Howard Marks' Scrapbook On Lessons From A Rhyming History; And Why We Believe This Time It Is Different
As always, a must read letter (which is a compilation of many prior Howard Marks missives: "Thanks to the tendency of investors to forget lessons and repeat behavior, it sometimes seems there’s no longer a need for me to come up with new ideas for these memos. Rather, all I have to do is recycle components from previous memos, like a builder reusing elements from old houses") from the chairman of Oaktree who, prudent as always, cautions against the latest episode of Fed-funded irrational exuberance: "Investors who engaged in aggressive behavior just a few years ago experienced significant pain as a result. Perhaps the punishment was too brief, and perhaps it was reversed too soon. Thus some are acting aggressively once again. It’s possible that such behavior won’t be punished again the second time around, but prudent investors shouldn’t take the risk." On the other hand, whole countries are now at stake should the market decline. Taking on one central bank is tough... Taking on all the printers in the world may be a task that only nature can eventually tackle.
In a nutshell, to Marks, the three key trends exhivited by the most recent batch of exhuberance is as follows:
- rising confidence and declining risk aversion,
- emphasis on potential return rather than risk, and
- willingness to buy securities of declining quality.
We agree and disagree with Marks' conclusion: as never before has the very fate of the economic system been tied in with the continued ramp in Ponzi markets, any ability to derive history lessons fails. For the central banking cartel this is it: a do or die moment, in which the die is not even a possibility. Just like buying CDS on the US used to be considered the dumbest trade ever (what counterparty pays if the trade succeeds?) so now outright shorting of asset classes is futile: it will succeed of course, eventually, but when it does it will mean a total overhaul in the economic system. As such any and all paper profits will be irrelevant.
From Oaktree: Open and Shut (link)