Oaktree Capital founder Howard Marks believes the coronavirus pandemic could have a “much wider” range of negative outcomes than the 2008 financial crisis.
In a new memo outlining the potential economic repercussions associated with the virus, Marks sought to determine whether asset prices had fallen “appropriately, too much or too little” over the last few weeks.
“In the last six weeks the markets have seen the best of times and the worst of times,” the Oaktree co-chairman wrote in the memo, released Tuesday evening. “The U.S. stock market saw the quickest meltdown in history, for a loss of 33.9 percent on the S&P 500. Then its 17.5% gain from Tuesday through Thursday of last week made for the best three-day stretch since the 1930s.”
In order to make sense of these sharp swings in market sentiment, Marks laid out both optimistic and pessimistic cases for what’s to come as a result of the coronavirus pandemic.
The bull case: “The negative impact of the disease on the economy will be sharp but brief,” Marks wrote. In this scenario, one could expect to see a “V-shaped” recovery, in which the markets go back to where they were quickly, once the virus is under control.
Marks said he had seen forecasts that this would happen within around three months, so long as social isolation, quarantine, and testing is widespread.
“Telling people to stay home – and thus causing businesses to close – is the economic equivalent of putting a patient into a coma to facilitate curing a serious disease,” Marks wrote. “The government will provide life support to the economy during the coma and bring the patient out of the coma after the cure has been effected.”
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Other factors supporting a more positive outlook? Banks are carrying much less leverage than they used to, according to Marks. And, he added, declining securities prices could draw buyers with dry powder into the market.
Marks, however, said he was more prone to take a negative outlook. “I’m more of a worrier than a dreamer,” the Oaktree founder wrote. “Thus, it shouldn’t come as a surprise today that my list of cons is longer than my pros.”
He pointed to the rising number of cases in coronavirus in the United States — where cases have surpassed the number of reported infections in China and Italy — as one cause for worry. What’s more, he added, is that the United States’ healthcare system is “under-equipped” to manage the impending crush of coronavirus patients.
“The economy will contract at a record rate,” Marks predicted, noting that unemployment rates are already rising rapidly. “Many millions will be thrown out of work,” he wrote. “People will be unable to patronize businesses. Not only will workers miss paychecks and businesses miss revenues, but businesses’ physical output will tail off, meaning essentials like food may run short.”
Although the government has stepped in to pay workers’ wages, he added that it’s unclear whether it will be enough to support a “V-shaped” recovery.
To Marks, the situation seems like a double bind. “The longer people remain at home, the more difficult it will be to bring the economy back to life,” he wrote. “But the sooner they return to work and other activities, the harder it will be to get the disease under control.”
Ultimately, Marks said he expected asset prices to decline again.
“You may or may not feel there’s still time to increase defensiveness ahead of potentially negative developments,” Marks wrote. “But the most important thing is to be ready to respond and take advantage of declines.”