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Howard Marks Interviewed: "There’s No Free Market Today"
Earlier this year, Oaktree Capital Management's Howard Marks asked what is perhaps the most important question for capital markets: "What would happen if a large number of holders decided to sell a high yield bond ETF all at once?"
The answer, of course, is that fund managers would be left with a massive, non-diversifiable, unidirectional flow which would force them to either tap emergency liquidity lines with banks to meet redemptions or else risk selling the underlying bonds into an increasingly thin secondary market for corporate credit; the former option is a delay-and-pray scheme while the latter has the potential to trigger a sum-of-all-fears scenario wherein illiquidity quickly begets a fire sale.
"The ETF can’t be more liquid than the underlying, and we know the underlying can become highly illiquid," Marks warned.
Recently, the "lonely contrarian" spoke to Goldman on topics ranging from manipulated markets to investor psychology. Here are some notable excerpts.
* * *
From Goldman's "Fortnightly Thoughts"
How can we understand investor psychology and use it to make investment decisions?
It's the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. It’s important to control fear and greed.
Why do behaviour patterns and mistakes recur despite the plethora of information available now? Are we doomed to repeat our mistakes?
The bottom line is that even though knowing financial history is important, requiring people to study it won’t make a big difference, because they'll ignore its lessons. There's a very strong tendency for people to believe in things which, if true, would make them rich. Demosthenes said, "For that a man wishes, he generally believes to be true" Just like in the movies, where they show a person in a dilemma to have an angel on one side and a devil on the other, in the case of investing, investors have prudence and memory on one shoulder and greed on the other. Most of the time greed wins.
Is it volatility that’s made people scared of equity markets, particularly since 2000?
Volatility goes in both directions but it’s declines that people dislike, not volatility. In 2000, people pursued growth but forgot to ask themselves ‘at what price?’ And in recent years they've been pursuing safety and income while ignoring the same question. Today the price being paid for the safety and income of bonds is among the highest in history.
How do you think about the current very low interest rate regime?
Yes. The point is that today you can't make a decent return safely. Six or seven years back, you could buy three to five-year Treasurys and get a return of 6% or so. So you could have both safety and income. But today, investors have to make a difficult choice: safety or income. If investors want complete safety, they can't get much income, and if they aim for high income, they can't completely avoid risk. It’s much more challenging today with rates being suppressed by governments. This is one of the negative consequences of centrally administered economic decisions. People talk about the wisdom of the free market – of the invisible hand – but there’s no free market in money today. Interest rates are not natural. They are where they are because the governments have set them at that level. Free markets optimise the allocation of resources in the long run, and administered markets distort the allocation of resources. This is not a good thing... although it was absolutely necessary four years ago in order to avoid a complete crash and restart the capital markets.
Looking at the current scenario, is your level of caution and concern as high as it was during 2006-07?
The worst things that occurred in 2006-07 are not happening as much today. But currently I’m just cautious, like I was in 2004-05. And some people might easily argue that I turned cautious too early.
If it’s human nature that causes the bubbles and crashes, do you think asset management should be done with more machines and fewer people?
No, I disagree strenuously. People who doubt the existence of inefficient markets and the ability to profit from them may disagree with me. But if you think you're operating in an inefficient market like I try to do, a lot can be accomplished by getting great people, developing an effective investment approach, hunting for misvaluations, keeping psychology under control, and understanding where you are in the cycle. I am not saying that everyone should try this. In fact, an algorithm or an index fund may work best for a lot of people. But at Oaktree, we don't make heavy use of machines. We are fundamentalists and ours is a "non-quant shop." As long as there are people on the other side making mistakes – failing to fully understand assets, acting emotionally, selling too low and buying too high – we’ll continue to find opportunities to produce superior risk-adjusted returns. This is something I'm very sure of.
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never was a free market to begin with, Oligarchs have always called the shots from day one, you're chasing pink unicorns in Narnia if you think a market will ever be free. Not with Oligarchs and politicians painting each others toes
You are absolutely right, the 1% has always controlled the 99%, while claiming divine powers. Witch doctors, high priests, banksters, only the names change. They all have in common one thing, namely a complete lack of empirically provable skill. An engineer can provably build a better bridge than a layperson, a doctor can provably perform better surgery, but a bankster has no empirically provable skill whatsoever.
