Howard Marks' Latest Memo: Now Entering the "Nobody Knows" Territory
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Howard Marks' Latest Memo: Now Entering the "Nobody Knows" Territory
"The tariff developments so far have been like what soccer fans call an 'own goal'—a situation where a player accidentally scores into their own net, benefiting the opposing side."
Navigating Web3 tides with focused insightsAuthor: Howard Marks, Co-Chairman and Co-Founder of Oaktree Capital
Source: Oaktree Capital
*Published on April 9, 2025
On Friday, September 15, 2008, shortly after the New York Stock Exchange closed, the sudden bankruptcy filing by Lehman Brothers sent shockwaves across the globe. Prior to that, Bear Stearns and Merrill Lynch had already sought bailouts or declared bankruptcy, followed quickly by crises engulfing Wachovia, Washington Mutual, and AIG. Market participants swiftly concluded that the U.S. financial system was on the verge of collapse.
The situation had become painfully clear—unlike just days earlier—that a combination of factors could trigger a domino-like cascade of failures among financial institutions:
(1) Deregulation in finance; (2) a housing frenzy; (3) irrational mortgage lending; (4) the structuring of mortgages into thousands of tranches of securities with inflated credit ratings; (5) highly leveraged banks investing heavily in these securities; and (6) interconnectedness among banks creating severe counterparty risk. Panic spread rapidly, and markets appeared to be spiraling downward without end.
I felt compelled to share my thoughts on these developments and what might lie ahead, so four days later I issued a memo titled “Nobody Knows.” As always, I acknowledged my own complete lack of foresight about the future—a condition that now felt even more acute given how thoroughly prior assumptions had been shattered. Nobody knew whether this spiral would stop, and certainly I did not. Nevertheless, I concluded we had to assume it eventually would stop, and therefore it made sense to aggressively buy financial assets while they were deeply discounted.
No one at the time—not me, not anyone—could credibly claim to “know” what lay ahead. My conclusions were based purely on inference:
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We cannot know when or if doomsday will arrive,
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Even if we did know, there’s little we could do about it,
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If doomsday doesn’t come, actions taken in anticipation of it may themselves prove disastrous, and
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Doomsday rarely arrives.
Clearly, none of these points rests on actual knowledge of the future. But aside from putting capital to work—including deploying the $10 billion of dry powder in our Opportunity Fund VII B—I saw no more logical course. We raised that fund precisely to take advantage of major opportunities in distressed debt. And when such an opportunity arises—especially considering we can buy top-quality debt at steep discounts and with astonishing yields—how could we possibly stand aside? That said, we truly had no idea what would happen next.
I cannot claim to analyze the future. In fact, I believe the phrase “analyzing the future” is a profound contradiction. The future hasn’t happened yet, and it remains subject to countless complex, unquantifiable, unpredictable, and ever-changing influences. We can think about the future, speculate about it, but we cannot analyze it—and that was certainly true during the early stages of the global financial crisis.
In March 2020, I reused the title of my 2008 memo for “Nobody Knows II,” my first memo written during the pandemic. It quoted Harvard epidemiologist Marc Lipsitch, who observed that people typically make decisions based on (1) facts, (2) informed extrapolations from similar past experiences, or (3) opinions/speculation. But given the absence of both relevant facts and historical parallels at that time, we were left with only speculation.
Regarding the 2008 crisis and other market upheavals I’ve experienced—including the present moment—I want to emphasize that my decisions were never made with certainty, nor were they free of anxiety. There is no certainty in investing, especially during turning points and periods of extreme volatility. I have never been sure I’m right, but as long as I reach what seems like the most logical conclusion, I feel obliged to act accordingly.
An Uncertain Outlook
In my February client-only memo, “2024 in Review,” I described the Trump administration as defined by “uncertainty.” This president’s decision-making appears less predictable than his predecessors’, largely because it doesn’t necessarily follow a consistent ideology and often involves tactical shifts and reversals. That said, Trump has long complained about perceived unfairness in world trade for the U.S., advocating tariffs since at least 1987. While we might have anticipated he’d raise tariffs, their scale has far exceeded expectations—and clearly caught markets off guard.
