said he's never seen a worse risk return opportunity, said that on May 12th, and then the market went up about another 11%. So it hasn't cooperated with Stan yet. But I do think that it... it does smack to me of being too high.

Chris Stadler:
Well you and I talked about this setting when we started our careers, there was much more of a weight in market movements on a regular basis of the fundamentals. And the technicals would certainly have their place, and there were times where they could dominate, but not the dominance that they're showing, really over the last three or four years relative to the fundamentals.

Howard Marks:
Well, I think that's right, Chris. And the point is that one of the reasons is that we have more people being evaluated based on their short term performance. And number two, we have more people looking at short term performance. Now when I started off in this business in the late 60s, you may not relate to this, but at the end of the year, it took a few days to figure out what your return was for the year. Because we had to do a lot of grinding calculations without any computers and really without any calculators. And of course now, not only do you get your performance instantaneously at the end of each quarter, and year, but you get it in real time every minute.

So there's just this obsession with short term performance, and everybody's terrified of being in any stocks that go up less than the other stocks. It strikes me that imagine you were on a boat, and the captain came on the loudspeaker, and he said, "Everybody run to the left." And they run over there. Then he comes on he says, "Everybody run to the right." And they run over there. You get terrible volatility, and not much progress. And I think that's what we have.

Chris Stadler:
Well, you know your point about FOMO before. The way I like to talk about it with my staff is to say, "Look, you need to be first and foremost scared to death of losing money. And you need to always have that front of mind. But you actually have to be just as afraid, or a little bit more of being irrelevant, because you got to get the money out."

Howard Marks:

Chris Stadler:
And that balance as an investor is critical and having a sense of where you are in the market to know which of those two instincts to be paying a bit more attention to is really important.

Howard Marks:
Because Chris, I agree with you 100%. The way I put it is that there are two risks that every investor faces every day, there's the risk of losing money, which is obvious, and then it's the risk of missing opportunity, which is a little more subtle, and if you eliminate one, then you're 100% exposed to the other. So we have to compromise them. And we have to say, "Well, I don't want to lose a lot of money. But on the other hand, I don't want to miss all the opportunities." So you balance the two, but what we see in the market is that we see a day like March 23rd, when people are only afraid of losing money, and then nobody is afraid of missing opportunity, and then you see a day like the 8th June, when everybody's afraid of missing opportunity, and nobody's afraid of losing money. And that's what gives us this rocky passage that I described.

When will earnings return?

Byron Wayne:
Howard, it seems to me, Howard, that there's an important segment of the economy that's still in serious trouble. You have hotels, airlines, restaurants, depending on how you define that, that's at least 10% of the economy. And it could be as much as 30. Plus there are a number of us so aren't going back to work very quickly, because we are compromised by our age, or physical condition. You talked about when you think the stock market might get back to where it was, when do you think earnings are going to get back to where they were in 2019?

Howard Marks:
Well, I think most of us look at the earnings for the S&P 500. That's the popular benchmark for the stock market, and we calculate the collective earnings for those companies. I don't know any better than anybody else, Byron, but I think there's a chance that they... I guess they'll probably get back to the '19 level in '21. In 2020, in '21, in '19, they were $158. This year, I think they were expected to be about 173. Now, they're expected to be out of about 120 or so. And I think it'll be certainly until maybe late '21, '22 before they're running at the at the 158 rate again, and we are going to be missing a couple years of growth, maybe permanently.

Is this a worldwide leverage buy out?

Jerry Vanier:
Howard, you've written 30 years ago, famous memos clients criticizing excessive leverage, even if some of your teams and all follow your advice. Now, with trillions of debts added to the balance sheet of governments and corporates. This looks like a huge worldwide LBO. How do we recover from this?

Howard Marks:
Well, that's a great question. When I was a kid, there used to be a debate about whether it was okay for nations to have debt. We seem to have gotten past that. Lord Keynes said he thought that nations should run deficits in times of weakness in order to encourage job creation, and then in terms of prosperity, should run surpluses and repay the debt. We seem to have gotten past that. All nations now are permanent debtors. And the only question is what's too much debt? And of course, there's no way to calculate what too much debt is. Most nations appear hell bent on finding out the hard way. There's really nothing we can say about whether it's 50% of GDP, 100%, 150% of GDP, 200%. And nobody knows. But I guess No Labels is always pushing for unity in Washington. And I think that the lawmakers have found something that they're united on, which is that they don't care about deficits and debt.

