Guest Post by Simon Black
Howard Marks is one of the greatest investors in history.
Marks is the founder of the credit investment firm Oaktree Capital Management. And he’s been sharing his insights with the public in his Chairman memos since 1990 (which you can read for free on his website).
Even Warren Buffett stops what he’s doing when Marks releases a new memo… Buffett says it’s “the first thing I open and read.”
Marks’ latest memo, titled The Seven Worst Words in the World, came out last week. And those seven words are – “too much money chasing too few deals.”
As you probably guessed, Marks is talking about how overheated the market is today and the end of the economic cycle.
He starts the memo by recounting the days leading up to the Gobal Financial Crisis, when Oaktree started turning cautious…
“The economy was doing quite well. Stocks weren’t particularly overpriced. And I can assure you we had no idea that sub-prime mortgages and sub-prime mortgage backed securities would go bad in huge numbers, bringing on the Global Financial Crisis…
[A]lmost every day we saw deals being done that we felt wouldn’t be doable in a market marked by appropriate levels of caution, discipline, skepticism and risk aversion. As Warren Buffett says, “the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” Thus the imprudent deals that were getting done in 2005-06 were enough reason for us to increase our caution.”
Sound familiar?
Today, like in the days leading up to the Global Financial Crisis we’re seeing lots of inconsistencies in the market…
Two stocks, Apple and Amazon, are responsible for nearly 30% of the S&P 500’s gain so far this year.
And investors are willing to lend US companies (which are already sitting on a record $6.3 trillion of debt) more money with less protection.
As our friend Jim Grant mentioned in our podcast, today we have boom era stock prices coupled with depression era interest rates – two things that are completely incongruent with one another.
In his memo, Marks lists a number of other things that just don’t make sense today…
– At the beginning of this year, private equity firms looked to raise $744 billion for funds, more money than at any other time in history
– Japanese conglomerate SoftBank is organizing a $100 billion fund for tech investment (and has raised $93 billion as of June)
– One of the fastest-growing areas of the credit markets are leveraged loans (lending money to already highly indebted firms), which have grown from $500 billion in 2008 to $1.1 trillion
Marks also lists a number of specific deals his team has seen, and highlights a conversation a colleague had with a banker which particularly highlights the folly in most investors’ thinking today…
A banker recently told me that for the first time since 2007, he has been in a credit review and heard the credit deputy rationalize approving a risky deal because it is a small part of a larger portfolio so they can afford for it to go wrong, and if they pass on the deal, they will lose market share to their competitors.
I could go on, but you get the idea. Things are crazy today. I’d encourage you to read Marks’ memo to see even more egregious examples.
But it’s not just Marks that is urging caution today. Ray Dalio, founder of Bridgewater, the world’s largest hedge fund, says we’ll see a recession by 2020. He even wrote a book called A Template for Understanding BIG DEBT CRISES, which he’s giving away for free.
Ken Griffin from Citadel says we have 18-24 months before a correction. And in a recent interview, billionaire hedge fund manager Stan Druckenmiller said “we’re kind of at that stage in the cycle where bombs are going off.”
I’m not saying the market can’t keep going up from here, because it can (and every guru I mention above agrees).
The point is, it’s time to be cautious. And it’s time to start preparing for the inevitable downturn, whenever it hits.
But you don’t have to invest in overpriced stocks or risky corporate bonds today. You have more options.
Yes, you can always sell out of everything and wait on the sidelines. That’s perfectly fine (and we’ve shared some ideas on how you can raise cash today), but you might miss out on future gains.
Smaller investors have a major advantage over Buffett and Marks today.
Even if you have $10 or $20 million to invest, you have lots of options for solid, risk-adjusted returns today.
Buffett and Marks don’t. Buffett is literally sitting on the sidelines with $112 billion because he can’t find anything to invest in. For something to move Buffett’s needle, he has to put at least a couple billion dollars to work.
To give you an example of what I’m talking about, we’re currently evaluating a deal for our Total Access members (our highest level of membership)… It’s a secured loan that will pay us 10-15% a year, with collateral worth 3-4x our investment. Plus, we actually have legal and administrative custody of the asset.
These opportunities are out there. No, they’re not as easy as buying Apple stock… you’ve got to put the work in.
But on a risk-adjusted basis, you have a lot of advantages today as a smaller, individual investor… namely access to certain opportunities the big guys don’t have. It just takes a bit of education, the willingness to think different and take action.
As Marks said, there’s too much money chasing too few deals. So we’ve got to look where the big guys aren’t.
I’ll be in touch soon with details on another idea that offers the potential for huge gains on an incredibly tax-advantaged basis. It’s one of the most exciting opportunities I’ve seen in awhile.