Last week’s events reminded me of what happened in 2008 and the global financial crisis that followed. All the rules have been thrown out. The way world trade has operated over the last 80 years may be rewritten. Its implications for the economy—and the world order—are entirely unpredictable. Once again, we face major decisions without factual grounding or historical precedent. Truly, nobody knows—and much of this memo will explore things we cannot know. But I hope it helps clarify your thinking and assessment of the situation.
I must stress: in the current environment, there are no real experts. Economists have analytical tools and theories, but under these circumstances, no scholar or model can deliver conclusions with confidence. There has never been a large-scale trade war in modern history, so all theories remain untested. Investors, entrepreneurs, academics, and government leaders will offer advice, but they’re unlikely to be more accurate than any well-informed observer. The obvious conclusions—such as higher prices—are easy to identify. The subtle, critical truths are much harder to discern.
I maintain that even for those who rely on predictions to navigate the future, predictions alone are insufficient. Beyond the prediction itself, you must assess its probability of coming true, since not all predictions carry equal weight. In the current environment, we must acknowledge that predictive accuracy will inevitably be lower than usual.
Why? Because the situation is filled with unprecedented unknowns—potentially evolving into the most significant economic shift of our lifetimes. There is no prescience here, only complexity and uncertainty, and we must accept that. This means if we insist on certainty—or even confidence—as a prerequisite for action, we’ll paralyze ourselves. Or, to put it bluntly, if we believe we’re making definitive decisions, we’re probably wrong. We must act despite lacking certainty.
But equally important: deciding “not to act” isn’t the opposite of taking action—it is itself an action. The choice not to act—the decision to keep a portfolio unchanged—is just as consequential as changing it and deserves equal scrutiny. Sayings embraced by fearful investors—“don’t catch falling knives” and “wait until the dust settles”—are not actionable guidance. I love the title of market analyst Walter Deemer’s book: *When the Time Comes To Buy, You Won’t Want To*. The very developments that cause the steepest price declines generate fear and suppress buying impulses. Yet it’s often precisely when bad news piles up that decisive action makes the most sense.
Finally, given Trump’s tactical mindset, remember that everything can change instantly. It wouldn’t be surprising if he declares victory after pressuring opponents into concessions… nor would it be surprising if he escalates further in response to retaliation. So, as I said at the Wharton School forum on Friday: if someone claims to know what tariff rates will be in three months, I’d bet heavily they’re wrong—even without knowing their forecast.
Tariffs
What motivates President Trump’s tariff policy? Are the reasons valid? On the day the policy was announced, I heard a TV commentator suggest there was “method to the madness.” What are his goals? They include some or all of the following:
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Revive U.S. manufacturing
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Promote exports
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Limit imports
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Narrow or eliminate the trade deficit
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Increase supply chain security through onshoring
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Counteract unfair trade practices against the U.S.
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Force other countries to negotiate
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Generate revenue for the U.S. Treasury
Each goal, considered in isolation, is desirable and represents a plausible outcome of tariff policy.
Unfortunately, reality is more complicated. The real world—especially economics—involves second- and third-order effects that must be considered. Without such ripple effects, economics would be as reliable as physical science: “If you do A, then B happens.” As theoretical physicist Richard Feynman put it, “Imagine how difficult physics would be if electrons had feelings.”
Economies and markets are made up almost entirely of humans, who do have emotions and react unpredictably. In economics, others react not only to action A but also to outcome B caused by A, and we must anticipate the consequences of their reactions. These effects are often significant and hard to predict. Moreover, politics plays a major, unpredictable role in the current situation, operating by its own logic.
What might be the consequences of Trump’s tariff policies? The list is long, and many outcomes would be severe:
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Retaliation by other countries
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Higher prices and rising inflation
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Falling demand due to higher prices and weakening consumer confidence
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Recession and unemployment in the U.S. and globally
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Supply shortages
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Major shifts in the world order
There are many threads to follow, and if I tried to cover them all, this memo would never end. I’ll touch briefly on several key points.
Some countries will negotiate—after all, using Trump’s language, the U.S. generally “holds the cards”—but others won’t, either because their leaders adopt a defiant stance or because escalation takes hold. Imposing “reciprocal tariffs” is unlikely to produce positive results and could worsen conditions for both sides. Even if we suffer less than others, that offers little comfort.
