Billionaire investor Howard Marks expects years of stubborn inflation and interest rates up to 4% - but sees ways to profit from the new paradigm

• Howard Marks predicts stubborn inflation and average interest rates of up to 4% in the years ahead.
• He foresees rising wages fueling price increases, and the Fed leaving itself room to cut rates.

Investors face years of stubborn inflation and interest rates averaging between 2% and 4%, but there could be fresh opportunities to profit, Howard Marks has said.

The billionaire money manager and Oaktree Capital Management cofounder, in a memo published on Monday, framed the new paradigm as only the third "sea change" in his five decades on Wall Street. The first was a shift in investor mentality from avoiding risks to weighing them relative to potential rewards, while the second was the gradual decline in interest rates to virtually zero over the past four decades.

Annualized inflation surged to a 40-year high of 9.1% in June, and remained north of 7% in November — well above the Federal Reserve's target of 2%. Marks predicted a tight US labor market, rising wages, robust economic growth, and deglobalization will continue pushing up prices in the years ahead.

"While history shows that no one can predict inflation, it seems likely to remain higher than what we became used to after the Global Financial Crisis, at least for a while," he said.

The Fed has scrambled to curb inflation by hiking its benchmark interest rate from almost 0% in March to around 4% today, and has signaled it could peak above 5% next year.

Higher rates encourage saving over spending and investing, and can lead companies to cut back on hiring in the face of higher borrowing costs, which helps to cool the economy and slow the pace of price increases.

Marks predicted the Fed won't reverse all of its hikes anytime soon. The US central bank will want to keep inflation in check, avoid being seen as capricious and reactionary by markets, and give itself room to cut rates in the future, he said.

"The bottom line is that highly stimulative rates are likely not in the cards for the next several years, barring a serious recession from which we need rescuing," he said.

"The base interest rate over the next several years is more likely to average 2-4% (i.e., not far from where it is now) than 0-2%," he added.

Marks underscored the impact of low rates in his memo, arguing they've mattered more than economic growth, corporate success, technology and productivity gains, and globalization to investors' returns since the early 1980s.

"I'd be surprised if 40 years of declining interest rates didn't play the greatest role of all," he said. "I consider it nearly impossible to overstate the influence of declining rates over the last four decades."

Marks likened depressed rates to a moving walkway that propeled investors along, and warned higher rates would provide less of a tailwind going forward.

On the other hand, they may allow investors to earn solid returns without taking much risk at all, he said, as higher rates translate into larger government-bond yields and greater interest rates on savings accounts.

"We've gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term," he said.

Higher rates may also provide lenders and bargain hunters more chances to profit, as liquidity dries up and investors dump risky assets, he added.