In this lecture on SYA, Howard Marks discusses the lower returns across all asset classes, that have increased risk-taking, and a “race to the bottom” in the investment world. Here’s an excerpt from the lecture:
Marks: The issue is that when we got into the global financial crisis, the central banks of the world were afraid about the economic future and so they lowered the risk-free rate.
And when they lowered the risk-free rate, everything else fell with it. The return on treasuries, high-grade bonds, quality stocks, high-yield bonds, and private equity also declined. That’s what we call a parallel shift.
The line fell throughout and so the returns on other assets fell into line with the decreased return on the risk-free rate.
And that’s approximately where we are today.
It wouldn’t make any sense if the risk-free rate is very low, and of course in Europe there’s trillions of dollars of bonds that have negative yields. It wouldn’t make any sense for the risk-free rate to be low or negative and other classes to be safely high.
So everything falls in line.
And so because the rates are low, you can see that the people who used to invest here and get good returns with safety now have to go out here to high-risk behavior to try to get the similar return.
And so investors in many markets have taken on increased risk to try to get the returns they want. Too much money is chasing the limited opportunities in risk markets and the race to the bottom is underway.
And as I said before, the seven worst words in the world are out there today in my opinion: too much money chasing too few deals.
You can listen to the entire discussion here:
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