Check out my recently updated blog on Australian and international financial crime:
http://drbenway.blogspot.com/ncr
he's a total douchebag when he said "it was necessary 4 years ago" to save the markets.....BUT NOT NOW......hahahahahaa..........he wants his cake for sure
He's been on tilt for awhile...
Most have been sucking tit for awhile... ;-)
No free market just today? since when tbere was any free market?
Market goes my way... It's free... Market doesn't go my way it's manipulated .
No shit Sherlock......
i prefer this Howard:
https://en.wikipedia.org/wiki/Howard_Marks
Mission style, all the way
I thought all these funds and other moneychangers have already boosted their capital reserves via bank credit lines, in order to avoid selling underlying assets into a 'bidless' market?
Is this somehow a way for the Fed. to let interest rates rise through market risk?
The Fed. has 2 ways to raise rates. reduce their balance sheet,(sell bonds to primary dealers)) or pay a higher rate on excess reserves.(to banks)
If the market prices risk naturally, then money gets more expensive as borrowing costs rise. Banks buying risk exposure-credit lines, looks like the Fed. crawling down a hole to me.
If the Fed. were to sell bonds, it would cause massive inflation. That means the fed is going to make bank risk more expensive, or pay more for excess reserves. IMHO
Lots of Whac-A-Mole games to play, YC, and not just by the fed. Some "glitches" along the way, as well.
Hey Cunny, nice to hear from you.
It's going to be hard for the Fed. to reduce it's balance sheet. Inflation-stagflation.
CF <HEART> YC
Did you buy some gold and/or silver today? :-D
The problem is these credit lines are far too small to contain a full-blown panic.
wow.. a non-quant shop still exists. pinch me.
YOU are correct Mr Marks. WE do not have a free market. We have a market managed by a group of people who think they are the "gods of economics". A centrally planned finance system. but as we all know, such an artificial animal can only exist for so long. and then it collapses.
Truthfully - they might have had a chance to "manage" the economy ... if it wasnt for the fact that there is a pyramid of financial derivatives, sitting on a pile of collateral that does not exist. That is nothing ... but certain suicide. YES, we do blame the Fed for this exercise in supreme foolishness. The idea was to run the US banking system with rules that promoted safe banking policies - NOT to create a financial system that looks like a Chinese juggling act.
best of luck to you!
zh, these kinds of interviews are misleading... you are running out of ideas now. The Plan B... always keep in mind.
by the way what happened to the rental problem that I gave to you as an assignment? no body in the world knows the answer to it. not even you and your cohorts who I read regularly.
Also, restore my old login : thinair
http://just-a-thought-from-thinair.blogspot.com/
Marks is stating the obvious, but it can't hurt to keep repeating it.
There are no governments today.
Just bank subsidiaries.
Jeb will fix it.
While the bubble is inflating people get the true joy of Capitalism.
Making money while doing nothing.
Markets are irrational and have been since Tulip Mania in 1600's Holland.
Do not look for rational explanations, the prospect of easy money turns human beings into gibbering idiots.
Stocks, house prices, <yet another asset type> are going up in value.
I have heard of someone who has made lots of money, I want in.
I am making money, I need to borrow money to carry on investing and make more money.
Gibber, gibber, gibber ....................................
The bubbles burst; I am going to be ruined.
No more gibbering, till next time.
Tulip bulbs ..... gibber
South sea company .... gibber
UK Railways (1800s) .... gibber
The new internet (pre 1999) .... gibber
Sub-prime ..... gibber
Property .... gibber
Social media .... gibber
Emerging markets ... gibber
Easy money ..... gibber, gibber, gibber
No wonder the Chinese stock market went crazy.
The typical Chinese experience of Capitalism has been working in an Apple factory with suicide nets.
With the stock market boom, they could make money for nothing and get the true joy of Capitalism.
In the West, experience has made no difference, we still boom and bust and can't resist a bubble.
It is China’s first time, no wonder they went crazy.
“Capitalism’s free lunch, I love it” Chinese ex-Apple employee (last month).
.
The Chosenite would know.....