howard marks Markets

Howard Marks Has Lots To Say About Bailouts And Moral Hazard. So, I’ll Bite.

"Most of us believe in the free-market system as the best allocator of resources."

It was only - checks notes - seven days ago, when Howard Marks declared it was time for investors to at least consider going on offense. "Conditions have changed such that caution is no longer as imperative", Marks wrote, in his fifth memo in five weeks. "With part of the crisis-related losses having already taken place, Iā€™m somewhat less worried about losing money and somewhat more interested in making sure our clients participate in gains", he added. That represented something of a reversal for Marks who, just a week previous, said that due to a "wider range of negative outcomes" compared to the conditions which persisted during the GFC, he "expects asset prices to decline". Through Tuesday, the S&P was up nearly 29% from the March lows. The bounce (which skeptics including myself are still keen to describe as a "bear market rally") has been helped along by trillions in fiscal stimulus and what amounts to a promise from the Fed to make everyone "whole". That implicit promise from the Fed rests on the notion that the pandemic isn't anyone's "fault", and therefore shouldn't be "allowed" to trigger outcomes which many market participants have long warned would accompan
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14 comments on “Howard Marks Has Lots To Say About Bailouts And Moral Hazard. So, I’ll Bite.

  1. Edward Allen says:

    Another thoughtful and timely article Many thanks.
    (Your comments on eating foie gras, given the intense cruelty of the industry are abominable)

  2. George says:

    A Brave new World H……….. and Howard both describe…but Howard is out on the Limb further.. As in the last sentence ….nobody knows how it will turn out or for that matter if a system resembling anything we currently have will emerge at all…

    • Mr. Lucky says:

      Marks may be out on a limb, but he is right about the system. It simply cannot stay the same. Adjustments will be made, if for no other reason than the huge amount of outside interference taking place. The kind of market participants H talks about the most will find new ways to make more money and leave us with a system we know even less about that the current one.

  3. Jim Clark says:

    That’s interesting take as I when originally read H. Mark’s memo I actually thought it wasn’t his writing. It had an off tone from so many of his past year’s earlier memos and the memo from only a week before. Maybe that Fed President asked him to put a little positive color out there to the readership.

  4. monkfelonious says:

    The only ‘leverage’ I’ve ever used in my whole life has had to do with moving an object that had more mass than me. I’ve never applied ‘leverage’ in any other way. Once, I got cold-cocked by the handle of a Handyman jack while changing a tire. It slipped a cog – important to the leverage – much to my unleveraged chin’s chagrin. Leverage is wonderful, too bad it has this tension against it!

  5. Ria says:

    Howard is upset because it will be harder for him to be a predator now. He is upset that the fed backstopped some if his targets. I usually like his articles but when I read this one, I realized right away he had a major axe to grind.

  6. Anaximander says:

    Yes, like large corporates, many main street businesses are also over-leveraged, but this does not imply an equivalent level of moral hazard, primarily because of the large differences around recourse. Banks, and even the SBA as a lender of last resort, force most mainstreet businesses to provide personal guarantees to get meaningful business credit, except for rare small businesses with sizeable hard assets they can collateralize. Inventory is generally not even accepted as collateral. Corporate investors and managers do not bear equivalent levels of personal risk in their business activities, and will not suffer similar personal consequences in the unfolding catastrophe, as the rules of the game stand today.

    • Mr. Lucky says:

      A timely and correct comment. Even when they set up as LLPs most small firm owners must put just about everything they own on the line. Limited liability doesn’t exist for these folks. Remember, SMEs, on average, only have six total employees, almost no assets except real estate, and almost no cash.

  7. Wilson says:

    if $330 trillion is “cartoonish”, but $10 trillion or whatever we are at is “not even close” then the Fed has explaining to do why we aren’t getting stimulus checks more in the neighborhood of $120,000

  8. joesailboat says:

    Main Street is getting money through legislation. Individual States may hear the bull horn of moral hazard .

  9. RStantz says:

    Implicit in the Fed behavior over the last 10 years is that we can never have a rainy day again. And now that it is pouring, the promise of an umbrella big enough seems a bit dubious. The Fed’s power to eliminate the business cycle, insure that we never have a recession again by becoming an insurance company that doesn’t collect premiums, which was always a dodgy proposition became more than suspect when the repo market began flashing red last fall. The moral hazard problem is a problem whether Fed chooses to ignore it or not. And that is something of a misnomer –the Fed actively encouraged investors to seek out risk in all the wrong places. The recovery from this very exogenous shock will be the real indicator of the wisdom of what was “unconventional” in 2009 become the norm in 2019 as what will be revealed is that there is a very real difference between making a marginal deal a good deal with free money and trying to make a bad deal into a good deal with free money. At the end of the day paying to build a bridge to nowhere is nothing more than a series of transfer payments whose benefit depreciates along with the currency printed to pay them.

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