Source: Caixin.

On the afternoon of June 17th, Howard Marks, Co-founder and Co-chairman of Oaktree Capital, and Peng Wensheng, Chief Economist of CITIC Securities, had a dialogue in Shanghai on many hot topics such as the U.S. economy, Fed interest rate trends, U.S. stock markets, and artificial intelligence (AI). In terms of product structure, the operating income of products worth 10-30 billion yuan was 401/1288/60 million yuan respectively, with a total sales volume of 18,000 kiloliters, a year-on-year increase of 28.10%, showing significant growth.

Marks believes that the economic stimulus policies of the Biden administration and the reshoring of manufacturing are the main reasons for the recent strong performance of the U.S. economy, and the resilience of the U.S. economy has always affected the Fed's decisions and the performance of U.S. stock markets.

The economic stimulus policies of the Biden administration and the reshoring of manufacturing have contributed to the success of the U.S. economy.

Marks said that the resilience of the U.S. economy is due in large part to the economic stimulus plan of the Biden administration.

In March 2021, shortly after taking office, U.S. President Biden proposed a $1.9 trillion coronavirus relief bill, which involves a wide range of economic assistance to households, businesses, and communities across the United States. Among them, eligible U.S. citizens can receive a subsidy of $1,400 each.

Marks believes that Biden's economic stimulus plan is somewhat too aggressive because only about 10%-15% of the U.S. population has been affected by the COVID-19 pandemic, but as many as 85% of those who received relief funds have seen their income rise, thus boosting more spending and also encouraging more people to spend.

In addition to the U.S. government's economic stimulus plan, the reshoring driven by the trend of "de-globalization" has also helped to maintain the strong performance of the U.S. economy. This has not only brought about more infrastructure and service demand, but also strengthened the fundamentals of U.S. companies. On the other hand, the slowing growth of other economies has made the U.S. economy appear even more resilient.

Marks said that although the current U.S. stock market may be somewhat overheated, there is no need for the market to adjust its expectations of the U.S. economy. Even if the U.S. economy experiences a recession in the next two to three years, it is likely to be driven by geopolitical or other external factors rather than internal factors.

Future interest rate trends of the Fed

At last week's Fed interest rate meeting, policymakers continued to keep the federal fund rate target range unchanged at 5.25%-5.5%. This is the highest rate level in the United States in over 23 years. The Fed raised the benchmark interest rate to this range in July of last year. Investors, however, are more concerned about the dot plot, which shows that officials expect only one interest rate cut this year, down from three cuts predicted in March.

Some pessimists believe that given the resilience of the U.S. economy and the stubbornness of inflation, the Fed may not cut interest rates this year. However, Marks pointed out that there is a strong demand from the public for rate cuts, and the Fed will respond to this demand. The Fed is currently in a relatively neutral position, and policymakers may be more patient in waiting for more conditions to be met for rate cuts.

He pointed out that U.S. inflation has fallen sharply from its peak of over 9%, but after falling to 3.5%, inflation has been somewhat sticky and has not shown the progress that the Fed wants to see. Policymakers hope that inflation will smoothly move toward the target level of 2%.

Reasons for the continued strength of the U.S. stock market

Just at the beginning of the year, investors were optimistic that the Fed could cut interest rates up to six times this year. However, their wishes have been repeatedly frustrated, and the market now expects the Fed to cut rates only once or twice this year. Marks pointed out that it is now past the midpoint of 2024, the Fed has not yet cut rates, but the U.S. stock market is exceptionally strong, which seems somewhat contradictory.

Marks pointed out that the reason why the U.S. stock market remains strong is largely due to technology stocks, led by AI chips, whose performance has been outstanding and has carried the expectations of the entire stock market. Behind the scenes, the inflow of funds from other markets into the United States is also an important reason, because the U.S. economy is strong and other economies are not performing as well.

So far this year, all three major U.S. stock indexes have recorded gains. The S&P 500 index has risen more than 14%, the Nasdaq has risen 18%, and the Dow has risen over 2%.

Marks believes that the reason why the U.S. stock market remains strong is largely due to technology stocks, led by AI chips, whose performance has been outstanding and has carried the expectations of the entire stock market.$NVIDIA (NVDA.US)$Behind the scenes, the inflow of funds from other markets into the United States is also an important reason, because the U.S. economy is strong and other economies are not performing as well.

He added that investors are essentially optimists, they are naturally optimistic and this optimism can last for a long time. If investors predict at the end of 2022 that the Fed will not cut interest rates until the second half of this year, the market may not be so strong, which reflects the unpredictability of the market.

"The market currently has a very strong momentum, which has gained the upper hand and has led the market away from the fundamentals of the economy," he said.

Talking about AI and bubbles.

AI has been the theme of the market since last year, but there has always been doubts about whether the AI frenzy is a bubble.

Max said that many people are too optimistic about the development of AI. If the positive changes brought by this new technology do not meet the expectations of investors, or if they are not good enough, the US stock market may fall. However, he emphasized that he did not think AI was a bubble.

However, he emphasized that he did not think AI was a bubble.

Max listed the bubbles he has experienced since he started his investment career, such as the "Nifty Fifty" bubble in the 1970s, the technology bubble in 1999, and the real estate bubble in 2006. In more distant times, there were also the tulip bubble in the 17th century and the South Sea bubble in the 18th century. The common point of these bubbles is that a attractive new thing first appeared, people were crazy about it, and finally disillusionment occurred because it did not meet expectations.

He emphasized that AI is the newest thing that has appeared, but no one knows what impact AI will ultimately have on the economy and employment, or when this impact can be realized.

Oaktree Capital in China

Oaktree Capital was founded in 1995. As of the end of March 2024, its asset management scale has reached 192 billion US dollars, covering four major areas: credit, physical assets, private equity investments, and listed stocks. Oaktree Capital is best known for its deep involvement in the non-performing assets field and is the largest non-performing asset investor globally.

Max has a long-term bullish view on the Chinese market and believes that the Chinese economy is still in its "teenage years" and has a promising future.

Oaktree Capital officially entered the Chinese non-performing asset market in 2013 and established a wholly-owned subsidiary in Shanghai in November of that year. It was one of the first institutions to obtain the qualification of the Qualified Domestic Limited Partner (QDLP) pilot program in Shanghai, and issued non-performing debt funds. In 2020, Oaktree Capital established a wholly-owned subsidiary in Beijing, which was the first foreign-funded asset management company approved to be established in China.

Editor/tolk