There’s no doubt tariffs will raise prices. Tariffs are taxes on imported goods, and someone must bear the cost. This applies not only to foreign-made goods but also to U.S.-produced goods containing imported materials or components. Thus, the impact will be broad. Although importers pay tariffs at ports, costs are usually passed on to end consumers. Theoretically, manufacturers, exporters, exporting countries, or importers could absorb the tax to preserve business, but few would willingly cut profits, and most lack sufficient margin to do so.
Recall my March 2022 memo, “The Pendulum in International Affairs”: from 1995 to 2020, U.S. durable goods prices fell 40% in real terms, and overall inflation averaged just 1.8% annually. Durable goods—cars, appliances, electronics—have high import content. Imagine what inflation would have looked like if cheap imports had been restricted.
But suppose the three main goals are somehow achieved, leading more goods sold in the U.S. to be produced domestically:
First, the U.S. lacks sufficient existing manufacturing capacity. For example, I doubt any U.S. factory currently produces LCD screens for TVs or computers. Building enough capacity to meet most U.S. demand would take years, meaning short-term supply shortages and/or prices likely remaining at “original price + tariff” levels.
Second, new factories built to restore manufacturing jobs face long approval and construction timelines. Their capital investments must be justified by expectations of profitability over many years—adding further complexity, especially amid uncertainties around automation and AI. Which CEO would commit billions based on tariffs that might be renegotiated—or repealed by the next administration? Remember, Trump replaced NAFTA, effective since 1994, with USMCA in 2020, only now to replace USMCA with 25% tariffs on Mexican and Canadian goods.
Third, the U.S. may lack enough skilled workers to fully replace those in China and other developing countries who currently produce our goods.
Fourth, why did Americans originally buy imports? Because they were cheaper. Why did the U.S. lose jobs? Because American workers command higher wages, but product quality doesn’t justify higher prices. That’s why U.S. Volkswagen imports surged from 330 units in 1950 to 400,000 in 2012—not because tariffs were too low. Simply put, foreign goods are usually cheaper than comparable U.S.-made products. Even if tariffs rise enough to make “Made in America” cheaper than “imported + tariff,” the absolute price will still be higher than pre-tariff levels. Either way, U.S.-made goods will almost certainly cost more than the imports Americans are used to buying.
Since most Americans have little disposable income after necessities, rising prices could reduce living standards. Wage increases keeping pace with inflation are unlikely, risking a dangerous inflationary spiral.
Higher prices may reduce sales, squeezing profit margins. My favorite economist (a seeming oxymoron, given I never forecast the economy)—Conrad DeQuadros of Brean Capital—believes corporate profit margins are the best leading indicator of recession. When margins come under pressure, companies halt investment and resort to layoffs and cost-cutting, often triggering downturns.
Economics is fundamentally about choices and trade-offs—nowhere more so than in trade and tariffs. For instance, reports (of questionable accuracy) claim the 2018 steel tariffs saved 1,000 jobs in the U.S. steel industry—but cost 75,000 jobs (or potential hires) in industries using steel. How do we weigh such trade-offs? Similarly, as I wrote in my May 2016 memo, “Economic Reality”:
How do we balance the interests of 3.2 million Americans who lost manufacturing jobs due to Chinese competition against those of millions more Americans who benefit from lower-priced imports? This is a hard question.
The more uncertain the world feels, the less willing people are to take risks. In this potentially unstable environment, individuals may hesitate, avoid deals, and assign lower values to each unit of potential profit.
John Maynard Keynes described economic activity as driven by “animal spirits”—a spontaneous urge to act rather than wait passively, “a spontaneous optimism . . . not the product of a weighted average of quantitative benefits multiplied by quantitative probabilities” (per Wikipedia). This impulse often stems from optimism, perhaps reflected in consumer confidence. So, in the environment ahead, where will positive “animal spirits” come from?
Global Perspective
The impact of tariffs extends far beyond economics into international relations. Since WWII, world trade has brought enormous benefits globally. Postwar reconstruction spending, technological and managerial advances, infrastructure improvements, capital market expansion, and the wave of globalization created widespread prosperity—“a rising tide lifts all boats.” Countries and people benefited unequally, but all gained. I believe this is a key reason for the relative peace and prosperity of the last 80 years. Indeed, we’ve lived through the finest era in human history.