Historically the democrats were supposed to be the party of spending, and the republicans were supposed to be the party of fiscal prudence. But they did unanimously back Trump's Tax Bill in 2017, which this year was going to create a $1.3 trillion deficit in times of prosperity. So the point is, nobody cares about the level of deficit and debt anymore. There is something out there called modern monetary theory, which explicitly says that deficits and debt don't matter. I don't think the theory's winning today just the result is winning today. We're not running huge deficits and debt now because people subscribe to modern monetary theory. We're running huge deficits and debt, because the Fed and the Treasury concluded that they had to do that to rescue the economy, or otherwise it was going to slip into a worldwide depression. I was talking depression, just before they came out with their actions around March 18th, 19th. I was musing with my partner as to whether we would have a depression. I believe that I believe that what the Fed and Treasury are doing is absolutely necessary, but dangerous.

Chris Stadler:
In answering that question then, Howard, are they restoring order and proper function of markets or the distorting the way markets price risk? I guess the answer is, yes.

Howard Marks:
Yes. Well, I think they're distorting the market, Chris. I think when the government stays out, you get a functioning market, which most of the time I should say, which prices things about right. It happens that people were panicking as I described, the market was going to melt down, companies needing money, we're going to find it impossible to get money or refinance their debts. And so the Fed and Treasury came in and did what they did. Certainly, they have distorted the market, the price is being paid for stocks and low quality bonds, or maybe all bonds are certainly higher than they would be in a normally functioning economy. They just will not let companies that need money fail to get it. And the way that they're getting the money to them is by making the markets extremely generous, so that people are afraid to not make investments in stocks and bonds. And they're forcing the capital markets to accommodate companies. So I do think it's a distortion.

Communication through Social Unrest

Thank you, Chris and Howard for doing this. I've been on two Zoom calls today, one with public market investors, one with private real estate. In both calls, the consensus was there was very little confidence that the government will provide leadership out of both COVID and racial and justice and that, in both cases, private sector would have to do that. So I'll focus more on racial injustice, I guess to this question, you guys, both run companies, you both lead companies. What is your sense of that, and what is your messaging to your companies right now?

Howard Marks:
Well, Chris, you own a bunch of companies. What are you telling your management?

Chris Stadler:
I think Glenn that you're right. I'll actually talk a little bit about a non for profit board I chair called Global Citizen. And almost our entire budget is from corporate sponsorships as a not for profit. And this is over $50 million budget, and that would have been unheard of a few years ago. And that's because the corporates are under tremendous pressure to really make these issues front and center. It used to be a backwater within your company, sustainability, or community relations. That was somewhere Within the the HR department now this is a CEO issue, we own an advisory firm called Teneo that advises more of the Fortune 500 than than just about anybody on strategic communications. And we see this all the time, that this is something now where your customers care.

So you got the supply, the the supplier requirements that you might need to meet from your customers, your employees really care, especially if they're young. Your regulators care, the communities in which you operate care. And I've seen a swing in this issue. I'll start before the issue you got too Glenn around the Paris accords. When the president pulled out just about all the big companies in the United States said, "We're staying in. We are we're going to meet the requirements of the Paris Accord." And I think you're seeing the same kind of reaction to the protest this week. I think you're going to see that the corporates realize that they need to do something, and first and foremost, for their own population. And so it's a source of optimism for me. And so we're very forward on... my firm was originally based in Europe, and so on ESG in general, our pension fund investors really care about it.

So it's been very, very important to us for the last five or six years. So we're very forward on what we're doing there. And I think with this issue, it is going to be the same. We're fortunate, given we operate in so many different markets, we are very diverse, but but not in every way that you can measure it, and not in every office that we operate, not in every market that we operate. And so I think and I'm very hopeful that corporates will be leaders here because to a certain extent, the government's are having a difficult time landing on what they want to do. Howard?

