The big homie Howard Marks thinks maybe the media might have taken a little too much in the way of creative license with his July memo.
Guilty as charged, Howard. Because by God we certainly jumped at the opportunity to document Marks’ reservations (or at least skepticism) with regard to the assumption that the FANG/FAAMG narrative will never die and perhaps more importantly, with the idea that there can never be too much of a good thing when it comes to passive investing.
In fact, Howard’s “perpetual motion machine” characterization of the dynamic that serves to perpetuate the self-fulfilling nature of modern markets has formed the backbone of many a Heisenberg commentary over the past six months including the “wave paradox” piece.
Well, in his latest memo, Marks notes that “some readers” of his July piece “perceived his stance as ultra-bearish.” “This was epitomized by the TV commentator who reported, ‘Howard Marks says it’s time to get out,'” he adds.
But very much unlike Jeff Gundlach who, in cases like that, would simply take to Twitter to call the financial media “fake news” on the way to positing a massive global conspiracy, Marks decided to take the high road by simply writing a memo to (partially) refute the mischaracterization. This is his second attempt at that (the first being in September) and this piece finds Howard outlining the positives and the negatives.
“The recent tax law will put money into the pockets of corporations that pay U.S. taxes by reducing their tax rate, and it will result in the repatriation of large amounts of foreign profits that U.S. companies have been holding abroad,” Marks writes, in the section documenting the positives. That, in turn, “will generally be very positive for corporate profits, cash flows and perhaps capital investment.”
He also adds that “the low levels of inflation worldwide mean central bankers needn’t rush to raise interest rates,” which is of course just another way of saying that the “Goldilocks” narrative which underpins this whole house of cards is still viable. Here’s the money quote from the positives section:
The known catalysts for a market downturn — recession, ballooning inflation, much-higher interest rates, major central bank missteps, a governmental breakdown in Washington, and war — can’t be assigned probabilities that are more than modest.
As far as the negatives go, you should be just as familiar with the list as you are with the positives; if not more so.
“Most valuation parameters are either the richest ever (Buffett ratio of stock market capitalization to GDP, price-to-sales ratio, the VIX, bond yields, private equity transaction multiples, real estate capitalization ratios) or among the highest in history (p/e ratios, Shiller cycle-adjusted p/e ratio),” Marks warns, adding that “in the past, levels like these were followed by downturns, thus a decision to invest today has to rely on the belief that ‘it’s different this time.'”
Well don’t worry Howard, there will never – ever – be a shortage of people who think “this time is different.”
Marks continues:
The need of investors to wring out good returns in this “low-return world” is causing them to engage in what I call pro-risk behavior. They’re paying high prices for assets and accepting risky and poorly structured propositions.In such a climate, it’s hard for “prudent” investors to insist on traditional levels of safety. Investors who don’t want to sign on for risk (that is, who “refuse to dance”) can be constrained to the sidelines.
The bottom line is the same as it’s been for months – if not years. Namely that it’s all relative these days, which is why you continually hear pundits parroting the “it’s cheap compared to [XYZ]” line. To wit:
It appears many investment decisions are being made today on the basis of relative return, the unacceptability of the returns on cash and Treasurys, the belief that the overpriced market may have further to go, and FOMO. That is, they’re not being based on absolute returns or the fairness of price relative to intrinsic value.
The full memo can be found below…
OK Howard, let’s talk out of both sides of our mouth and distort both messages as the same fu*king thing only in reverse. There I made as much sense as you did.