Renowned investor Howard Marks, who co-founded Oaktree Capital, has raised concerns that a return to the low-interest rate environment, which was seen between the Great Financial Crisis and the outbreak of the pandemic, could foster detrimental investment behavior.
What Happened: In a Tuesday memo, Marks stated that the natural rate, which reflects the balance of supply and demand for money without central bank interference, ought to guide capital allocation decisions. He, however, pointed out that the financial market has not operated freely since the 90s due to the Federal Reserve’s ‘activist’ approach, which involves pumping liquidity to avert potential problems, reported Business Insider.
With inflation dropping, investors expect the Federal Reserve to slash interest rates again, which would impact both the equity and bond markets. Despite this, Marks warned against expecting near-zero rates, underlining the problems that arose from the easy-money era before the pandemic.
“Maybe we have a new version of Lord Acton’s law: easy money corrupts, and really easy money corrupts absolutely,” Marks wrote, quoting the late investor Charlie Munger from an interaction the two shared.
Marks explained that while lower borrowing costs can spur economic growth, they can also accelerate ...