Howard Marks:
I'll take a slightly different tack, I want to believe that the government's will get involved. I think that we can accomplish so much more with leadership. I think that one of the reasons we struggled with the COVID problem is that we did not have national leadership, until we had a patchwork pattern of behavior in the States. And we obviously didn't have central encouragement of social distancing, or masks, or anything like that. I'd like to get... I think the central government can do a lot, and I want them to come out and express leadership.

When does the Fed lose control?

Joe Meyers:
Howard, a very fascinating comment. I would add to your list of one of the greatest long term investors, Warren Buffett, also has a great deal of cash in the past when the market sold off dramatically, he would put it over to use. But interestingly, he put very little or none of it to use, actually seem to be selling. So clearly the Fed has made cash worthless, which is harmful to savers, forcing them, and as you've said, into risky investments. What happens when the Fed loses control and rates take off, and they have no control anymore? And when do you think that'll happen?

Howard Marks:
Well, that's what we used to call the $64 question when we were young. I will say, Joe, that number one, people have been saying for years that interest rates would go up. And one of the biggest consensus mistakes of the last five years was that belief. And if you go back, I would say three years ago maybe four, there was absolute near unanimity that rates would go up, and of course they didn't. One of the great mysteries is why we don't have higher rates. And it's in particular, that's because why don't we have inflation. We had such, normally inflation was believed to be governed by something called the Phillips curve, which says that the lower the unemployment would be, the less lack there would be in the economy, the more negotiating power labor would have, inflation would go up. Well, it didn't happen.

All around the world, governments want inflation and they can't get it. And without inflation, I don't know if we're going to get rising interest rates. Now, the thing arguing for inflation is the monetary issue, and the impact of all this debt and deficit. We don't have a strong enough economy for demand to an excess demand over supply would normally cause inflation. But I don't think demand is going to be strong enough. I think that people are likely to sit on their money. There's a negative wealth effect, everybody feels poorer than they used to feel. They're not going to spend their money. Most people have learned to live without spending as a pastime, and have learned that they don't need to so many suits and ties, and things of that nature. I don't personally think we're going to get inflation unless the macro issue of debt and deficit takes off.

Joe Meyers:
Yeah, but let me just challenge, so that was near uniformity, that interest rates are going to go up and clearly when there's no uniformity, interest rates go the other way when there's no uniformity about anything and always goes the other way, because you have 100% of people already in. Right now, it seems 100% the other way, which is a bit scary that rates can stay near zero forever, and inflation may not have to drive it next time. There's just so much money. But that's a separate debate. But thank you for your comment.

Howard Marks:

Chris Stadler:
Well, I think it is that that issue of market confidence and whether or not that can do it. The only other thing that I think could start to create pockets of inflation is if we were to continue down the road we were heading prior to COVID, which is around protectionism, tariffs. If that's followed up by, "Hey, we need a lot more industries with supply chains here in the US." And as a result of what we're seeing right now, on the equality issue, more wage gains are pushed into the system. Those kind of things could do it, but I think it's going to take a lot. Let's head over to Omar Simmons.

How will credit markets evolve?

Omar Simmons:
I definitely agree with your view on the public markets. I'd be curious to see how you view the credit markets, and the private equity markets, and how that might evolve, because those have different drivers. And maybe are a little less volatile on a day to day basis, but they really has a big impact with the market businesses.

Howard Marks:
Yeah, I think that the credit markets have been... I mean, they're almost never as volatile as the stock market. But they've been very volatile, too. One of the things we do at our firm is high yield bonds. And if you go back to early February, high yield bonds were yielding three and a half percent, if you leave out energy. Energy, which was struggling so badly, required high yield, so they were pulling up the average yield. But if you leave energy out of the equation, the average high yield bond yields are three and a half percent, which obviously isn't very high. And then that was early February, by March 23rd at the low, high yield bonds were yielding about 10 and a half percent. So the yield tripled. And of course, the way the yield triples is by the price falling.

