"The development of tariffs to date is akin to what soccer fans refer to as an 'own goal'—a situation where a player inadvertently sends the ball into their own net, resulting in a score for the opposing team."
Written by: Howard Marks, Co-Founder and Co-Chairman 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 news of Lehman Brothers' sudden bankruptcy shocked the world. Prior to this, Bear Stearns and Merrill Lynch had already sought bailouts or declared bankruptcy, and soon after, Wachovia Bank, Washington Mutual, and AIG also fell into crisis. Market participants quickly concluded that the U.S. financial system was on the brink of collapse.
The situation was evident (in stark contrast to just a few days prior), as multiple factors combined to suggest that financial institutions might fall like dominoes:
- Financial deregulation;
- A real estate frenzy;
- Irrational mortgage lending;
- The structuring of mortgages into thousands of over-rated tranches;
- High-leverage banks investing in these securities; and
- The "counterparty risk" arising from the high interconnectivity among banks. Panic escalated, and the market seemed to be caught in an endless downward spiral.
At that time, I felt it necessary to share my views on these developments and future prospects, and four days later, I published a memo titled "Nobody Knows." I acknowledged, as always, that I knew nothing about the future, but in light of the complete upheaval of previous expectations, this ignorance felt more pronounced than ever. No one knew whether this downward spiral would stop, and that was especially true for me. Nevertheless, my conclusion was that we must assume it would eventually stop, and therefore we should aggressively increase our positions while financial asset prices were significantly discounted.
At that time, no one dared to claim they "knew" the future, myself included. I could only infer the following conclusions:
We cannot be certain when the end will come,
Even if we knew the end was near, we would be powerless to act,
If the end does not ultimately come, all actions taken in anticipation of it could lead to disaster, and
Most of the time, the end will not come after all.
Clearly, none of the above conclusions were based on knowledge of the future. But apart from putting money into the market, including the $10 billion in unallocated funds from Opportunity Fund VII, I saw no more logical choice. The purpose of establishing that fund was to seize significant opportunities in the distressed debt space. And when opportunities arise, especially considering that we can buy the highest quality debt at a discount—with astonishing yields—how could we hesitate? However, we must admit that we had no clue what the future would hold.
I cannot claim to be able to analyze the future. In fact, I believe that the very phrase "analyzing the future" is a huge paradox. The future has not yet happened and is always influenced by countless complex, unquantifiable, unpredictable, and ever-changing factors. We can think about the future, speculate about it, but we cannot analyze it, especially not at the onset of a global financial crisis.
In March 2020, I reused the title of my 2008 memo and wrote "Nobody Knows II"—this was the first memo I wrote during the COVID-19 pandemic. The article referenced the views of Harvard epidemiologist Marc Lipsitch: people typically make decisions based on three points—(1) factual basis, (2) reasoned inferences from similar experiences, and (3) opinions or speculations. However, given that there were neither applicable facts regarding the COVID-19 pandemic nor similar experiences at that time, we were left with only speculation.
Regarding the 2008 crisis and other market turmoil I have experienced—including the current situation—I want to say that my decisions were not guaranteed to succeed, and I felt uneasy while taking action. There is fundamentally no certainty in investing, especially during market turning points and extreme volatility. I have never been certain that my judgments were absolutely correct, but as long as I could reason the most logical conclusions, I had to move in that direction.
Uncertain Prospects
In my February client-only memo "2024 in Review," I summarized the characteristics of the Trump administration with the term "uncertainty." This president's decision-making is more unpredictable than that of his predecessors, largely because he does not necessarily adhere to a coherent ideology and often makes tactical adjustments and corrections. However, it is worth noting that Trump has long complained about the unfair treatment of the U.S. in world trade, and he has advocated for tariffs since at least 1987. Even so, even if we anticipated that he would impose tariffs, the extent of his policies exceeded expectations. Clearly, the market was also caught off guard.
