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

Books Mentioned

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
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Notes By Alex Wiec

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