Howard Marks: The Most Important Thing Is To Be Ready To Respond To And Take Advantage Of Declines

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Howard Marks recently released a memo to his clients titled – Which Way Now, in which he discusses the bull and bear cases for the current environment, oil, and the government programs. He finishes his memo with the following quote:

The most important thing is to be ready to respond to and take advantage of declines. The world will be back to normal someday, although today it seems unlikely to end up unchanged. What matters most – in terms of both health and finances – is how we do in the interim. Stay safe!

Here’s a summary of the memo:

Rather than reinvent the wheel – and to show you how others are viewing the situation (albeit in ways that parallel my view) – I’m going to share the workload by recycling the conclusion from a note I received from Jason Klein, CIO of Memorial Sloan Kettering:

The bull case from here seems to be that monetary policy will work, fiscal policy will kick-in, valuations have reset, society will follow effective healthcare policies (e.g., social distancing) that will be effective, the real economy will adapt, and geopolitics will remain subdued. The bear market seems to be the flip side of each issue, and has the potential to be much darker as the prospects of a hot war with China, or even Iran, seem rather ominous. Across all recent events, I find it in some ways most interesting that Saudi Arabia chose to instigate a supply shock targeting U.S. shale at a moment when the demand for U.S. energy was already reeling from the demandside shock from COVID-19 restrictions. It highlights the unpredictability of events. As you’ve said, nobody knows.

Richard Masson, my Oaktree co-founder and resident scold, might say Twitter isn’t a worthy source, but nevertheless I want to include a concise summary tweeted by @yourMTLbroker:

Bull case: everything opens in 6 weeks. The unemployed can go back to old jobs or as true Americans, bootstrap. Economy back to normal within 6 months. 2T $ in PE dry powder, low gas prices and 0% interest rates pour fuel onto on the economy. The roaring 20’s mean the 2020’s now.

Bear case: Unemployment goes to 20%+. Everything does NOT go back to normal before at least a year or two, and in the meantime, there is a huge demand shock. The effects of the lockdown on businesses as well as the oil shock create depression-like conditions.

In the Global Financial Crisis, I worried about a downward cascade of financial news, and about the implications for the economy of serial bankruptcies among financial institutions. But everyday life was unchanged from what it had been, and there was no obvious threat to life and limb.

Today the range of negative outcomes seems much wider, as described above. Social isolation, disease and death, economic contraction, enormous reliance on government action, and uncertainty about the long-term effects are all with us, and the main questions surround how far they will go.

Nevertheless, the market prices of assets have responded to the events and outlook (in a very micro sense, I feel last week’s bounce reflected too much optimism, but that’s me). I would say assets were priced fairly on Friday for the optimistic case but didn’t give enough scope for the possibility of worsening news. Thus my reaction to all the above is to expect asset prices to decline. You may or may not feel there’s still time to increase defensiveness ahead of potentially negative developments. But the most important thing is to be ready to respond to and take advantage of declines.

The world will be back to normal someday, although today it seems unlikely to end up unchanged. What matters most – in terms of both health and finances – is how we do in the interim. Stay safe!

You can read the entire memo here: Howard Marks – Which Way Now?

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