Loading ...Have you seen anything that would make you change your view on the existence of cycles? Some people say that cycles are a thing of the past because of monetary policy.
They say that all the time. Just before the global financial crisis, they were talking about the Great Moderation. Here’s a quote from Tim Geithners autobiography: «Economists were starting to debate whether that long stretch of stability constituted a new normal, a great moderation, a quasi-permanent situation of resilience to shocks. There was growing confidence that derivatives and other financial innovations designed to hedge and distribute risk, along with the monetary policy, to respond to downturns and the use of technology to smooth out inventory cycles meant that big crises were a thing of the past.» We know how that all ended.
So what’s the most important lesson from that?
I think our ability to cope with these things is not complete. And as long as people are involved in the process, and given their tendency to take everything to the excess in the upward or the downward direction, there never will be permanent moderation. I have quotes from the Nineties about how we never will have recessions again, I have quotes from the Twenties about the fact that we are in an era of permanent prosperity. It’s all wishful thinking. The interesting thing here is: This discussion that current conditions are permanent always increases at high market levels. And when people encourage others to be optimistic, it’s always at high levels. But the people you want to follow in this world are the ones that encourage optimism at low valuation levels; those who say «cool it,» when prices go higher and higher.
About Howard Marks
Howard Marks is the co-chairman and a co-founder of the investment firm Oaktree Capital which specializes in distressed debt and has around 100 bn $ of assets under management. He is a true grandmaster when it comes to investment philosophy. In his insightful book named «The Most Important Thing» he explains the keys to successful investment and the pitfalls that can destroy capital or ruin a career. His legendary memos to Oaktree clients are a must read for financial professionals. «When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something», says none other than Warren Buffet.