Worthwhile discussion in this segment. Fed liquidity can stall defaults and bail out some market participants, but not all, and not indefinitely. Marks expects a slow and halting recovery from the coronavirus pandemic and says “there will be plenty” of debt defaults and bankruptcies when corporate borrowers start running out of cash in the months ahead.
Howard Marks, co-founder and co-chairman at Oaktree Capital, discusses Federal Reserve intervention in response to the coronavirus pandemic and warns that distress will sweep through credit markets when the Fed’s support inevitably recedes.
Here is a direct video link.
Marks: “We are living through the worst economy that almost anybody alive has ever seen. You have to be over 80 years old, to go back to the 30s to have seen worse, and maybe we’re even worse than that. It’s believed that the unemployment rate will hit a higher level than was achieved in the Great Depression. People are talking about second-quarter GDP be doing down 30 to 40%. As far as we know…there’s never been a quarterly decline in GDP to that extent. So we are in the worst economic environment let’s say ever. You would think that would bring on the greatest distress ever…It may not happen because of the Fed and government action. I think we will still have a very substantial distress episode. In 1990-91 and 01-02 we had two years of 10% defaults in the high yield bond universe. We may have 20% defaults in high yield bonds anyway, and there are still lots of highly levered companies and highly levered investment entities that desperately need large amounts of cash to avoid a meltdown, and some of them will not get what they need and some will meltdown.”
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