Last week's events reminded us of what happened in 2008 and the global financial crisis it triggered. All rules were overturned. The way world trade has operated for the past 80 years may be rewritten. The impact on the economy and the overall global landscape is completely unpredictable. We are once again faced with significant choices, yet we still lack factual basis and historical experience for reference. This memo will largely revolve around those unknowable things. But I hope it can help you clarify your thoughts and assess the situation.
I want to point out that there are no true experts in the current situation. Economists may have analytical tools and theories at their disposal, but in this context, no scholar or model's conclusions can be taken as certain. There has never been a large-scale trade war in modern history; therefore, all theories have not been tested in practice. Investors, entrepreneurs, scholars, and government leaders may offer advice, but they are not necessarily more correct than the average observer. Obvious conclusions, such as that prices may rise, are well-known. The truly critical subtle truths are often difficult to discern.
I maintain that even for those who predict to cope with the future, mere predictions are not enough. In addition to the predictions themselves, we need to weigh the probabilities of their realization, as not all predictions hold equal value. In the current environment, we must acknowledge that the accuracy of predictions is likely less than usual.
Why is this so? The fundamental reason is that the current situation is filled with numerous unprecedented unknown variables, which could evolve into the most significant economic upheaval of our lifetime. There is no such thing as foresight, only complexity and uncertainty, and we must accept this fact. This means that if we insist on taking action based on certainty or even confidence, we will fall into a state of inaction. Or rather, if we mistakenly believe we have made a decision with absolute certainty, we are likely making a mistake. We must make decisions in the absence of certainty.
But it is equally important to remember: the decision to "not take action" is not the opposite of "taking action"; it is, in itself, an action. The decision to not take action—keeping the investment portfolio unchanged—should be considered with the same caution as making a change. The adages viewed as safe havens by panicked investors—"don't catch falling knives" and "wait for the dust to settle"—cannot guide our actions. I am very fond of the title of a book by market analyst Walter Deemer: "When the Time Comes To Buy, You Won't Want To." The most panic-inducing adverse developments that lead to price declines suppress investors' desire to buy. However, when adverse developments come in waves, it is often the best time to act decisively.
Finally, given Trump's tactical thinking, it is essential to remember that everything can change in an instant. If he declares victory after pressuring opponents to concede, it would not be surprising… Likewise, if he responds to other countries' counterattacks by escalating confrontations, that would also be reasonable. Therefore, on Friday at the Wharton School forum, I said that if anyone thinks they know the tariff rates three months from now, I would bet they are certainly wrong—without even needing to know the specific numbers they predict.
Tariffs
What motivates President Trump's tariff policy? Are his reasons valid? On the day the policy was announced, I heard a television commentator suggest that Trump's "impulsiveness" had some merit. What are his goals? They include some or all of the following:
Boosting U.S. manufacturing
Encouraging exports
Limiting imports
Reducing or eliminating the trade deficit
Increasing supply chain security through domestic localization
Curbing unfair trade practices against the U.S.
Forcing other countries to the negotiating table
Generating revenue for the U.S. Treasury
It must be acknowledged that each of these goals is commendable in its own right and is a reasonable expected outcome of tariff policy.
Unfortunately, the situation is not as simple as it seems. The problem is that the real world (especially in economics) has second-order and third-order chain reactions that must be considered. Without these effects, economics would be as reliable as the physical sciences, like "if you do A, then B will happen." As theoretical physicist Richard Feynman said, "Imagine how difficult physics would be if electrons had feelings."
Economics and markets are almost entirely composed of people, and people indeed have emotions, making their reactions unpredictable. In economics, others will react to behavior A and the resulting outcome B, and we must consider what consequences their reactions will trigger. The impacts are often significant and difficult to predict. Moreover, politics plays a crucial and unpredictable role in the current issues, following its own set of logic.
