Thinking About Macro

Episode Summary

Executive Summary: Howard Marks argues that macro forecasting is usually unhelpful because the future is not knowable, yet inflation is too important to ignore. He reviews why 2021 inflation is difficult to interpret, weighs transitory versus persistent forces, critiques forecasters and the Fed’s uncertainty, and concludes investors should prepare modestly for inflation without radically changing allocations.

Main Topics: Skepticism toward macro forecasting (Priority: 5/5): Marks argues that macro forecasts are typically consensus-driven, unverifiable, and rarely create an advantage. He says investors usually do better with bottom-up decisions than by betting on macro predictions. Inflation as the central macro risk (Priority: 5/5): Despite skepticism about forecasting, Marks says inflation is currently the most important wildcard because it can affect rates, asset prices, borrowing costs, and market valuations. Why inflation may be transitory (Priority: 4/5): He cites reopening disruptions, supply-chain bottlenecks, temporary demand spikes from pandemic relief, labor normalization, and longer-term deflationary forces like technology and globalization. Why inflation may persist (Priority: 4/5): Marks also notes strong fiscal/monetary stimulus, shortages, wage pressure, rising CPI readings, deficit spending, and the possibility that expectations could become embedded. Fed uncertainty and policy tradeoffs (Priority: 5/5): The Fed is trying to support employment while containing inflation, but its own statements show uncertainty. Marks worries about long-term distortions from persistent intervention and artificial rates. Market and forecaster signals are unreliable (Priority: 4/5): He contrasts stock, bond, and gold reactions and shows that markets and Wall Street forecasts often disagree or fail to predict the future, reinforcing his skepticism. Investor preparation rather than prediction (Priority: 5/5): Marks advises maintaining balanced exposure, with only modest tilts toward inflation-resistant assets such as floating-rate debt, pricing power, and real assets rather than large allocation shifts.

Key Arguments: Macro outcomes are important but generally not knowable, so investors should be agnostic rather than confidently predictive. Consensus forecasts are usually not advantageous; being merely as right as everyone else does not produce excess returns. Inflation is the key macro issue because it can drive rates higher, reduce asset values, and alter policy. Recent inflation could be temporary because it was partly driven by reopening frictions, supply shortages, and pent-up demand financed by stimulus. Inflation could also persist because fiscal deficits, money creation, labor pressures, and supply-demand imbalances may outlast the reopening. The Fed itself is uncertain, shifting from 'no inflation' to 'transitory' to 'we have tools,' which shows limited confidence. Markets are good at reacting to current events but are poor long-range forecasters; stock, bond, and gold signals can conflict. Historic Wall Street forecasts have been consistently wrong, especially when accuracy mattered most. Low rates make many current asset prices look reasonable relative to yields, even if they are vulnerable if rates rise. Investors should not dramatically invert portfolios on macro guesses; instead they should prepare with selective defenses against inflation.

Data Points: Inflation target: 2% - The long-standing goal targeted by central bankers in the U.S., Europe, and Japan. U.S. inflation readings: 4.2% in April, 5.0% in May, 5.4% in June 2021 - Year-over-year CPI increases cited as evidence that inflation was rising sharply. Historical inflation period: 5% to 15% annually - Inflation experienced in the U.S. from the early 1970s through 1982, shaping Marks’s early investing years. Fed bond buying: $120 billion per month - Monthly pace of bond purchases during the recovery response. Estimated consumer balance sheet boost: About $2 trillion - Approximate increase from elevated 2020 incomes and reduced spending during COVID-19 shutdowns. SP 500 return in 2020: 18.4% - Actual return used to compare against Wall Street forecasts. Median Wall Street forecast for 2020: 2.7% - Forecast made in December 2019 for the SP 500’s 2020 return. Consensus forecast for 2020 during April 2020: -11% - Revised forecast after the pandemic began and policy response was underway. Average analyst forecast since 2000: 9.5% annually - Median forecast for SP 500 yearly returns from 2000 onward. Actual average SP 500 gain since 2000: 6.0% annually - Long-term actual return cited versus forecasts. Average forecast miss: 12.9 percentage points - Average absolute miss of the median Wall Street forecast from 2000-2020. Years with negative stock returns: 6 years - Since 2000, the market lost money in six calendar years despite forecasts never predicting declines. SP 500 decline in June 2021 week: Dow -3.45%, SP 500 -1.9%, Nasdaq -0.3% - Weekly declines attributed by the media to inflation and rate-hike fears. 10-year Treasury yield: 1.449% - Yield level during the June 2021 risk-off period, despite inflation concerns. Gold price peak: $2,067/oz on August 6, 2020 - All-time high likely driven by massive monetary stimulus. Gold price on June 18, 2021: $1,773/oz - About 14% below the prior peak despite rising inflation fears. SP 500 gain from March 23, 2020 low to end-2020: 68% - Example of the market recognizing the impact of policy actions better than most commentators. Q1 2021 real GDP growth: 6.4% annualized - Used to illustrate the strength of the recovery. Missing jobs referenced by Powell: 7.5 million - Jobs still absent relative to pre-pandemic levels, supporting continued Fed accommodation. Lumber price rise: Roughly 540% from April 2020 low to May 2021 high - Example of temporary inflationary price spikes tied to supply/demand mismatches. Lumber price drop: More than 60% in two months - Used to argue that some inflationary spikes can reverse quickly.

Pivotal Quotes: "For a piece of information to be desirable, it has to satisfy two criteria: it has to be important and it has to be knowable." — Howard Marks (citing Warren Buffett): Introduces the memo’s central framework for judging macro forecasts. "Important, but not knowable." — Howard Marks: His conclusion on inflation and broader macro forecasting despite its significance. "No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future." — Ian H. Wilson: Used to underscore the limits of forecasting and decision-making under uncertainty.

Implications: Investors should avoid large portfolio bets based on macro certainty. Inflation risk merits attention, but the prudent response is modest preparation, diversification, and preference for assets with pricing power or floating rates.