Billionaire Howard Marks says investors have ‘gone from the low-return world of 2009-21 to a full-return world,’ and it’s a ‘sea change’ from the last 40 years

Howard Marks has been in the investment world for 53 years and has only seen two real changes.

Marks said he has seen a number of economic cycles, but only two real sea changes. We may be in the middle of a third one today.

In the 70s, the adoption of a new investor mentality was the first shift. Marks said the shift led to new investments such as distressed debt, mortgage backed securities, structured credit, and private lending.

Marks decided to invest in bonds of America's riskiest companies because he was aware of sea change.

Today's investment world bears almost no resemblance to that of 50 years ago. Young people joining the industry today would be shocked to know that back then investors didn't think in terms of risk and return. We do nothing else. A sea change is what it's called.

The second transformation took place in the 1980's. The Federal Reserve, led by Paul Volcker, raised the federal funds lending rate to 20% to lower inflation that had soared to 14.5% due to a spike in oil prices. Inflation fell to 3.2% over the next three years. The Fed gradually reduced the federal funds rate as a result of that success.

Marks said that low interest rates fueled an era of cheap and easy money. The environment was described as anaberration by Bank of America.

The past two decades of inflation, growth, and wages have ended with a return to the long-term historical mean.

The Fed cut the federal funds rate to zero in an effort to save the economy from the Great Financial Crisis. The U.S. had its longest economic recovery in history from 2009 to 2020.

Oaktree raised billions of dollars in debt to purchase distressed assets and his investors benefited from the firm's recognizing the opportunity as debt boomed.

This year saw high inflation and higher interest rates. After hitting a four-decade high in June, U.S. inflation slowed to a seven-month low in November. The Fed hiked interest rates seven times this year, pushing the federal funds rate to a range of 4% to 5%.

Marks said that inflation and interest rates are likely to remain the main factors affecting the investment environment for the next several years.

Marks wrote that we have gone from the low-return world of 2009-21 to a full-return world.

That means investors can get good returns without having to rely on riskier investments, which could mean better opportunities for bargain hunters. Marks said that investment strategies that worked best over the last 40 years might not work well in the future.

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