Nobody Knows (Yet Again)

Episode Summary

Executive Summary: Howard Marks argues that Trump’s tariff shock has created a radically uncertain environment where no one can know the future, and certainty would be a mistake. He contends tariffs will likely raise prices, slow growth, and disrupt trade, while any benefits like reshoring or better bargaining power will take years and may never fully materialize. For investors, the lesson is to avoid paralysis, assess probabilities, and be ready to buy distressed assets when fear drives mispricing.

Main Topics: Uncertainty and the limits of forecasting (Priority: 5/5): Marks frames the tariff shock as a classic 'nobody knows' moment, similar to Lehman in 2008 and COVID in 2020, arguing that in unprecedented conditions analysis cannot yield confidence and certainty should not be a prerequisite for action. Why tariffs are economically disruptive (Priority: 5/5): He explains that tariffs may be intended to support manufacturing, reduce imports, and raise revenue, but in practice they function as taxes that raise prices, compress margins, reduce demand, and can trigger inflation, shortages, and recession. Second-order effects and political unpredictability (Priority: 4/5): Marks emphasizes that economic outcomes depend on reactions from firms, consumers, governments, and political leaders, making retaliation, escalation, and policy reversals difficult to predict. Globalization, comparative advantage, and the postwar order (Priority: 4/5): He defends globalization as beneficial to the world and the U.S., arguing that trade based on comparative advantage improved efficiency, boosted prosperity, and supported peace and alliances. U.S. fiscal and reserve-currency risks (Priority: 4/5): Marks warns that antagonizing allies and trading partners could weaken trust in the U.S., reduce purchases of Treasuries, and threaten the 'golden credit card' that has supported persistent fiscal deficits. Investment response: act on logic, not certainty (Priority: 5/5): He urges investors not to hide behind 'wait and see' reflexes; decisions to not act are still decisions, and market panics can create attractive opportunities in distressed debt and other beaten-down assets. Potential market and Fed consequences (Priority: 3/5): Marks says the tariff-driven shock could force the Fed into a difficult tradeoff between recession support and inflation control, while markets may have already repriced risk sharply and may continue to do so.

Key Arguments: Nobody can forecast the full consequences of tariffs because the situation is unprecedented and filled with unknowable second- and third-order effects. Tariffs are likely to be inflationary because importers usually pass the cost to consumers, and domestic substitutes may be scarce or slower to develop. Reshoring manufacturing is not immediate: capacity, skilled labor, permitting, capital investment, and multi-year build times make rapid substitution unrealistic. Trade wars can provoke retaliation and escalation, especially when leaders seek to look strong politically, worsening outcomes for all sides. Global trade and comparative advantage have raised living standards, and reversing that system risks lower prosperity, poorer product choice, and weaker alliances. The U.S. has benefited from global goodwill and reserve-currency status; damaging that trust could raise borrowing costs and undermine fiscal flexibility. Investors should not freeze waiting for certainty; when prices dislocate, disciplined buying of high-quality distressed assets can be the logical response.

Data Points: Lehman Brothers bankruptcy date: September 15, 2008 - Marks references the start of the 2008 crisis and his original 'Nobody Knows' memo. Gap between Lehman bankruptcy and memo publication: 4 days - He says the original memo was published four days after Lehman’s collapse. Uninvested capital in Opportunities Fund 7B: $10 billion - Marks cites cash ready to deploy into distressed opportunities during the crisis. U.S. consumer durable prices: down 40% in real terms (1995–2020) - Used to illustrate the inflation benefit of low-cost imports. Average inflation: 1.8% per year (1995–2020) - Referenced in discussing the effects of imports on consumer prices. Steel jobs saved: 1,000 - A reported estimate of jobs preserved by 2018 steel tariffs. Jobs lost or not hired in steel-using industries: 75,000 - Used to show trade-offs from steel tariffs. Manufacturing jobs lost to China: 3.2 million - Marks cites this estimate when discussing competing interests in trade policy. U.S. national debt: $36 trillion - He argues persistent deficits have produced an unsustainable debt burden. Years of U.S. fiscal deficits: 25 of the last 25 years; 41 of the last 45 years - Marks says the U.S. has repeatedly lived beyond its means. Trillion-dollar-plus deficits: Each of the last 5 years - He uses this to underscore recent fiscal excess. Global trade system timeframe: about 80 years - Marks describes the post-WWII trade order as the basis of modern prosperity. U.S. economy size relative to Japan: more than doubled since the 1980s - Used to argue that losing autos did not doom U.S. economic leadership. Tariff announcement date: April 9, 2025 - Marks dates the memo and the market shock.

Pivotal Quotes: "There’s absolutely no place for certainty in the world of investing, and that’s particularly true at turning points and during upheavals." — Howard Marks: His core investing philosophy amid the tariff shock. "When the time comes to buy, you won’t want to." — Walter Diemer (quoted by Howard Marks): Marks uses this to explain why fear often creates the best buying opportunities. "I consider the tariff developments thus far to be what soccer fans call an own goal." — Howard Marks: His bottom-line judgment on the current tariff policy.

Implications: Investors should expect volatility, inflation pressure, and slower growth, but also possible mispriced opportunities in credit and distressed assets. More broadly, tariffs could weaken trade ties, raise borrowing costs, and reshape the global order.