The primary economic benefit of globalization is known as “comparative advantage.” Each country excels relatively in certain production areas, creating complementary relationships. If each specializes in producing its advantageous goods, exports them, and imports goods it produces less efficiently, international trade maximizes collective welfare through greater efficiency. As I said on Bloomberg TV Friday: “Italy makes pasta, Switzerland makes watches—this benefits us all.” But if trade barriers force Italy to make watches and Switzerland to make pasta, citizens in both countries may end up paying more for previously affordable imports, settling for lower-quality domestic substitutes, or both.
The fact that most goods can be produced more cheaply elsewhere—especially in developing countries with lower wages—has greatly benefited Americans. Yes, millions of jobs were lost, but Americans’ standard of living improved dramatically compared to being limited to domestically produced goods. That’s simply why Walmart’s non-food items are mostly imported.
Another factor contributing to a better world: I describe U.S. post-WWII behavior as “enlightened self-interest” and generosity toward others. Under the Marshall Plan, we gave (not lent) billions to rebuild Western Europe. From 1945 to 1952, General MacArthur oversaw Japan’s reconstruction and economic revival. Since then, the U.S. has (1) provided substantial foreign aid, (2) invested heavily in healthcare systems in developing countries, (3) promoted educational exchanges, and (4) projected a positive global image. These were generous acts. Cynics might call us suckers for giving so much with little direct return.
Yes, it was generous—but as the National Archives notes, the Marshall Plan “opened markets for American goods, created reliable trading partners, and helped establish stable democracies in Western Europe.” Not bad returns. Other nations received vast aid, but these programs clearly benefited the U.S.: limiting ideological rivals, building defense alliances, and helping America become the world’s most prosperous nation. I don’t want the U.S. to become isolationist.
But: we could reverse this process.
We could antagonize trade partners and bully allies.
We could push countries that once relied on U.S. capital and aid toward China and Russia.
We could prompt others to reduce investments in the U.S. and sell U.S. Treasuries.
The first two could cost us vital allies and weaken global appeal for democracy. As my friend Michael Smith says: “You can’t alienate people and expect to influence them.” The third could severely impact U.S. fiscal health.
To date, global confidence in the U.S. economy, rule of law, and fiscal stability has granted us a “platinum credit card”—with unlimited spending and no bills due. This allowed annual budget deficits for 25 of the last 25 years (and 41 of the last 45), including trillion-dollar-plus deficits annually over the past five years. In short, we’ve lived beyond our means—the federal government consistently spending more than it collects in taxes and fees. This has led to the worst outcome: $36 trillion in national debt and profoundly irresponsible federal behavior.
I don’t expect sudden fiscal responsibility, so I wonder how long we can rely on this credit card.
Will foreign appetite for U.S. Treasuries decline? Will they deem our fiscal management unreliable?
Even if our credit stays strong, might they buy less due to concern, resentment, or political motives?
What if Treasury auctions fail? (I suspect the Fed would buy unsold bonds, but I’m uneasy about the Fed creating money by crediting bank reserves. Ultimately, where does the money come from?)
If the dollar’s status as global reserve currency weakens, will our credit endure?
If Treasury buyers demand higher yields, what happens to deficits (and national debt)? So far, part of our trade deficit may have been recycled into Treasury purchases. If that stops, what happens to Treasury yields?
Since WWII—or earlier—the U.S. has “held the cards.” Trump believes in American strength and monetizing it. That’s his approach to tariffs: no longer “paying for the world.” No more generosity that generates long-term benefits, but transactional dealings demanding “fair value.”
I received many positive responses to my Friday appearance on Bloomberg TV. Let me conclude this section with a viewer’s comment:
In the 1980s, Peter Navarro [Trump’s trade and manufacturing advisor] and others argued that Japan’s lead in autos threatened America’s future.
Japan did gain leadership—and has maintained it.
