May 14, 2020

The Current Economy, The Fed’s Solution & Investing Philosophy | Howard Marks on The Tim Ferriss Show

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Key Takeaways

• “There is no such thing as knowledge of the future because the future does not operate according to a fixed schedule…All we have is an extrapolation from past patterns” – Howard Marks
  • “The problem we have now is that there is no history for what we’re engaged in” 
    • We have the worst health crisis to come to America in a century
    • We have the worst economy since the Great Depression
    • We have the worst collapse of oil prices
    • We have the greatest stimulus rescue in history
      • “We have four things going on which are unprecedented and as a result, we really can’t say what lies ahead”
• “The Fed is throwing everything and the kitchen sink at the problem and the problem has to be solved” – Howard Marks
  • “We’re battling problems we’ve never seen before with weapons we’ve never seen before” 
• The government is pumping roughly $10 trillion into the economy. Will this cause an impact? “We don’t know” – Howard Marks
  • “I think they’re going to continue to spend until the economy can take over for itself”
    • Howard compares it to a doctor putting a patient into a coma until their disease is removed
      • “They have to keep it on life support until they can bring the economy back” 
        • Howard believes the Fed will support the economy until the unemployment rate falls to single digits

Intro

• Howard Marks (@HowardMarksBook) is a famed investor and co-founder of Oaktree Capital
  • He’s the best selling author of The Most Important Thing and Mastering the Market Cycle
•  Host: Tim Ferriss (@tferriss)

Books Mentioned

• Being first has its advantages, Malcolm Gladwell talks about this in Outliers
• Howard wrote a book about the markets called Mastering the Market Cycle: Getting the Odds on Your Side 
• Tim and Howard are both fans of the book Thinking In Bets by Annie Duke

Howard’s Early Career

• Howard started his career at First National Citibank in May 1968 
  • He worked in the investment research department
    • He learned a hard lesson while working there: investing in growth companies isn’t enough, you have to buy their stock when they’re undervalued
      • “Hey you are, you’re investing in the best companies in America and you lose 80 to 90% of your money” – Howard Marks
• In 1978, Howard started the first-ever high-yield bond fund
  • Being first has its advantages, Malcolm Gladwell talks about this in Outliers
    • High-yield bonds were considered speculative investments and it was looked down upon by many investors
      • “Now I’m making money safely and steadily in the worst companies in America because they were so cheap” – Howard Marks
• Howard wrote a book about the markets called Mastering the Market Cycle: Getting the Odds on Your Side 
• Tim and Howard are both fans of the book Thinking In Bets by Annie Duke
  • When it comes to investing, it isn’t just about odds, it’s also about payoffs
    • E.g: Investing in a good company that is overvalued likely won’t have a good payoff
      • High-yield bonds were seen as a bad investment but were very lucrative when they paid off

What Does The Future Economy Hold?

• “There is no such thing as knowledge of the future because the future does not operate according to a fixed schedule…All we have is an extrapolation from past patterns” – Howard Marks
  • “The problem we have now is that there is no history for what we’re engaged in” 
    • We have the worst health crisis to come to America in a century
    • We have the worst economy since the Great Depression
    • We have the worst collapse of oil
    • We have the greatest stimulus rescue in history
      • “We have four things going on which are unprecedented and as a result, we really can’t say what lies ahead”
• We don’t have accurate data on COVID-19 and we also don’t know if the virus will return
  • Questions still unanswered:
    • When will we have a vaccine?
    • Will there be a rebound in cases?
    • How quickly will we return to work?
    • How quickly will the economy bounce back?
      • The current consensus is that the economy will be at 2019 levels by 2021
        • The consensus is that the economy will pass 2019 levels by 2022
• Howard believes the economy will return gradually rather than sharply since people won’t return to work immediately
  • People will wait before using public transportation or planes
    • And even if a vaccine is invented, America has a large anti-vax cohort and we don’t know how that might affect the spread of the virus
• “I think in 5 years we’re going to be okay” – Howard Marks

What Will The Fed Do?

• “The Fed is throwing everything and the kitchen sink at the problem and the problem has to be solved” – Howard Marks
  • “We’re battling problems we’ve never seen before with weapons we’ve never seen before” 
• We don’t know the negative unintended consequences that will emerge from this
  • And sometimes consequences don’t happen: The government has been printing money for a long time but inflation has yet to occur
    • The government is pumping roughly $10 trillion into the economy. Will this cause an impact? “We don’t know” – Howard Marks
      • “I think they’re going to continue to spend until the economy can take over for itself”
        • Howard compares it to a doctor putting a patient into a coma until their disease is removed
          • “They have to keep it on life support until they can bring the economy back” 
            • Howard believes the Fed will support the economy until the unemployment rate falls to single digits
              • Currently, about 26 million Americans have filed for unemployment 
• “I worry that there will be some negative effects I can’t predict” – Howard Marks

Balancing Risk & Reward

• “Every investor has to balance offense and defense” – Howard Marks
  • Investors have to strike a balance between trying to make money and avoiding losing money at the same time
• Every investor faces 2 risks every day:
  • The risk of losing money
  • The risk of missing opportunities to make money
• In a low reward world, investors take more risky bets. When that happens it’s important to emphasize defense over offense.
  • “We adopted a mantra: Move forward but with caution”
• There are 3 main ways to play defense:
  • Go to cash 
  • Invest in defensive asset classes such as bonds and large, stable US companies 
  • Use defensive tactics such as moving money into mutual funds
• One flagship strategy by Howard’s company is investing in distressed debt
  • However, this tactic becomes less profitable if the Federal Reserve keeps pumping money into companies
    • “If the Fed comes in and buys in those markets then it makes our lives more difficult because things don’t fall the way they otherwise would have; we don’t get the bargains we otherwise would have” – Howard Marks

Tim Ferriss Show : covid-19, economy, investing, risk
Notes By Alex Wiec