What consequences might Trump's tariff policy bring? The list is long, and many of the consequences are particularly severe:
Retaliation from other countries
Rising prices and inflation
Demand shrinkage due to rising prices and declining consumer confidence
Economic recession and unemployment in the U.S. and globally
Supply shortages
Major changes in the world order
There are many lines of concern, and if I attempted to detail them all, we would never finish this memo. I will briefly discuss a few points.
Some countries will negotiate—after all, to borrow Trump's terminology, in most cases, the U.S. "holds the cards"—but some countries will not, possibly because their decision-makers adopt a hardline stance, leading to an escalation of the situation. Imposing "reciprocal tariffs" is unlikely to yield any positive effects overall; rather, it may worsen the situation for both sides. Even if the problems we face are milder than those of other countries, there is little to be comforted by.
Undoubtedly, tariffs will raise prices. Tariffs are taxes on imported goods, and someone must bear the cost. This applies both to goods imported from abroad and to those manufactured in the U.S. that contain imported materials or components. This means the impact will be very widespread. Although tariffs are paid by importers at the port, the costs are typically passed on to the final product buyers, i.e., consumers. Theoretically, manufacturers, exporters, exporting countries, or importers could choose to absorb the tax burden to maintain their business, but they are unlikely to willingly cut profits for this, and in most cases, they do not have enough profit margin to absorb this cost.
It is worth recalling that in my March 2022 memo "The Pendulum in International Affairs," I pointed out that from 1995 to 2020, the prices of durable goods in the U.S. decreased by 40% in real terms, with an average annual inflation rate of only 1.8%. Durable goods primarily include automobiles, appliances, and electronics, which have a high proportion of imports. Imagine if, at that time, low-priced imports had been restricted or suppressed—how would inflation have looked?
However, if we assume that the aforementioned three major goals can indeed be achieved, leading to more goods sold in the U.S. being produced domestically:
First, in most cases, the U.S. does not have sufficient existing manufacturing capacity to draw upon. For example, I doubt whether there are factories in the U.S. capable of producing televisions or computer LCD screens. Establishing capacity to meet a significant portion of U.S. demand would take years, meaning that in the short term, there would likely be supply shortages and/or prices would probably remain at the level of "original price + tariffs."
Second, new factories built to restore manufacturing jobs would have to undergo a lengthy approval and construction process, and the corresponding construction costs must be justified based on expectations of profitability over many future years. This further complicates decision-making, as the uncertainties surrounding the future development of automation and artificial intelligence pose challenges to decision-making. Which CEO would commit to investment solely because of tariff policies that might face renegotiation (or be abolished by the next administration)? Let’s not forget that Trump signed the USMCA during his first term, which took effect in 2020, replacing the NAFTA that had been in place since 1994, and now he is imposing a 25% tariff on goods from Mexico and Canada, effectively replacing the USMCA.
Third, the number of skilled workers in the U.S. may not be sufficient to fully replace the workers in China and other developing countries who currently produce products for us.
Fourth, why did Americans initially buy imported goods? Because they were cheaper. Why did the U.S. lose jobs? Because for the same work, American workers are paid more, but the product quality does not support the higher price. This is the fundamental reason why the import volume of Volkswagen in the U.S. surged from 330 vehicles in 1950 to 400,000 vehicles in 2012. It was not because U.S. tariffs were too low. The simple truth is that the cost of foreign goods is often lower than that of similar goods made in the U.S. Even if future tariffs are high enough to make "Made in America" products cheaper than "imported goods + tariffs," their absolute prices will still be higher than the prices a week ago (i.e., before the tariffs). In any case, the prices of domestically produced products are almost destined to be higher than the imported goods that Americans are accustomed to purchasing.
As most Americans have little income left after paying for necessities, rising prices could lead to a decline in living standards. Unless wages rise in tandem with prices, which is generally unlikely, we could face a dangerous inflation spiral.
Rising prices are likely to lead to declining sales, which in turn squeezes profit margins. My favorite economist (which is itself a contradictory rhetoric, as I never predict economic trends)—Conrad DeQuadros of Brean Capital—believes that corporate profit margins are the best leading indicator of predicting economic recessions. When profit margins are under pressure, companies stop new investments and take measures such as layoffs and other cost-cutting actions, which often trigger economic downturns.