Yet since then, the U.S. economy has grown more than twice as large as Japan’s. Even adjusting for demographics and currency appreciation, growth has more than doubled. Despite losing ground in autos, the U.S. economy doubled—or perhaps partly because of it? Profit margins in software and jet engines are far higher than in mass-market cars. (Emphasis mine)
Japan leveraged its automotive strength; the U.S. shifted to areas where it held advantages. Isn’t this how a dynamic global economy should work?
As I asked in my September memo: Is it wise for governments to override economic forces—forces that would otherwise evolve naturally—to align economies with policy preferences? Tariffs are an “external” or “artificial” intervention meant to: (1) suppress exports that could otherwise occur, and (2) help domestic firms achieve sales they wouldn’t attain otherwise. Who pays the cost, and how high is it?
Conclusion
To me, the tariff developments so far resemble what soccer fans call an “own goal”—a player accidentally scoring against their own team. This resembles Brexit, and we already know how that turned out: Britain paid dearly in GDP, morale, and alliances, damaging government credibility and stability—all self-inflicted wounds.
I’ve enjoyed how things have worked during my lifetime, which spans nearly all of the postwar period I’ve discussed. Some government spending was clearly wasteful, both domestically and abroad, and our national debt is nothing to celebrate. But I’ve valued living in a peaceful, prosperous, and increasingly healthy world, and I don’t want that to change. Just months ago, the U.S. economy was strong, outlooks optimistic, stock markets near record highs, and talk of American exceptionalism was everywhere. Now, if Trump’s tariffs take full effect, the U.S. economy could fall into recession faster, with higher inflation and widespread dislocation, than under any other scenario. Even if tariffs are fully rescinded, other nations are unlikely to ignore what happened and conclude they needn’t worry about their relationship with the U.S.
Undeniably, tariffs might achieve some of the goals listed earlier. U.S. manufacturing could grow, creating jobs and more resilient supply chains. Trade treatment might become fairer. Treasury revenues could rise.
On the other hand, some expected benefits may prove elusive. Especially in reducing the trade deficit: as long as the U.S. is stronger, more prosperous, and thus has greater purchasing power, Americans are unlikely to buy significantly less from abroad than foreigners buy from the U.S. Higher U.S. wages mean American-made goods are unlikely to become cheaper than foreign-produced ones.
Desired outcomes may materialize, negative effects may unfold, or both. But crucially, any gains may take years to emerge, while costs are likely immediate.
What about financial markets? In recent days, economic outlooks have shifted dramatically, sending stocks sharply lower. As always, the key question is whether the market reaction is appropriate: adequate, excessive, or insufficient? This is even harder to judge now, as almost no one believes the future economic world won’t differ significantly—and possibly for the worse—from the one we’ve known. On one hand, if announced tariffs persist and retaliatory measures spark a full-blown trade war, economic consequences could be severe. On the other, if cooler heads prevail—politically and in markets—tariffs could retreat to less damaging levels, or even yield gains for freer trade.
How might the Fed respond? Rising recession risks could spur more aggressive rate cuts to stimulate growth. Or inflation concerns might delay planned cuts. But note: raising rates to fight inflation—effective against typical demand-driven inflation—may be less successful against inflation caused by tariffs. Today’s headline fits the Fed perfectly: nobody knows.
In the markets Oaktree operates, concerns about defaults (not unfounded) have pushed risk premiums—measured in yield spreads—significantly higher, resulting in substantially higher net yields on available credit. At the same time, we expect rising distress and greater demand for customized capital solutions. Our latest opportunistic debt fund is likely to deploy capital faster.
As Mark Twain said, history rhymes. So just as I reused the title of my post-Lehman memo for this one, I’ll also borrow its closing lines:
Eighteen to twenty-four to thirty-six months ago, everyone eagerly bought assets amid clear skies and soaring prices. Now unimaginable risks are visible and priced in. Buying assets at a discount makes perfect sense: yesterday’s treasures are today abandoned by investors (babies thrown out with the bathwater). We are deploying actively.
Personally, I had the good fortune to visit investors in Montreal on the day tariffs were announced, and Toronto the next day. My timing couldn’t have been better! At every meeting, I opened by saying that, like hundreds of millions of Americans, I respect Canada and regard it as a partner and ally. The response was heartening. This is exactly the moment for all of us to strengthen ties with friends around the world.
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