Oaktree Capital’s Howard Marks analyzes the current state of the economy #1

Howard Marks of Oaktree has released a memo detailing his thoughts on economic outlook, how where the current situation differs from traditional cyclical markets, and thoroughly analyzes the economy in a detailed 17 page analysis.

We're going to share the highlights.

Usually market up cycles are caused because the economy's going well. Companies are expanding, stock prices are rising, and innovation is encouraged. When too much of these things are generated and production exceeds demand, there can be a recession. Often, a recession is accompanied by other external events. These recessions are usually reversed by stimulus spending and resumption of consumer buying. Then the cycle continues.

This particular set of events, as you're aware, is unprecedented. In fact, the word "unprecedented" has been used so many times this year, it may be the most used word. Marks states that "the recession – rather than being the cause – was the result" of deliberate business closings to prevent the pandemic.

This then makes the downcycle difficult to fix through stimulus alone – and requires an effective vaccine – to resume business and life. Even with reopened businesses, there's the very real probability that small restaurants and bars will never reopen and their millions of employees will not be rehired.

It's not just small businesses that are struggling. State and local governments are too – with reduced taxes and fees – but they're also needing to spend and unlike the federal government, can't take advantage of deficit spending. Nor do they qualify for federal aid the way a small business would. There's no easy answer for how they recover.

Marks believes that a V-shaped recovery is too optimistic.

https://www.oaktreecapital.com/insights/howard-marks-memos