Are We There Yet? Here Is Howard Marks' "Bubble Checklist"

As first reported yesterday, in his latest nearly-30 page memo, a distinctly less optimistic Howard Marks - hardly known for his extreme positions - "sounded the alarm" on markets by laying out a plethora of reasons why investors should be turning far more cautious on the risk, and summarizing his current view on the investing environment with the following 4 bullet points:

  • The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.
  • In the vast majority of asset classes, prospective returns are just about the lowest they’ve ever been.
  • Asset prices are high across the board.  Almost nothing can be bought below its intrinsic value, and there are few bargains.In general the best we can do is look for things that are less over-priced than others.
  • Pro-risk behavior is commonplace, as the majority of investors embrace increased risk as the route to the returns they want or need.

Among the items on Marks' of the items, the one we focused on yesterday, had to do with Marks recurring warnings on ETFs and passive investing. To be sure, he also covered pretty much everything else from equities, to the record low VIX, to FAANG stocks, to record tight credit spreads, to EM debt, to PE and even Bitcoin.

To those who haven't read it yet, it can be found here. However we wanted to bring attention to one particular section, which lays out the necessary conditions which if met "will deliver a boom or bubble." In other words, Howard Marks' bubble checklist. The issue is that if these conditions (all of them) have to be present to validate a bubble, at least in the eyes of one of the world's most respected investors, then we may have a problem because at least according to the more skeptical market participants, most of these are currently present.

Here is Marks:

My son Andrew worked extensively with me in preparing this memo.  We particularly enjoyed making a list of the elements that typically form the foundation for a bull market, boom or bubble.  We concluded that some or all of the following are necessary conditions.  A few will give us a bull market.  All of them together will deliver a boom or bubble:

  • A benign environment – good results lull investors into complacency, as they get used to having their positive expectations rewarded.Gains in the recent past encourage the heated pursuit of further gains in the future (rather than suggest that past gains might have borrowed from future gains).
  • A grain of truth – the story supporting a boom isn’t created out of whole cloth; it generally coalesces around something real.The seed usually isn’t imaginary, just eventually overblown.
  • Early success – the gains enjoyed by the “wise man in the beginning” – the first to seize upon the grain of truth – tends to attract “the fool in the end” who jumps in too late.
  • More money than ideas – when capital is in oversupply, it is inevitable that risk aversion dries up, gullibility expands, and investment standards are relaxed.
  • Willing suspension of disbelief – the quest for gain overcomes prudence and deference to history.Everyone concludes “this time it’s different.”No story is too good to be true.
  • Rejection of valuation norms – all we hear is, “the asset is so great: there’s no price too high.”Buying into a fad regardless of price is the absolute hallmark of a bubble.
  • The pursuit of the new – old timers fare worst in a boom, with the gains going disproportionately to those who are untrammeled by knowledge of the past and thus able to buy into an entirely new future.
  • The virtuous circle – no one can see any end to the potential of the underlying truth or how high it can push the prices of related assets.It’s broadly accepted that trees can grow to the sky: “It can only go up.Nothing can stop it.”Certainly no one can picture things taking a turn for the worse.
  • Fear of missing out – when all the above becomes widespread, optimism prevails and no one can imagine a glitch.That causes most people to conclude that the greatest potential error lies in failing to participate in the current market darling.

So where are we on this list according to Marks? The answer: almost there.

Certainly many of the things listed above are in play today.  Performance has been good – with minor exceptions, quickly rectified – since the beginning of 2009 (that’s more than eight years).  There’s certainly more money around these days than high-return possibilities.  “New ideas” are readily accepted, and some things are viewed as representing virtuous circles


On the other hand, some of the usual ingredients are missing.  Most people (a) are conscious of the uncertainties listed above, (b) recognize that prospective returns are quite skimpy, and (c) accept that things are unlikely to go well forever.  That’s all healthy.


But on the third hand, most people can’t think of what might cause trouble anytime soon.  But it’s precisely when people can’t see what it is that could make things turn down that risk is highest, since they tend not to price in risks they can’t see.  With the negative catalyst so elusive and the return on cash at punitive levels, people worry more about being underinvested or bearing too little risk (and thus earning too low a return in good markets) than they do about losing money


This combination of elements presents today’s investors with a highly challenging environment.  The result is a world in which assets have appreciated significantly, risk aversion is low, and propositions are accepted that would be questioned if investors were more wary. 