So we went from having a penalty yield of three and a half, to a [inaudible 00:32:13] yield of 10 and a half. And then since then the Fed has been flooding the world with money. So the Fed goes out and they buy securities. Every time they buy securities, they put money in people's hands, the people whose hands they put money into, have to go out and get rid of that money. They have to buy something. So that causes demand. And the demand for high yield bonds has been so strong that the yield is now down to about 6.2%. So it has gone down more than halfway from its high of 10 and a half. I think that right now, credit is pretty freely available and people are competing to put money to work, and when they compete to put money to work, they bid up the price, which means they bid down the yield.

And when somebody says, "I want 8% to lend money." Somebody else says, "I'll do it at seven and a half." Somebody says, "I'll take seven." Somebody says, "I'll take six and a half." And it's what I call the race to the bottom, but when there's too much money, that's what happens. And it has been happening ever since the Fed announced its plans. Now private equity. You might want to talk to Chris about that. He's not that active in the US, but maybe he has a view on values in the private equity space.

Chris Stadler:
Yeah, look, I think, with respect to private equity, it's very similar factors. What private equity has benefited from for very long term, and each time I think that trick is played out something else happens and so it was gaining a bigger allocation within the portfolio of big pension funds, then it was having it spread to more investors. Then those big pension funds decided that they wanted even more of an allocation in alternatives in the chase for yield. And, in fact, when I thought most of it was was kind of done, I think the hedge funds over a 10 year period, we're not kind of earning their fees, we're not beating markets, and some money came out of hedge funds and into private equity.

And then on the demand side of the other side, the equation, owners or the people who run businesses don't like being in the public markets. And so they prefer being private given how difficult it is being a CEO. And so we've kind of been in a virtuous circle for a long time. And the question to me becomes, "How much are investors going to continue to be willing to allocate to private equity, and how many managers are going to continue to want to be out of the business of running public companies?" Because every time I think it can't get any worse to be as a public company CEO, something happens to make it worse. And so we continue to own an increasingly large share of the world's companies.

I think regulators, policymakers may have something to say about just how much of that can happen, as investors will. We are certainly seeing what we thought was going to be a great buying opportunity. Prices are not coming down. There's a lot of money to put out there. And so, I think it is going to remain tricky, and what I like about that is what it requires us to do is actually run the businesses better. And I think private equity because they are aligned, we are invested with our own money, that's how we get wealthy. When we're on boards, it is our day job. I think we can do that, whether we can do it with as much money as we have, is going to be a pretty interesting question.

Hertz - Investments that don't make sense

David Mark:
I've been watching what's going on in the public equity markets regarding the mania in certain stocks. And Hertz is a stock that a lot of people have been talking about in the last few days, where it files for bankruptcy. And yet, as we were talking, the judge in the case in bankruptcy has allowed them to raise roughly a billion dollars in new equity through selling shares. I would love to get some perspective from you guys on if that makes sense, if that should be permissible, and what that says about overall public markets?

Howard Marks:
First of all, David, I want to thank you for the way you ended your question. One of the things that I always try to look at is not what's happening, but what does it mean? And that's what you asked, what does it mean about the public markets? I think it's very unusual. I think it's unique for a company in bankruptcy to be able to raise equity. Usually they borrow money, what's called a debtor in possession loan, which goes in to the capital structure at the very highest level, because the person who's putting new money into a bankrupt company wants to be protected. Now, the money is going in at the lowest level, which is the equity level. And that says a lot about the market. It says that it has a speculative tone.

What they call things, tells you a lot about what's going on in the markets. And in good times, they call it rescue finance, and in bad times, they call it throwing good money after bad. And I think the fact that we have a bankrupt company that can raise equity money, tells you that people are in a speculative mood. And they're viewing Hertz as depressed equity. As a gambling opportunity, where it's so low. Maybe if there's a miracle you can make a big return. Usually, people who put money into bankrupt situations like us, want a very high degree of protection. And obviously the fact that people are willing to invest without it tells you we're in a speculative market.

What's going on with Tesla?

Bobs Ivan:
Howard, thanks for this. This is interesting. I have a question. And then depending on your answer, or maybe regardless, I'd like to make a comment afterwards. But I'd like to know your thoughts on Tesla.

