Howard Marks On Big Mistakes Made In The Market: Contagion Will Be Psychological

Howard Marks, Oaktree Capital Group LLC (NYSE: OAK) Co-Chairman, was on CNBC Wednesday discussing his investment outlook. Talking about the firm’s large cash reserves, the investor was asked what they're waiting for.

"We think that the prerequisites for supply have been put in place. In other words, we think bad decisions have been made," he said. However, the experts at Oaktree don't know exactly when the opportunities will present to them. "We just want to have the money now."

When questioned about particular industries, Marks said he believed the worst decisions were taken in the oil and gas, and metals and mining sectors. Companies in these sectors got people to lend them "tremendous amounts of money." Given the unpredictable nature of their business and results, which are inextricably linked to commodity prices, this is not usual.

In fact, some of these mistakes have already created attractive opportunities, Marks said: "The default rate on high yield bonds is up, and most of the increase comes in those sectors."

Discussing trigger points, the investor pointed out the firm has started to see the defaults.

"We almost had as many defaults in the first quarter as in any of the previous six years," he continued, predicting there are still more defaults to come – both if oil remains at current prices or if it falls again.

And, of course, the malaise in the oil sector would have some impact on financial companies, he said, clarifying that Oaktree isn't particularly invested in this sector since it's "hard to predict and macro dependent."

However, he concluded, "the most important contagion will be psychological. When there starts to be a lot of defaults in one sector, people get worried with regards to all the other sectors."

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.