May 14, 2020
The Current Economy, The Fed’s Solution & Investing Philosophy | Howard Marks on The Tim Ferriss Show
Check out The Tim Ferriss Show Episode Page & Show Notes
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 problem we have now is that there is no history for what we’re engaged in”
- “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
- “They have to keep it on life support until they can bring the economy back”
- Howard compares it to a doctor putting a patient into a coma until their disease is removed
- “I think they’re going to continue to spend until the economy can take over for itself”
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
- 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
- He worked in the investment research department
- 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
- High-yield bonds were considered speculative investments and it was looked down upon by many investors
- 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
- 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
- E.g: Investing in a good company that is overvalued likely won’t have a good payoff
- When it comes to investing, it isn’t just about odds, it’s also about payoffs
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”
- “The problem we have now is that there is no history for what we’re engaged in”
- 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
- The current consensus is that the economy will be at 2019 levels by 2021
- Questions still unanswered:
- 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
- People will wait before using public transportation or planes
- “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
- Howard believes the Fed will support the economy until the unemployment rate falls to single digits
- “They have to keep it on life support until they can bring the economy back”
- Howard compares it to a doctor putting a patient into a coma until their disease is removed
- “I think they’re going to continue to spend until the economy can take over for itself”
- The government is pumping roughly $10 trillion into the economy. Will this cause an impact? “We don’t know” – Howard Marks
- And sometimes consequences don’t happen: The government has been printing money for a long time but inflation has yet to occur
- “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
- However, this tactic becomes less profitable if the Federal Reserve keeps pumping money into companies
