A week ago, CNBC and its cohorts in the asset-pimping business crowed loudly that billionaire hedge fund manager Howard Marks had turned bullish.
Entire segments were devoted to his comment that "the risks in the environment are recognized and largely understood," and that "given these new conditions, I no longer feel defense should be favored;" and why investors should buy the dip because Marks was.
Even more specifically, Marks pointed out that potential returns are rising, citing the typical yield for high-yield bonds rising from 3.5% to about 9%.
However, what was little heard from the asset-gatherers and commission-rakers was his caveat emptor:
"The bottom line for me is I’m not at all troubled saying:
(a) markets may well be considerably lower sometime in the coming months and,
(b) we’re buying today when we find good value,” he wrote.
“I don’t find these statements inconsistent.”
Well, as long as you think so Howard, then that's good.
We note all this as background for Marks' latest letter - just seven days after his 'buy the HY bond market' - in which he appears to be a little less convicted in his "time to not be defensive" call (or maybe he just feels guilty taking advantage of The Fed's folly)...
"...my conviction that there’s no 'informed' way to choose between the positive and negative scenarios we face today."
Well that doesn't sound very bullish?
“What’s the Fed’s purpose in buying non-investment grade debt?”, the co-founder of Oaktree Capital Group wrote in his latest note to clients.
“Does it want to make sure all companies are able to borrow, regardless of their fundamentals? Does it want to protect bondholders from losses, and even mark-to-market declines?”
...are we "in a regulatory wonderland where there’s no pretense that financial statements have to be accurate or current."
But, as we have indicated numerous times, there is a point at which these things become undesirable and negative consequences outweigh (even well intentioned) benefits.
For example - when The Fed's actions drive the Junk bond ETF almost 5% above its fair-value...
Even as underlying fundamentals for HY credit are an absolute disaster...
The way Marks sees it, regulators have taken over the role of the free market, protecting investors and companies from the consequences of their actions when they take on too much leverage.
"Most of us believe in the free-market system as the best allocator of resources. Now it seems the government is happy to step in and take the place of private actors.
We have a buyer and lender of last resort, cushioning pain but taking over the role of the free market. When people get the feeling that the government will protect them from unpleasant financial consequences of their actions, it’s called “moral hazard.”
People and institutions are protected from pain, but bad lessons are learned. "
And, reading between Marks' lines, The Fed just crossed that Maginot Line:
“Markets work best when participants have a healthy fear of loss,” he wrote.
“It shouldn’t be the role of the Fed or the government to eradicate it.”
Leaving the one big question looming over his decision to BTFD in HY last week...
“Who’ll do the buying for the government and make sure the purchase prices aren’t too high and defaulting issuers are avoided (or doesn’t anyone care)?” Marks wrote.
“And why should the SEC provide relief to leveraged investment vehicles?”
Interestingly, as we detailed earlier, there seems to be more than a few "Fed-fighters" who are not buying the invincibility of Powell and his pals as Junk bond ETF shorts near a record high.
Additionally, in a hat-tip to Chamath's devastating defense of free-market capitalism on CNBC last week, Marks reflects supportively on the natural market way things should go...
"As I wrote in Which Way Now?, I understand they aren’t guilty of having ignored a likely risk. But unlikely (and even unforeseeable) things happen from time to time, and investors and business people have to allow for that possibility and expect to bear the consequences.
In other words, they have to think like the six-foot-tall man hoping to get across the stream that’s five feet deep on average. I see no reason why financiers should be bailed out simply because the event they’re being harmed by was unpredictable."
Finally, Marks offers his "mystified" artist son-in-law's perspective for some 'real world' thinking about what is happening...
“I don’t get it,” he told me on Saturday.
“The virus is rampant, business is frozen, and the government’s throwing money all over the place, even though tax revenues have to be down. How can the market be rising so strongly?”
We’ll find out as the future unfolds.
Of course, Marks (and his son in law) is not alone in his incredulity at what The Fed just did. As Morgan Stanley's Mike Wilson recently wrote:
The bottom line for us is that this latest move is very much in line with our prior view that investors should not have any doubts about the Fed's resolve to do whatever it takes to make sure this recession doesn't turn into a depression. In fact, they now appear to be trying to limit the healthy damage we typically get from a garden variety recession.
As noted in our prior research, we think the nature of this recession--the unprecedented suddenness and trajectory of the contraction centered on a health crisis--has provided absolute cover for policy makers to go well beyond traditional support. As such, the bad actors of the last cycle are getting bailed out, which could ultimately limit the malaise we typically get in a recession. In short, the worst stocks will likely have the biggest recoveries...
However, as Marks warns succinctly,
"in short, it’s my view that if you’re experiencing something that has never been seen before, you simply can’t say you know how it’ll turn out."
So now you know what to do with all those "strong buy" convictions you hear every hour on business media (and from Kudlow et al.).