Thursday, September 8, 2011

Howard Marks - What's Behind This Downturn?

Always interesting to read the guy.
Don't think I have much to add, but I'd like to quote his last paragraphs and highlight the part where he says the past few decades were above normal and not necessarily standard. I agree with that 100%. The now-famous New Normal is actually the 'average historical normal', that us, younger fellas, didn't live through or remember of.

Rather than end there, as I originally thought I would, I want to add a little about the longer-term future. I could prepare the way by repeating my standard confession that I’m given more to worrying than to enthusing, but you already know that.

What I want to say is this: the worries concerning the U.S. economic outlook enumerated on pages six (bottom) and seven are not limited to the current short-term cycle. I touched on most of them in “What Worries Me” (August 2008), “The Long View” (January 2009) and “Tell Me I’m Wrong” (January 2010), and my view of their importance hasn’t changed. I think they’re likely to influence the environment for years.

I feel today’s distribution of possible futures is shifted to the left – that is, generally less attractive – relative to the distribution that governed the late twentieth century. The picture in the U.S. is less positive today in terms of consumer-led growth and the super charging impact of increased credit use, competitiveness and job creation, and the government’s fiscal situation (and thus its ability to stimulate the economy).

I think we benefited greatly in that earlier period from the luck of the draw. Things went about as well as they could have for the economy (despite sluggish income growth). Inflation was very much under control, and we benefited from steadily declining interest rates. We were even lucky enough to see the collapse of our great enemy, the USSR, and to live in a world that was generally at peace.

It was a period in which the markets benefited from positive developments and over overwhelmingly bullish attitudes. As my partner David Kirchheimer points out, the favorable underlying trends constituted a rising tide in the Buffett sense, meaning for along time we didn’t get a chance to see which borrowers, risk takers and financial innovators were swimming unclothed. The picture has become less alluring with the tides less favorable, and I expect only moderate improvement in that regard.

David adds that “it took many years, trillions of dollars in credit extension, and countless well-intentioned but misguided policies to get us into this mess, so it’s likely that under the best of circumstances it will take many years for the economy – and standards of living – to reach a new equilibrium, and for the financial markets to acclimate to a ‘new normal’ of possibly lower returns without the artificial effect of record government stimulus.”

I feel the prosperity we enjoyed in the final decades of the twentieth century was considerably better than “normal,” and better than we’re likely to see up ahead. I’m not implying a world without growth or otherwise permanently negative. Just one without the prosperity, dynamism or positive feelings of past decades.
In addition, the newness of the macro picture and some of the problems – and the opacity of the solutions – certainly make it less clear in which direction we’ll go.

It’s my belief that things went better in the late twentieth century than we have reason to expect in the years ahead. We could get lucky again, of course, but it would be down right imprudent to make investments predicated on that assumption. Thus at Oaktree we’re making allowance for things that may go less well than they did in past periods. Cheapness provides a margin of safety today, but only so much.We’re moving forward, but cautiously.
Howard Marks on What's Behind the Downturn 09-07-11
*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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