Howard Marks:
Tesla, well, I don't invest in stocks, and I really have nothing to say, but sounds like you do.

Bobs Ivan:
Maybe I can say something quickly, because I think maybe the people on this call, especially the members of Congress will take some notice. But Tesla there's, for years I've been following tech, I'm in tech. I've been following stocks and companies for a couple decades. Tesla is very suspicious in that companies are popping up simply to promote them. They're claiming to be financial advisors without any information about who's behind them. They publish glowing reports in Tesla technology which doesn't exist, by the way, a lot of the technology that's publicized doesn't really exist. The stock is there now the number one automobile in the history of the planet, as far as market valuation.

They've disregarded SEC regulations, but the SEC is done a little bit slap them on the wrist, and politicians throughout the country have been bending over backwards and fighting each other to give them more taxpayer money. So I really think that somebody needs to investigate what's going on because the numbers are so awful at Tesla. And they play accounting games that need to be looked into because their quarterly statements are just full of misinformation and trickery. So it'd be nice if somebody would investigate because that stock keeps going up and up. And yet there's nothing behind it, very little behind.

Howard Marks:
Thank you.

Reflecting on 2008

Patricia Chadwick:
Howard, I'm just wondering if you could maybe put in perspective a little bit, the situation that existed in 2008, which we can definitely say, we brought on ourselves. The banks over leveraged, horrific mortgages that should never have been made et cetera. The government had to bail it out. And everybody at that time was saying too much money being put into the economy, and it's going to become highly inflationary. Ultimately, there was no velocity. Whatever happens that money, it just didn't get back into the economy right away. We've now gone through 12 years where the economy's slowly picked up, and we got the lowest unemployment rate with still very, very low inflation, if anything, a deflationary environment. I think.

Now we get this crisis which we cannot blame the way we could the 2008 crisis, the same solution is being applied. Is there any real reason outside of the fact that there is more leverage now than there was before? But is there any real reason to think we won't come through this, again? Certain sectors of the economy are going to be decimated, maybe forever, transportation, airlines, whatever. But the rest will come around. We will have higher level levels of debt, but we will work through this the way we worked through the last one.

Howard Marks:
Well, Everybody should know, I used to work with Patricia. And she's an equity person, stocks. And equity people are by nature optimistic, and she's no exception. Look, there are similarities in terms of the damage done between this and '08, there are differences as well. People make a big thing out of the fact that this one is nobody's fault, and I agree with that. But on the other hand, companies did lever up and and make themselves vulnerable to exogenous catalysts such as we have had. Look, I think that people who run companies, if they should expect to pay a price, if the companies underperform and I don't think that they have right to a bailout just because the reasons for the failure are not their fault.

But you highlight the fact that what everything that the Fed and Treasury are doing now, they just resurrected the playbook from '08, '09. And it's a playbook that worked. Should it work this time? Well, number one, I do believe that it will produce a recovery. I think it'll be a different recovery because I think that in the '08, '09, the damage was mostly in the financial sector. And there was no inherent change in life as we know it. I think that this episode is making changes in life as we know it, in areas like you identified, hotels, airlines, movie theaters, sports, and casinos, and retail and things like that. Things are fundamentally changed even in real estate, working from home rather than going to the office.

We're going to have a much more... it's like a snow globe. You shake up a snow globe, and then things are in motion or are mobile. There's much more in play now than last time. And it's not like just injecting a little liquidity is going to ever bring everything back to normal. We will have recovery. It's going to take a few years, in my opinion. Then the other question is the go back to [Ele Vanier's 00:46:39] question, "What is the long term impact of the rescue?" And the fact that the fact that the stimulus and bond buying quantitative easing engaged in last time the fact that it didn't produce any damage, doesn't mean that if you do 10 times as much now, it's still not going to produce any damage. And that's really the open question. And I'm very proud to say I have no idea what the answer is.