Economics is essentially the science of choices, filled with trade-offs. This is especially true in the realm of trade and tariffs. For example, recent reports claim (the authenticity is yet to be verified) that the tariffs on imported steel in 2018 saved 1,000 jobs in the U.S. steel industry. However, industries that use steel in the U.S. lost 75,000 jobs (or did not hire potential new employees). How do we make these choices? Similarly, as I wrote in my May 2016 memo "Economic Reality":
On one side are the interests of 3.2 million Americans who lost manufacturing-related jobs due to Chinese products, and on the other side are the interests of thousands of Americans who have to pay higher prices for imported products—how do we weigh these? This question is difficult to answer.
In all areas of economic activity, the stronger people's feelings of unease, the lower their willingness to take risks. In this uncertain world we may face, people may hesitate, be unwilling to reach agreements, and may pay lower prices for each unit of potential profit.
John Maynard Keynes described economic activity as driven by "animal spirits," which he characterized as "a spontaneous urge to action rather than inaction, and not a weighted average of quantifiable returns multiplied by quantifiable probabilities" (according to Wikipedia). This impulse often stems from optimism, perhaps as reflected in consumer confidence. So, what will be the source of positive "animal spirits" in the future environment?
International Perspective
The impact of tariff policies extends far beyond the economic realm, profoundly affecting international relations. Since the end of World War II, world trade has had a tremendous beneficial impact globally. With post-war reconstruction spending, technological and managerial advancements, infrastructure improvements, and capital market expansion, combined with the wave of globalization, a "rising tide lifts all boats" economic prosperity has been created. Indeed, the degree of benefit varies among countries and peoples, but ultimately, everyone has benefited. I believe this is one of the key reasons for the overall peace and prosperity of the past 80 years. It is also why we are fortunate to live in one of the best periods in human history.
The main benefit of globalization is known as "comparative advantage." Each country has areas of production in which it is relatively proficient and/or has lower costs, forming a complementary relationship with other countries. If each country focuses on exporting products in which it has an advantage while purchasing other products from countries where it does not have an advantage, international trade can be conducted, maximizing collective welfare through enhanced overall efficiency. As I said on Bloomberg TV last Friday, "Italy produces pasta, Switzerland specializes in watches, and this benefits us all." But if, due to trade barriers, Italy must produce watches itself and Switzerland must produce pasta itself, the citizens of both countries may ultimately need to purchase imported products at higher prices than they are accustomed to or buy lower-quality domestic products, or both situations may occur simultaneously.
Most goods are produced at lower costs in other countries, especially in developing countries, due to lower wages, which particularly benefits the American public. While the cost is the loss of millions of jobs, it has allowed all Americans to achieve a standard of living far superior to what they would have if they could only purchase domestic goods. This is the simple reason why most non-food items at Walmart are imported.
To cite another factor that has helped build a better world, I would describe U.S. behavior in the post-World War II period as "enlightened self-interest, showing generosity to other countries." Under the Marshall Plan, we gifted (rather than loaned) billions of dollars in reconstruction funds to Western Europe. Similarly, from 1945 to 1952, General MacArthur witnessed the reconstruction and economic revitalization of Japan. Since then, the U.S. has (1) provided substantial overseas aid, (2) invested heavily in the healthcare systems of developing countries, (3) promoted educational exchanges between the U.S. and other countries, and (4) projected a positive image globally. These initiatives all reflect a spirit of generosity. In every "transaction," our contributions have exceeded the direct benefits received, and cynics might deride us as "suckers."
