An Aggrieved Howard Marks Warns Fed Action Risks Creating ‘A Fake, Potemkin Market’

Howard Marks was a “very active buyer” in March, when the world was falling apart.

But Jerome Powell screwed things up for him.

See, it’s harder to get bargains in distressed debt when the benefactors with the printing presses are determined to make debt not distressed again (apologies for the MAGA reference).

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Marks has penned more than a half-dozen memos since the onset of the crisis. His latest, released last week, was a misguided attempt to wax philosophical about indeterminacy in the face of unprecedented circumstances.

Before that, he spilled gallons of digital ink oscillating from cautious to gung-ho and back again, before finally settling on a wholly generic “moral hazard” argument for why the Fed’s corporate credit facilities are perilous.

During an interview with Bloomberg’s “Front Row”, Howard reiterated his reservations about the central bank’s interventions.

“Those of us in the markets believe that stocks and bonds are selling at prices they wouldn’t sell at if the Fed were not the dominant force”, he said. “So if the Fed were to recede, we would all take over as buyers, but I don’t think at these levels”.

At least he’s honest about it. The bottom line is that the incredulity you’ve heard from Marks, Warren Buffett, Jeff Gundlach and others, is at least partially rooted in their belief that the rich and opportunistic possess an inalienable right to serve as a lender of last resort for the purposes of effectively extorting imperiled businesses during a crisis. I’m using “extorting” figuratively. It’s not “extortion” in the illegal sense, of course. But it’s not charity either.

Marks, by his own admission, wants to “take over as a buyer”. But he can’t, because the Fed won’t let companies which were solvent prior to COVID-19 become insolvent. The figure is a simple illustration of the effect the Fed’s pledge to keep credit markets orderly had on BBB debt and IG as a whole.

Forgive me, but I do not feel sorry for Howard. Not in the slightest. It should not, cannot and will not, be left to people like Marks to ensure that millions upon millions of jobs aren’t lost forever to the biggest public health crisis in at least a century.

Marks, Buffett and [fill in the blank with anybody else who might step in with billions to lend in a crunch] combined do not have the firepower to shore up this market by providing private capital where it’s needed. This crisis is, quite simply, too big for them. And even if they did have the firepower, they would deploy it at punitive rates. Just ask Buffett, who said the following earlier this month:

There was a period right before the Fed acted, we were starting to get calls. They weren’t attractive calls, but we were getting calls. And the companies we were getting calls from, after the Fed acted, a number of them were able to get money in the public market frankly at terms we wouldn’t have given.

It doesn’t get any clearer than that, folks. These would-be “saviors” wanted to extract the usual fee for deploying their capital in a crisis, and the Fed (and Congress) decided that this crisis was simply too existential to leave it up to the Howards and Warrens of the world. Sorry, not sorry.

As a reminder, the Fed’s pledge to stand behind some corporate credit kept the market open for borrowers, even those whose businesses have been disproportionately hit by the crisis. There’s the Carnival example, and then Boeing’s $25 billion deal, the sixth largest in history. Had Boeing not been able to tap the market, it’s possible taxpayers would have needed to bail the company (and its suppliers) out to the tune of $60 billion. That’s how much Boeing initially told the Trump administration was necessary. The Fed may well have averted that outcome.

Marks (and Buffett) are essentially claiming that they (and other whales like them) are the market. But what about all the investors who lined up for record IG supply in March and April?

It’s true that some are just waiting to sell to the Fed (as BofA was keen to remind Jerome Powell in a snarky note out earlier this month), but the bottom line is that blue-chip companies were able to tap debt markets for the most funding ever during the two worst months for the US economy since the Depression.

That is an outcome that only a backstop from the Fed and Congress can engineer. Warren Buffett buying some preferred stock wasn’t going to cut it this time. In fact, while the Fed was busy averting a catastrophe, Buffett was dumping his entire stake in the airlines, and selling bank shares, too.

As ever, I want to remind readers that nobody – and I repeat nobody – writing regularly for public consumption has been harder on the Fed than I have when it comes to exacerbating inequality by levitating the prices of financial assets. QE has been a perpetual motion machine for inequality creation, and the mechanism is hardly a mystery.

Financial assets are disproportionately concentrated in the hands of the wealthy, so when you levitate the prices of those assets, the benefits accrue in exponential fashion (i.e., not linearly). When you throw in tax cuts which incentivize buybacks, you end up with the kind of gross wealth divide you see in America right now.

For example, it is not a coincidence that some measures of inequality increased at the onset of the Fed’s response to the GFC. The visual below is a poignant example.

But no matter how many times a given blogger or commentator or irritated social media “influencer” tries to suggest that QE’s undesirable side effects somehow mean it would have been preferable to allow the system to implode in 2008 and/or in March of this year, that is patent nonsense.

As I patiently explained to one well-meaning member of the Twitterati on Sunday evening, many of the Fed facilities rolled out over the past two months have nothing whatever to do with perpetuating inequality. Only a lunatic would suggest it’s a good idea to let the commercial paper market freeze and sit idly by as dollar funding markets cease to function, for example.

Of course, most Fed critics of any standing know that, but they deliberately conflate the emergency facilities aimed at backstopping critical markets with other, more controversial programs (e.g., the corporate credit facilities) in order to perpetuate the notion that the emergency response is worse than an outcome where the Fed didn’t act.

Mercifully, Marks concedes that the Fed did the right thing. “Thank God that it did what it did”, he told Bloomberg, for the same interview. “Just because something has unforeseeable negative consequences, that doesn’t mean it was a mistake”.

Right. Otherwise, we get into really silly territory, don’t we? For example, if I live two miles from the nearest hospital (thereby making it likely I can get there before an ambulance is dispatched) and my neighbor has a heart attack right in front of me, the logic that says the Fed’s asset purchases make central bankers villains because those purchases exacerbated inequality, would dictate that my decision to rush my neighbor to the emergency room makes me a murderer of cuddly animals if I accidentally run over a mother duck and five ducklings crossing the road on the way.

And look, you shouldn’t feel too bad for Marks. He hasn’t given up, after all. Oaktree is raising $15 billion to invest in distressed debt right now.

As far as whether Powell will “rob” him of that opportunity too, Marks admits it’s possible.

“They could do that”, he told Bloomberg, referencing a hypothetical situation where the Fed expands its lending programs to include distressed corporates that don’t meet the criteria for the existing facilities.

“In theory, if they bought aggressively, they could make all the markets rise”, Howard went on to say. “Now everyone would know that that’s a Potemkin market, a fake, and the minute they stopped things would collapse”.

But that’s fine, right? Because if that happened, Marks, Buffett and all the rest would be there to serve as a lender of last resort.

And probably at terms that would make Tony Soprano proud.

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