Chris Stadler:
Admiral Blair... I'm going to jump a bit, has asked if we could touch on the racial equality issue some more. Tracy Stewart's also asked a question about what else we can do. I do believe, as I said, that... and I am an equity person and an optimist by nature as well, as Howard said, I do think this time is different in that when you see the difference in the participation in the protests and the diversity of the participation in the protest. I think that's one of the reasons why it's going to be different. I made my comments earlier about how I think company CEOs are evaluating this in the heat of the moment. Who knows, it might matters a lot more, what happens in the next six months than the next six minutes, which is the kind of environment that we're in.

But I think that what I would like to see and what we're going to be doing with our companies is to think about the things they can do in their company and in their community to support this. So let's talk about one of the biggest levers. I think President Obama talked about this, it is voting. And so if you are a corporation, you run a corporation, why don't you foster a voting drive at your company. Has it done in your facilities or through your email, to have people check their status, and have them register to vote. And then let's not wait for the government to create a day when it's a national holiday to vote. Give your employees the time they need to vote. Whether it's giving them off that day, or giving them off the time they want to do it.

These are the kind of things that that companies will have to do to show that they care about this issue. And it's about, of course, just the blocking and tackling of looking at your own employee population and see if it represents the communities that you're in. See if you have the participation across the management ranks there. See what you're doing in terms of vocational training. It's a lot of hard work. It requires focus by management. I do think that... I was listening to something Condoleezza Rice said the other day in a presentation. She said, acknowledge all the difficulties, but also said... She grew up in Alabama and said if George Floyd was killed while I was watching was young, you never would heard a thing about it.

And so we have made progress, but there is much, much more to do. And I think looking in the mirror and saying that about your own company and say, "Look, we're happy with this, we're not happy with this." Is what's required. And we're going to have to see if people can maintain the focus to do that. That's my perspective. Howard, maybe you want to bring some of what you put in your incredibly elegant, eloquent memo today.

Howard Marks:
Thank you, Chris. Sure. I agree with Chris that we shouldn't wait for the government and a lot of us in the private sector can do a lot. But I don't think we can do enough. And I still think we need leadership. The biggest single problem facing the country today, in my opinion, and the root cause of the inequality is education. When I was a kid, I went to the public schools in New York, and I got a perfectly good education. Not a great education but adequate to go off to college. I heard a presentation from an organization called SEO, Seeking Educational Opportunities, which takes care of kids in high school.

And the young man was describing the terrible high school he was supposed to go to until SEO rescued him, and guess what? It was my high school just 60 years later. We have to be able to give people a good education in the public schools. And that's one example. I honestly think that we need changes in the tax code. Because I think the tax code is cobbled together by people changing this, and changing that, and changing that, and changing that. And I think there's no overall consistency or equity. I personally believe that different forms of income should be taxed the same, or, certainly similarly. I personally believe that we are at a low ebb in terms of progressivity, and that it should be more progressive. But that's a personal opinion. But the point is, I think private enterprise can do a lot, but only so much. We need government to change some things.

Chris Stadler:
I think, by the way, Tracy's question on organizations, SEO is a great one. We use them.

Evaluating Risk Premiums

Howard Newman:
I gave a podcast [inaudible], where I started out by saying, "I'm going to begin this by saying that I heard Howard Marks mentioned that once you've seen one crisis, you've seen one crisis." And therefore everyone is different. So my question for you is something I've noticed so I'm in the private equity business for those of you who don't know me. And what I see is a huge dichotomy between what the capital markets are seeing, which is very low rates, very low risk premiums, very high leverage. And yet from the portfolio companies we have, we see people have an increased concern about the risk, and the concerns about the environment. So whereas the risk premium seem to have disappeared in the secondary market, so the capital markets, they're magnified now in the real markets. I wonder if you could comment on that dichotomy and how you would think about it?

Howard Marks:
Well, as Chris indicated, when he talked about trying to buy companies, we get different behavior from people who own companies, private companies, and are asked to part with them, or asked whether they want to level them up, and people who have the opportunity to buy companies with their own real money, as opposed to consider stocks as gambling devices. I think that when I went to college, we learned that the separation of management from ownership was one of the things that gave the US system its advantage, because even if the second or third generation of a family owned a company, they could go out and hire competent management, and get good performance out of it.