Indeed, this can be seen as generous giving, but as the U.S. National Archives states: the Marshall Plan "opened markets for American goods, fostered reliable trading partners, and helped Western Europe establish stable democratic governments." That is quite a good return. While people from other countries received substantial grants, these programs undoubtedly benefited the U.S. as well, including limiting the ideological expansion of competitors, forming defensive alliances with other countries, and helping the U.S. become the most prosperous country in the world. I do not wish to see the U.S. become isolationist.
However, this process is very likely to be reversed by us.
We can confront our trading partners, making our allies feel bullied and extorted.
We can force countries that once relied on us for capital and other forms of assistance to turn to China and Russia for support.
We can make other countries feel they must reduce their investments in the U.S. and decrease their holdings of U.S. Treasury bonds.
The first two points could lead us to lose important allies and weaken the goodwill towards democratic systems in various countries. As my friend Michael Smith said, "You cannot make enemies while trying to exert influence." The third point could have a significant impact on the U.S. fiscal situation.
So far, the high regard the world has for the U.S. economy, rule of law, and fiscal soundness has earned us a "credit card" status with no limit and no collection bills. This has allowed us to run fiscal deficits every year for the past 25 years, with only four exceptions in the past 45 years, including over a trillion dollars in new deficits each year over the past five years. In other words, we have been able to sustain ourselves despite running deficits—the federal government's expenditures have consistently exceeded its tax and administrative fee revenues. This has led to the worst-case scenario for the U.S.: a $36 trillion national debt and the resulting extremely irresponsible behavior of the federal government.
I do not expect the federal government to suddenly act responsibly and balance the budget, so I cannot help but wonder how much longer we can rely on this credit card.
Will other countries' willingness to purchase U.S. Treasury bonds decrease? Will they determine that our fiscal management is no longer reliable?
Even if we maintain the strongest credit globally, will they reduce their purchases out of concern, dissatisfaction, or political motives?
What will happen if a Treasury auction fails? (I suspect the Federal Reserve would buy the unsold securities, but I am uneasy about the Fed creating funds to purchase Treasury bonds by crediting banks' deposits. Ultimately, where does the money come from?)
If the recognition of the dollar as the global reserve currency diminishes, will we still maintain the strongest credit globally?
If buyers of Treasury bonds demand higher interest rates, what will happen to the deficit (and national debt)? So far, some of our trade deficits may have been used to purchase U.S. Treasury bonds. If this situation stops, what will happen to the interest rates on U.S. Treasury bonds?
Since World War II and even further back, the U.S. has always "held the cards." Trump believes in America's strength and its ability to leverage that strength. This is reflected in his tariff actions: no longer "paying" for other countries. No longer engaging in generous giving that could yield long-term benefits, but rather making transactions that demand fair value.
I have received many kind responses regarding my appearance on Bloomberg TV last Friday, and I would like to conclude this topic with a comment from one viewer:
In the 1980s, Peter Navarro (Trump's trade and manufacturing advisor) and others believed that Japan's lead in the automotive sector posed a threat to America's future.
Japan did indeed gain a lead in this area and has maintained that advantage.
But since then, the U.S. economy has more than doubled in size compared to Japan. Even considering demographic changes and currency appreciation, growth has doubled. Despite losing the lead in the automotive sector, the U.S. economy has still doubled in size, or should the doubling of the economy be partially attributed to losing that lead? The profit margins in computer software and aircraft engines are far higher than those in mass-market automobiles. (Bold added by the author)
Japan leveraged its advantage in automobile production, while the U.S. turned to other goods where it could gain its own advantages. Isn't this precisely how a vibrant global economy should operate?
As I pointed out in my September memo, is it wise for the government to try to override economic laws, striving to make its economy—if left to operate naturally—align with policy preferences? Tariffs are an "external factor" or "artificial factor," aimed at: (1) suppressing exports that could have been realized, thereby (2) helping domestic companies achieve sales that they would not have achieved if left to their own devices. What is the cost, and who will bear it?