Ok, I’ll wait right here.
“too much money chasing too few deals.” Sure. That’s all the money the FED printed. It was conjured up out of nowhere, and therefore liquidity is ahead of actual business needs. So the price of attaching your money to a cash flow has gone way up. “today we have boom era stock prices coupled with depression era interest rates – two things that are completely incongruent with one another.” Wrong. That’s easy to understand. It’s the same thing too much liquidity. Too much money chasing a return. When money is free there’s no reason to pay interest to borrow it. Yet asset values get pumped up because the same money is looking for somewhere to go. And if you want to know where they’re going to start causing problems in the economy, it will be credit cards, particularly business credit cards. Many small firms use credit cards to balance their cash flows. Take away that tool, and the economy won’t seem as good to many many people.
Why would they take that away?
Housing won’t be affected.
They have spent too much time and effort crushing small business so they can consolidate each industry. In other words, basically own it all. Trump has given new life to smaller business, I don’t think the bigs took it seriously for a while. Now they see the threat to their existence of antitrust. So they are going to go all in and dare anybody to take them down. They have nothing to lose that they’re not going to lose anyway, so they might as well fight to the death. Or the win. Real estate is a different matter. If real estate were repriced the way it should have been in 2008, the banks, being the loan holders, would instantly be bankrupt, as would the bond industry. What’s kept that afloat is the explosion of Section 8, paying spectacular rents for less than average properties. When Trump talks about taking away refugee status for a half a million Central Americans and Haitians and Africans, he doesn’t have to deport them to upset the apple cart. All he has to do is take away their refugee status. New immigrants don’t qualify for federal benefits. Refugees qualify on day one. So if he just took away the refugee status and made them normal immigrants they would instantly no longer be eligible for federal benefits. That’s the money that has kept rents up. I’m sure the DC area is just like Miami . It cost just as much to live amongst Haitians as it does to live amongst doctors. Because the Haitians aren’t paying their own rents. Section 8 is paying it to their landlord , Blackrock and the other REITs, which took all the inventory off the bank’s hands after the crash. We can’t have a $15 an hour society, and $2,500 a month rents, you will never have normal americans starting families and buying homes, it’s just too expensive. So the housing bubble will necessarily have to be popped, and that’s catastrophic for the banks and the bond market. Equities don’t really have anyting hanging over their head like that. Some people think they are overpriced, when the reality is, with all the excess liquidity out there, the cost of buying an income stream has gone up. Plain and simple. All the people can buy as much gold and silver and bullets as they want, people with real money could care less about that stuff. They’re buying income streams.
I’m genuinely asking…
1) what has trump done to help small businesses
2) what is their threat to antitrust
3) they’re going to do what to dare anyone to take them down
4) who are “they”…corporations?
5) why hasn’t trump taken away refugee status yet? He talks bigley about what he is going to do.
6) housing is being kept afloat by section 8? I have never seen any talk of that. New to me. I’m not saying it isn’t true but it does sound a bit farfetched.
7) so, the fix to housing prices is based on Haitians?
8) excess liquidity is going after income streams. These are big connected people and corporations I assume. These income streams, I assume, will come from rents, insurance, monopolies and government required expenses to the public. What is going to change that?
What? Things are great. Germany is even having to import more welfare recipients.
https://www.yahoo.com/news/germany-ease-immigration-rules-fight-worker-shortage-111955534.html
Can only end well.
Some days I am convinced that “them and they” are trying to drive us pipsqueaks out of the market so they can get it all. There is a shortage of stocks out there. The listed number keeps dropping year after year as the monsters gobble up everything in sight. I have been forced out of a number of outstanding stocks due to buyouts over the last several years.
My free advice is that Berkshire Hathaway is very undervalued. My target over the next 12-18 months for BRK-B is $250-280.
I would bet Buffet et al are buying physical gold/silver about now.
Regarding the 1988 issue of the econamist mag that 2018 will be the year of the great reset.
We have all seen the cover of that issue. Some are pointing to Oct. 10 A new currency issuance.
Food/ammo/tools/clothes all good buys if quality no matter what the other markets are up to.
Maybe time to invest into some land(more perhaps),spend a little learning a new skill/ trade always money well spent,a lot one can invest in with short of death a always solid return.
Who knows,perhaps time to build a S-10 monster truck!
You have all the above in hand,can be taken but assume most folks would make that a costly option,the 1’s&0’s in accounts can be vaped instantly.
A diesel powered s-10 monster truck.
Again,here is your inspiration/a basic build/start plan,how crazy ou go is up to ya’s: http://www.fourwheeler.com/project-vehicles/129-1203-1998-chevy-s10-4bta-cummins-diesel/
I bet that’s a badass truck.