But in a way, it has gone too far. And sometimes the management is too separated from the owners. And for example, there was a paroxysm of stock buybacks over the last five years, and many, many companies went out and bought their stock back even though it wasn't cheap. But it shrunk the capitalization and enhance the EPS which is what management often gets paid on. And I think that if the management had to go out and spend their own money to buy the stock, they might not have done it. So I do think that you get the behavior that you incentivize. I think that the behavior has been... the incentives have been skewed by the divorce of management from ownership in the public companies.

Leadership Diversity

Nithan Youngblood:
It's more of a comment than a question. But first off, I think we have absolutely improved with regard to progress building the race relations. A couple things even in the credit administration. First off, criminal justice reform, enormously important. Number two, opportunity zones. Again, I think also transformative. Quite frankly, this is the highest level of funding for historically black colleges and universities under any administration. So that's on the positive side. I would say that on the rhetoric side, it's been abysmal. I mean, words do matter. And unfortunately, there's not been a very good support spokesperson at the top with regard to that.

As a private equity investor, myself, and someone who's served on multiple public and private company boards, I think we can also do a better job. For example, Warner Music just did their IPO last week. There's not a single black person on the board of Warner Music. How could that be? Again, look at your portfolios. Again, I think that investing in the best and brightest among people of color is an important avenue. It may not give you as much pleasure as helping the poor kid down the block, but Investing in the best and brightest among us, and then we can hold our own folks accountable, and challenge them in ways that other people cannot. I'd love to hear your reaction.

Howard Marks:
Well, I think you're absolutely right. I think that the there is a great emphasis now on diversity and inclusion. I think it's at a level it's never been before, I think it is sure to produce progress. I know that if we develop a highly qualified, underrepresented employee, we tend to lose them to somebody else who wants to bid them away and had the stats. But look, I really believe that what happened last month, it was the straw that broke the camel's back. We've had a lot of straws, but this one feels different. And we have people of both parties coming out to say things that are constructive, not everybody, but some of them. And you have both public sector, and private sector, I hope and believe we're going to be seeing progress.

Nithan Youngblood:
I'm optimistic, I would say access to capital, though, is enormously important in terms of creating access to opportunity. And so we need to be focused on that with regard to, black and brown businesses.

Howard Marks:
Right. Very good.

Bill Galston Sign-Off

Bill Golston:
It's my pleasure. Look, let me just begin by saying that No Labels is enormously grateful. I can't say just how grateful because words fail me, for your willingness to share with us and with people who are cured key to us, what you shared today. I've been taking notes frantically, like being back in graduate school. And let me just play back to you some things that you said to underscore them because I think they're really so important for the future of this organization. Howard, almost in passing, you said, and I wrote it down, "People on this call, don't have an axe to grind. We just want the truth." Amen. Why do we want the truth?

Well, you wouldn't dream of making investments on false premises if you could possibly avoid it. Why should we do anything different for public policy? Public policy that isn't built on a foundation of truth is built on quick status, and it's going to crumble it will not solve the problem it was intended. Second, what we heard today was experience, cleverness, experience, judgment, and humility. You both said in different ways, we have to know what we don't know. Because if we pretend to know something that we don't, once again, we're building our policy or our investments on quicksand. You both talked about corporate responsibility.

Chris, your comments about voting, I thought were remarkably farsighted and challenging and it would be fantastic if No Labels leaders could get together to promote the kind of program you put on the table. Howard, you underscored a point that No Labels has been making in a number of its proposals when you said that you thought that all forms of income should be taxed about the same. Boy, wouldn't it be revolutionary if people shared that view and pushed for it in our tax system? All of this put together means that No Labels has emerged from this hour wiser and better prepared for sound public policymaking than we were when we began. And that is exactly what these sessions are supposed to accomplish. We couldn't have done it without you, and we cannot continue to move forward without you. Thank you for your leadership, and thanks to everybody on this call for participating.

Howard Marks:
Thank you, you Bill-

Chris Stadler:
Thank you.

Howard Marks:
... and for your contribution to everything we do for the mission.

Chris Stadler:
Absolutely, and thanks everybody for the good questions.

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