Philo Beddoe Thu, 07/27/2017 - 09:06 Permalink

Missing one. - Shithead retarded brother in law will not shut yap about how well his investments in the markets are doing. Same shithead retard seen smoking $5 cigar and holding a can of Pabst at local barbeque. 

bustdrs Thu, 07/27/2017 - 09:28 Permalink

This is what we come to ZH for, some finacial reporting balance.But honestly, is there actaully anything that can't be fixed with MOAR (dont say bitches, they dont count).Noble going down/ Save it with MOAR.Give greece MOAR, every year.Trillion dollar deficits just need MOAR.and btw, Hugh Hendry's a straw in the wind, bent over to whoever's blowing hardest, hentai, smug fuck cunt.There, feel better already.   

OverTheHedge bustdrs Thu, 07/27/2017 - 10:40 Permalink

I appreciate that Mr Marks made a lot of money selling drugs, but is he really the person we should be taking advice from? you having read Mr Nice, I stronlyg recommend that you do - intriguing book about the Cambridge graduate international drug dealer and all round stoner. Good insight into how Swiss banks worked, back when they still did privacy)

In reply to by bustdrs

adr Thu, 07/27/2017 - 09:28 Permalink

There was never a grain of truth. There was an accounting rule change that allowed companies like Select Comfort to swing a multi million dollar loss into a multi million dollar gain in the space of one week. There isn't any way possible they turned around their business in less than a month. Mark to Fantasy was born and with it the greatest bullshit run of all time.The entire rally was started with a fake Citibank memo saying losses weren't going to be as bad as Wall St thought. They were still terrible, but less terrible. Had the accounting rules not been changed the earnings report would have blown the worst estimates out of the water to the downside.The entire rally was manipulated from the start and none of it was real. Thanks to The Fed and that cocksucker Oblammy we had the greatest inflationary destruction of the economy since the late 1970s. The price of most consumer goods at least doubled, many tripled or quadrupled. A fucking can of shit Campbells soup that used to cost $.59 is now $2.39 and wages declined.

Truth Eater Thu, 07/27/2017 - 09:31 Permalink

Confidence.  The surface of a bubble is composed of reality that is being stretched to the point where internal pressure is ready to exceed the sum of surface integrity pressure plus external pressure.  Many pointy objects can prick that surface.  In the financial realm, that surface is not held together by filmy soap, but by confidence.  Look at what will shake confidence.  As long as the vast majority are mindless morons, confidence will not be shaken.  When they stop receiving SNAP, free housing, a weekly paycheck from the now bankrupt employer or a black swan shocks their little world, then confidence will be pricked.  The can that has been kicked down the road 12 miles too far is now worn down to a flat piece of scarred metal that no longer resembles a can.  The next attempt to kick it will be missed and the swinging boot will hit freeloader Freddie square in the groin.

Dickweed Wang Thu, 07/27/2017 - 09:35 Permalink

These so called "bubbles" are really nothing of the kind.  They are actually more like festering boils - just like on someone's ass.  The sooner they're lanced the sooner our economy will start to heal.

Dan'l Thu, 07/27/2017 - 10:18 Permalink

Let's all thank the loons at the Fed for driving down interest on low risk alternatives to the stock market and forcing Americans into this trap.

Deep Snorkeler Thu, 07/27/2017 - 10:19 Permalink

America's Economy on the Edge of Self-Realization1. The click-fraud empire of internet ads.2. The Apple Supermarket of silly technology.2. Oil fracking, fracking itself to death.3. Real estate market in a state of ecstatic lust, screaming women.4. Leadership failure: hysterical Trumpbaters crying in frustration.5. Warfare for the sake of warfare.6. The end of the benefits of technology.Your appointment at the local euthanasia clinic cannot be cancelled.

brushhog Thu, 07/27/2017 - 11:55 Permalink

The big thing to watch is oil. Its all about oil. Everything else in the economy is just a function of oil. Its the master indicator. With prices at 50per barrel producers cannot make money. Even the Saudi's cannot make a profit at 50, despite their claims of being able to pull it out at 25...when ALL of the inputs are calulated this claim turned out to be false. We are seeing domestic producers BLEEDING money and borrowing at historic levels to stay afloat. With the coming recession we are once again seeing downward pressure on oil prices. At some point we will see alot of the domestic producers go bust.The bust in the oil industry will cause supply shortages and prices will whipsaw up and smack right into the wall of falling demand, lowered production, and depressed consumption/wages. Thats when we'll either see shortages/rationing and/or sky-high inflation for everything that is made, shipped, or harvested with oil...IN OTHER WORDS everything. If I'm right, we can expect the real shit to BEGIN hitting the fan in 2 to 3 years.