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Howard Marks, chairman and co-founder of Oaktree Capital Management, is renowned for his ability to communicate investment concepts with clarity and insight in his periodic memos to clients (see archive at www.oaktreecapital.com).
Marks’ thoughts on investments were published in “The Most Important Thing —
Uncommon Sense for the Thoughtful Investor.” It’s a terrific book I keep close at hand and refer to often. Though Marks tackles weighty investment topics and concepts, his presentation is one of everyday common sense, not complex or abstract theories.
Marks’ most recent memo, “The Role of Confidence,” is particularly timely: “I have long been impressed by the role of confidence in an economy. In fact, I’ve written in the past — exaggerating only slightly — that sometimes I think confidence is all that matters. I consider its impact to be significant, pervasive, self-reinforcing and self-fulfilling.
“The primary impact of confidence on the economy is simple. If people think the economic future will be good, they’ll spend and invest. Thus, things will be good, because:
Consumers’ optimism will translate into incremental demand for goods, adding to (gross domestic product).
Consumer buying will convince businesses to invest in expanded facilities and additional workers to keep demand growing.
Businesses’ investment in plant and workers will add to GDP.
Newly hired workers will have money to spend, and their buying will add further to the cycle.
The reports of confidence-fueled increases in GDP and other positive mentions of the economy in the media will reinforce this virtuous circle of optimism: Back to Step 1.
“So, just like the wealth effect, increased confidence makes people and businesses spend more, and this in turn cycles back into the economy. Confidence leads to spending; spending strengthens the economy; and economic strength buttresses confidence. It’s a circular, self-
Marks also noted confidence tends to swing like a pendulum between optimism and pessimism. At the optimistic extreme, only good outcomes are possible, and there is nothing but blue skies ahead. At the negative extreme, only bad outcomes are possible, and doom and gloom are pervasive.
In addition, both optimism and pessimism can be self-fulfilling as positive and negative feedback loops push the pendulum farther in one direction or the other.
Five years ago, at the depth of the financial crisis, the pendulum had swung to a pessimistic extreme. Armageddon was at our doorstep as we stared into the abyss.
The pendulum has gradually begun to swing back toward “normal.” Surveys indicate private sector business leader confidence continues to increase. Similarly, consumer confidence is growing.
U.S. household net worth has reached an all-time high as stock and housing prices have gained. At the same time, the U.S. household debt service burden has reached an all-time low as Americans paid down debt and took advantage of historically low borrowing rates.
Finally, gasoline prices have dropped sharply. AAA reports the current national average for regular is $3.39 per gallon, down 39 cents per gallon from a year ago. As a rule of thumb, each penny change in a gallon of gas translates into about $1.4 billion, so a drop of 39 cents represents a huge boost to consumer pocketbooks.
Rebuilding confidence has been a long and difficult journey. Let’s hope the latest Washington budget/debt ceiling follies don’t derail it.
Mickey Kim is the chief operating officer and chief compliance officer for Columbus-based investment adviser Kirr Marbach & Co. He can be reached at 376-9444 or firstname.lastname@example.org.
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