Howard Marks – The Seven Worst Words in the World

by itsmyst

For those of you who haven’t read Howard’s latest memo, here’s the link. www.oaktreecapital.com/insights/howard-marks-memos

I wanted to ask a question or possibly spark a discussion pertaining to market crashes. I would also like to state that I am NOT trying to prophecize a greater depression esque market crash. I am asking an open ended question as a discussion point.

I’ve been watching lately a lot of interviews with Howard Marks and he has been very careful in his response when asked about the potential for a crash. He feels that we are very late in the cycle, however the cycle may continue for far longer. He feels that there is a lot of greed and therefor, as Warrent Buffet says, we should conduct ourselves with more caution. People are becoming a lot more risk tolerant rather than risk averse. Again however he makes no allusions as to when or what may cause a crash, or that we may even have no crash at all and just a healthy correction.

He sometimes compares today’s market with things he was seeing in 2006 and 2007, thus his advice for moving forward but with caution. The notable thing however, and the basis for my question, is that he specifically says he doesn’t see the same type of risk in the sense of unsustainable house prices coupled with essentially fraudulently rated triple A CDO’s and the like which effectively created a multilayered meltdown where everything was interwoven and linked on a global scale.

Barring hindsight, didn’t “no one” see any of these things coming? Looking back now one might say that the aftermath that unfolded after Lehman Brother’s collapse was “obvious”, but prior to that the market definitely wasn’t expecting it. If one subscribes to the efficient market hypothesis than all of that risk would have been effectively priced in had it been known.

In the memo I linked and most of his interviews he talks more specifically of the risks he sees, the things that are known by the market and therefor, in theory, priced in. Risk tolerance by most investors, Fed rising rates to “neutral” and possibly beyond, large amounts of corporate debt, and finally the trade war with China. Again, these are the things that on the surface are “obvious” and pose certain threats to the economy. In theory all of this has been priced into the market. But, just as in 2008, what about the things that we don’t, or can’t, see? Everyone knew that housing prices growing at the rate they were in the 2000’s was unsustainable, but what about that whole mess with CDO’s? In theory, is it possible, that there are currently some very unhealthy going on’s that are “unseen” by the market and therefor effectively not priced in. If something was to occur, say interest rates reaching a tipping point or further escalations in the trade war, it could act as a sort of trigger and much like in 2008 cause a cascading shit storm.

Ultimately what I mean to say is that, just as no one can know when or what will cause a market crash (or correction), one cannot effectively downplay it’s severity by claiming this time is different because there isn’t multilayered levels of fraud because these things are effectively unknowable – just as they were back before the previous crash occurred.