Conclusion
In my view, the development of tariffs so far resembles what soccer fans call an "own goal"—a situation where a player inadvertently sends the ball into their own net, resulting in a score for the opposing team. This situation is very similar to Brexit, and we already know how that turned out. Brexit has come at a heavy cost to the British people in terms of GDP, morale, and alliances. It has damaged the government's reputation and stability. All of this is the bitter fruit of its own making.
I have enjoyed the way affairs have run in my lifetime, which happens to span 99% of the post-war period I discuss. Some of our government spending has clearly been misused, both domestically and abroad, and our national debt is not something to celebrate. But I enjoy living in a peaceful, prosperous, and increasingly healthy world, and I do not wish to see that change. Just months ago, the U.S. economy was performing well, with an optimistic outlook, and the stock market hitting all-time highs, with discussions of American exceptionalism everywhere. Now, if Trump's tariff policies take effect, the U.S. economy could plunge into recession faster than under any other circumstances, with higher inflation and widespread economic dislocation. Even if tariffs are completely lifted, other countries are unlikely to overlook this event and conclude that they need not worry about their relationship with the U.S.
It is undeniable that tariff policies may achieve some of the goals listed above. U.S. manufacturing may grow, bringing new job opportunities and more reliable supply chains. Our treatment in world trade may become fairer. Treasury revenues may also increase.
On the other hand, some anticipated benefits may be out of reach. Particularly in reducing the trade deficit, as long as the U.S. is stronger, more prosperous, and thus has greater purchasing power, it is unlikely that the U.S. will buy fewer goods from other countries than it does from the U.S. Higher wages for American workers mean that the cost of American-made goods is unlikely to be lower than that of goods produced abroad.
The hoped-for outcomes may materialize, negative impacts may also become a reality, or both may occur. However, it must be remembered that any gains may take years to materialize, while the costs are likely to be immediate.
What about the financial markets? In the past few days, the economic outlook has changed dramatically, leading to a significant drop in the stock market. As always, the core question is whether the market's current reaction is appropriate: is it just right, excessive, or insufficient? This question is even harder to answer than before, as almost no one believes that the future economic world will not be significantly different from the world we have lived in so far, and it may even be worse. On one hand, if the announced tariffs remain unchanged and retaliatory measures from other countries lead to a full-blown trade war, the economic consequences could be severe. On the other hand, if calm decision-making (and strong political and market corrections) can prevail, tariffs could be reduced to less damaging levels, potentially even benefiting free trade.
How might the Federal Reserve respond? The risk of recession may prompt more aggressive rate cuts to stimulate the economy. Alternatively, the threat of inflation may delay planned rate cuts. However, it is important to note that measures to combat inflation, such as raising interest rates, may be less likely to succeed against inflation caused by tariffs compared to more typical demand-driven inflation. Today's headlines are particularly fitting for the Fed's actions: of course, no one knows.
In the markets that Oak Tree is involved in, concerns about defaults (not without basis) have led to a significant increase in risk compensation in the form of yield spreads, resulting in a notable net increase in available credit yields. Meanwhile, we expect the incidence of distress to rise, leading to increased demand for customized capital solutions, and our latest opportunistic debt fund is likely to accelerate deployment.
To borrow a quote from Mark Twain, history always rhymes. Therefore, just as I reused the title of a memo I wrote after the bankruptcy of Lehman Brothers for this memo, I will also borrow the conclusion of that memo:
18-24-36 months ago, everyone was eagerly buying assets, the outlook was bright, and asset prices soared. Now, risks that were once unimaginable are at hand and have begun to be priced in, making it reasonable to seek to buy assets at a discount: former treasures have been cast aside by investors (those babies thrown out with the bathwater). We are actively deploying.
Personally, I was fortunate to visit investors in Montreal on the day tariffs were announced and then visit investors in Toronto the next day. The timing of my visit to Canada was truly fortuitous! At the start of each meeting, I expressed that, like hundreds of millions of Americans, I respect Canada and view it as a partner and ally of the U.S. The response was exhilarating. This is precisely the opportunity for all of us to connect with friends around the world.
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