Howard Marks Explains "What's Behind The Downturn"

Tyler Durden's picture

Oaktree's Howard Marks once again cuts through what he perceives is the market's irrationality to explain what, to him, was the cause of the historic market collapse in early August: "Markets usually do a pretty good job of coping with problems one at a time. When one arises, analysts analyze and investors reach conclusions and calmly adjust their portfolios. But when there’s a confluence of negative events, the markets can become overwhelmed and lose their cool. Things that might be tolerable individually combine into an unfathomable mess whose extent and ramifications seem beyond analysis. Market crises are chaotic, not orderly, and the multiplicity and simultaneity of contributing causes play a big part in making them so.  It’s my sense that it was the simultaneous nature of these occurrences – in addition to, or perhaps rather than, their force individually – that rendered the markets so incapable of maintaining their equanimity.Certainly that was the case in early August. For the first time in history, the Dow Industrials either rose or fell by at least 400 points four days in a row... Importantly, we saw the onset of one of those negative feedback loops where intelligence is imputed to market developments. We’re told the falling prices reflect problems lying ahead, and thus investors sell in response to the message being provided by . . . investors who’re selling. Again, I think it was the collective force of these things that convinced people the world was a scary place. What could be worse than the convergence of a number of major worries whose extent, interaction and solution seem beyond comprehension."


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vast-dom's picture

Yes but against all laws of physics, nature and logic, the very same confluence of negative market forces has miraculously managed to also levitate this mother up yet once again.

These markets of late defy every single rule, principle, death cross, Kumo, formulae (HFT notwothstanding), etc. etc. etc.


The summer crash should have been here long time ago.

PY-129-20's picture

Was there even a crash in America? I got the impression that the rest of the world had a kind of slow motion "crash", while the American stock market was rather...well it seemed to be protected. Unlike the DAX who crashed down like an unguided missile.

But I agree with you about this article. And I don't see that things are fixed. Then again I am oldschool.

Raymond_K_Hessel's picture

The summer crash should have been here long time ago.

Exactly. I don't buy the confluence of events story. The vast majority of the "news" was old news.

What did we find out?
~Europe's broke - this is only news if you've been in a coma for the past few years or so
~The debt ceiling debate was a farce - anyone surprised at all by this?
~S&P downgrades US debt - anyone who believes that the US deserves an AA+ credit rating deserves to lose their money
~China's growth may not be sustainable - as if the talking heads haven't been warning us of the emerging markets bubble for years

The list goes on as do the lame explanations. Anyone else getting tired of reading headlines saying that the market is down because people are worried about Europe or the market is up because people are betting that the Fed is going to start QE3 when they really have no clue what they're talking about?

Clorox Cowboy's picture

The "market" is a manipulated, political tool.  As are 99% of the "economic correspondents" who choose to pretend that its movements still reflect the real world.

CrashisOptimistic's picture

Confluence of influences.  Let's start with the most powerful:

1) Hedge funds 2/20 fee structure and all other money management firms get eviscerated if investors see another sharp decline and yank their money.  They make no money if their OPM walks out the door.  So they will do anything . . . ANYTHING . . . even lose money in day to day trades, to prevent a crash.  If that means they gun SPY while losing money on buys of the actual index, they'll endure that to prevent crash.  Money that walks out the door never returns.

2) Pension funds cannot make their payments on less than 8% S&P each year.  They are terrified.  They also will do anything, even lose money, to hold the S&P up.

3) Multinational earnings are Euro dependent.  Every story out of whoever sprinted to a microphone to announce "agreement" will get read by the headline reading algos and jack the market up.


Notice how earnings are last of those 3?  Notice also that the S&P is down YTD?  This means they are losing their ability to stop the inevitable.  They will never stop trying, but their power is weakening.

Kat's picture

These markets of late defy every single rule, principle, death cross, Kumo, formulae (HFT notwothstanding), etc. etc. etc


That's because markets are no longer allowed to function.  Government intervention persistently interferes with price discovery - as it is meant to do.  Heavy manipulation by government via bailouts, monetary policy, regulatory restrictions, etc.  Asset markets reflect bets on politics instead of economics.  

As for HFT, algorithmic trading is here to stay.  It's far more efficient for companies than hiring traders (trader headcount has been steadily dropping).  The bands imposed on market makers (that everyone is such a fan of here for reasons they can't understand) require algos.  So, the SEC has pretty much required HFT of its regulated firms.

I've looked into the quote stuffing issue and the SEC won't "solve" it.  If quote stuffing is doing what you guys think it's doing, it's a big problem for competing HFT shops.  They have every motivation to find a solution to deal with it so as to make quote stuffing ineffective and unprofitable.  Imagine!  A market based solution that doesn't require the Gestapo, I mean the SEC to impose more idiotic rules that do not perform as advertised.

You guys have to stop turning to government to for solutions.   The more you do, the more powerful it is and the less powerful you are - and we will permanently have a market that trades on politics like we've had since 2008.

DoChenRollingBearing's picture

Mark Steyn in his new book After America, makes Howard Marks look like a wimp.

Nihilarian's picture

The only certainty is the extent of political and economic ignorance, the confluence of which will lead to guaranteed market collapse. Periods of calm interrupting panic volatility, as Howard Marks points out, is exhaustion of fear (and not exhaustion of bad policies or overvalued asset prices). Buy the dip at your own risk.

