Deep Thoughts From Howard Marks

http://www.oaktreecapital.com/Memos/So%20Much%20Thats%20False%20&%20Nutty_07_08_09.pdf

Comments

[Anonymous]

for those who prefer PDF files -
http://www.oaktreecapital.com/Memos/So%20Much%20Thats%20False%20&%20Nutt...

[Sniggles]

You can click "More" > "Save Document" in Scribd to get any of these posted docs as PDF. 

[EQ]

The vast majority of derivatives should be banned.   All should be banned from the balance sheets of our hallowed institutions of savings.  Even off balance sheet ones should be banned.  Haha.  I know these kinds of statements are taken as completely ignorant but then I believe the people arguing my ignorance are themselves the ones who are truly deluded.  There is no such thing as a binding legal contract, ie derivative, when the vast majority of contracts and risks are held by a handful of firms.  It's like batting around a nuclear bomb in our institutions of savings.  The systemic risk is incredible.  And, therefore markets that are perceived to provide liqudity re his remarks, have, can and will see liquidity evaporate literally in the blink of an eye.   We know this because of our first experience in 1987 and the subsequence implosions ever since.    We have a financial system built on a house of cards and everyone now thinks the world is all better.  In fact, there has been no structural changes made to deal with any of the major risk points. 

Wall Street is headed down the road to perdition again and they will fail to see it again.  Once every hundred year or fat tail events are now the norm.  And we see no political will to shut off the corrupt schemes because of conflicts of interest or worse.  So, down we will go.  Again. 

[crazyjerrygarcialover (not verified)]

1920s versions of derivatives and securitization were two of the main culprits in the Crash of 1929 and the credit-event recession/depression which followed.  I don't find your comments ignorant at all.  Rather I find them very tuned in to the true root causes of what we will soon be facing. 

If you have not already done so, might I recommend "The Fourth Turning" by William Strauss and Neil Howe for reading?  It is not an investment/trading book.  It is historical/social science theory.  IMO, quite compelling.  It does an outstanding job of going beyond conflicts of interest to explain the lack of political will and the fact that, once every 80-100 years, modern history tends to repeat itself.  Basically, history and societal evolution are much more cyclical in nature than Western linear history thinking acknowledges.  I could say more but than you might not read the book.

[Cplus]

A Tale of Two Depressions

Not sure if you've mentioned this , since it was published last month, but clearly the "recession is over" and the green-shoots mobs haven't digested it. It's by academic economists Eichengreen of Berkeley and O'Rourke of Trinity College Dublin and makes its points through a series of clear and simple graphs:

[3Gonads]

 The prime purpose of most derivatives  is to sufficiently  obfuscate fair value , and in so doing enable the seller to obtain a maximum value for their wares.

  Con Fucious

[Kreditanstalt]

Perhaps all of those ca.1960-present market embellishments, from "investment boutiques" to "quant trading" to securitization to exotic mortgages exist because real productivity has, over that time span, been insufficient to sustain the desired western standard of living.  Traditional investment returns, @4 or 5%PA, couldn't cut it in a world of both reduced western competitiveness (because of the high cost standard of living),  competition from emerging nations and resource depletion.  People became greedy, desperate to maintain lifestyle and heedless of risk.  "Income" became confused with "wealth".

What happens when more and more people start performing jobs and running investment schemes that don't actually add anything tangible to the net wealth of a society?  It's the old story of each member of society doing another's laundry while attempting to grow wealth...Most investment strategies are no longer investments at all; they're bets.  Isn't that what we do?  We should acknowledge that we are gambling, not "investing", because the underlying asset is becoming insignificant in realtion to the nominal sizes of the wagers being placed.  Either that or the denominating currencies are becoming increasingly valueless... 

[Anonymous]

ding ding ding!!!! we have a winner - at least
with the initial observation about falling
productivity....as i have
stated many times - although the analysis of the
article was quite good as far as it went it did
not go far enough to ask the question of why
were money managers taking irresponsible risks
and foolhardy actions....and why did joe 6pack
start investing and watching kudblow and flamer
et. al.?

the reason is that the united states in spite of
vast increases in productivity technology has
become a fundamentally capital hostile country
because of the federal reserve system which
must and inherently introduces instability into
the economy through its open market operations....
continuously declining interest rates destroys
captial....investors prefer the risk free capital
appreciation of bonds rather than the riskier
investments in productive capital formation
because continuously declining interest rates also
decreases pricing power....every investment
decision is a bad one because a longer wait to
invest could always be done at a lower rate
instantly obsolescing capital by increasing the
liquidation value of contracted debt.

and because guaranteed inflation (open market
operations) destroys the value income it drives
investors overseas to cheaper labor in a vain
bid to compensate through lower wages - again
thanks to the fed.....

so to keep up appearances, folks have become
speculators both joe and jamie. almost no one
buying any capital entity is investing because
he hasn't a clue about fundamentals....when you
buy fundamentals you are investing; if you trade
charts and technicals you are speculating....
eventually speculation brings a nasty crash - worse
than an investment nightmare....

then you add all of the regulatory and tax burden
to capital formation and you can see why the
american economy is sitting in china, india and
elsewhere.....

this is all the result of the fed which should
be incinerated immediately....i care not who
makes the laws so long as i control the money.

[trader1]

excellent points.

[Pirate]

did you people even read Howie's memo before posting above?

[Anonymous]

yes there was some good stuff but there was
another layer of analysis needed to get to root
causes.

[Kreditanstalt]

Yes, Mr. Pirate, we did.  But  Marks never dealt with WHY "investors" felt compelled to take on more and more risk...I submit that it was desperation to 'keep up' in the face of a declining standard of living, rather than greed on the part of those proffering investment products, that was the motivating force. 

[lookma]

" Marks never dealt with WHY "investors" felt compelled to take on more and more risk..."

Some suggest that artificially lowered interest rates spurned investors to seek riskier investment opportunities to keep up with inflation.   

[Anonymous]

Apart from a few smart hedge funds who have made money out of them (broker dealers on balance probably have not) Can anyone provide a potential benefit that credit derivatives provide ?

[BabaBooey]

Sounds to me like they are trying to justify low returns for their customers.