X.inf.capt's picture

suming up of the stock markets action since 2008 'Were stealing whats left of peoples 401K's  and pentions before this house of cards collaspes and buying commodities as fast as we can!' end of news flash....

oldman's picture

I find this oldman as confused as the author of this piece. I, too, am conditioned to think in terms of individual investors and rational decision-making, but correct me if I am wrong about thiese markets being 'run' by indexes that negate the value of individual stocks and 'los algos' just doing whatever it is that they are doing. There are no fun things in this mechanical game of today.

dammit, I wish we could go back to the old days where the market was where we voted and it could be read by anyone. That was a fun game!       om


bob_dabolina's picture

"Again, I think it was the collective force of these things that convinced people the world was a scary place."

The world is a scary place. 

That is all.

plocequ1's picture

And thats why i am going back to bed. The futes are back in the green. Goodnite.

oogs66's picture

30 point up days on SPX are a sign that all is good, not that the "collective force of these things convinced people the world was a good place"

seems like this is just a longer and more complex way of saying "TRANSITORY"

pebblewriter's picture

The rest of the first wave down is here.  Between a Butterfly pattern and a Head and Shoulders pattern nearing completion, and fan/trend lines (some of which date back several years), we're looking at 1050 in the very near future.

keating's picture

I thought this web site had already provided the answer. In early August, once the debt deal was done, the Treasury need to raise money and chose to make an incentive for folks to buy Government bonds by manipulating the stock market down for a brief spell. Mr. Marks should follow ZH pieces so he can be sure not to talk gibberish, when the actual solution is simple and has already been published.

plocequ1's picture

Who the fuck is Howard Marks? Do you know who i am? Thats right.... Nobody.

max2205's picture

This guy misses the question of how the market was rigged to stay up for so long on fumes. We need better posters this one is cluless

Zola's picture

Absolutely agreed, this guy is clueless and could not see the storm brewing, probably drinking the kool aid from MSM.

YHC-FTSE's picture

Why not just cut to the chase and state that it's all about behavioural science and nothing to do with reality. 


If anyone here is still mad/ballsy enough, these volatile times are a boon for high risk gambles on spreads. Desperation feeds on the desperate creating positive feedback loops that are affected by the tiniest farts of good news (Same with negative feedback loops too, but they tend to need bigger farts). We have two really good farts coming up: Obama's $200 - $400 Billion jobs plan today, and the $600 B - $1T Fannie May/Freddie Mac mortgage refinancing fiasco, probably on the 20th. 

Use of Weapons's picture

Tyler, check this out.


JP Morgan resorts to using lego to demonstrate the crash. Just about sums up the level of engagement required to pitch "why you get no cheese" to the Dancing with the stars crowd... but probably won't.



YHC-FTSE's picture

That was funny. Using toys recommeded for 9-11 yr olds to illustrate the eventual arrows of death pointing to the ECB, who then point it to the taxpayers of Europe. If you can't laugh, you'd cry. 

casey13's picture

In a world were the value of all assets including the fiat dollar are subject to the whims of those that know better than the market, volatility is to be expected. People thought the Swiss franc was safe last weekend. Stocks look to be overvalued in many cases but fiat money can be debased at will so who really knows what anything is worth. The shared ownership in a stable business may all things considered not be so risky. Fiat money is only safe when it has a good custodian.    

sbenard's picture

So Marks is suggesting that the only reason things look so frightfully ugly is because events have converged simultaneously, as if that is some type of aberration!

Sorry, Mr. Marks, but we don't get to pick and choose events like we're setting all our ducks up in a row. Many of these events "converge" because we have not only made catastrophic errors in judgment, but we have then sought to bail out those poor decisions by passing them onto the backs of the citizens of entire nations. That doesn't seem like a convergence of "unexpected" black swans to be me. That sounds more like a convergence of hubris, irresponsibility, and downright foolishness!That sounds like we have been ignoring risk, hoping that politicians and Fed -foolish academics could -- and should -- bail us out with money-printing. That's just welfare for Wall St! That is NOT investing!

We should have seen these events coming!

adr's picture

The issue I have is that most people don't care that the market is manipulated and select insiders and board memebers are getting rich through pump and dump schemes. I tell them that an insider only buys a small amount of shares to mae it look like he has faith in his company but at the same time is selling 10 times the shares he bought. I tell them how a CEO who has run the company into the ground gets fired with a $15million paycheck. People say that is stupid and doesn't happen. I tell them the entire Fortune 500 is a con game, they don't believe.

I work as a consultant to help build business and it astounds me as to how stupid CEOs are today. 99% of them couldn't come up with an original thought pertaining to actual business if their life depended on it. The only things they understand are mergers to hide losses and eliminate competition and hiring a CFO willing to cook the books. Then they all sit on each others boards generously giving each other stock options to pad bank accounts.

The fact that US corporations actually produce anything is amazing, although it desn't take much of a brain to bring in a product from China you pay a buck for and wholesale it for $5. We need to stop thinking that CEOs are actually intelligent people and that the market is nothing but a zero sum con game.

The downturn is the result of total systemic collaps and the realization of a few people that our ecomony is based on a total farce that you can have growthwithout any real production other than paper.