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We'll begin this hour with our top story, No news is good news, stocks edging, KaiA as Sham, and Powertow's Congress. He's expecting rate cuts this year, even as a strong economy keeps the FED on hold for now oh trees. Howard Mark's writing this in his latest MAMO. I find it interesting that the current stock market rally began as a result of optimism powered by consensus thinking that was
generally off target. Investors motivated by their belief that the FED would pivot to dubbishness and start cutting rates in twenty three.
That was wrong.
We'll get into consensus in just a moment. The legendary Howard Marx joins to surround the table. Howard, good morning to you. Good mine, fantastic MAMO. Really enjoyed the read earlier this year, Easy Money. You reflect on the easier times fueled by easy money, lunning investors into a false sense of intellectual superiority. I want to know, and I think Lisa wants to know too. Have we fully realized the pain associated with some of the loans, some of the things we did ten years ago.
No, clearly not it's early. The economy is still good. That keeps shaky loans aloft.
The maturities.
You know, any company that was not asleep at the switch pushed off its debt maturities in twenty twenty one twenty two, when rates were still close to zero, pushed them off. So the maturities start for real in twenty five. There are not substantial maturities this year. And you know there are three ways you can default. You can breach a covenant that specifies levels for your financial statements, you can fail to make an interest payment, or you can
fail to meet a maturity. Well, the eager lenders let companies exclude covenants in recent years, so you can't do that. Interest rates mean that the coupons are low. Interest coupons are low, so it's hard to miss one of those. And in a positive climate, you can borrow.
To make your interest payments.
So we're really talking about maturities which have been pushed off to next year. And if you get maturities spiking in a weak economic period or week for certain groups, that's when you get defaults.
They're still running low.
A lot of people have come on the show Howard and said that this market is discerning. It's not necessarily just buying everything with abandon It isn't exuberant, There isn't euphoria. There's sort of a separation of those zombies or those that are likely to default in twenty five, that can't survive until twenty twenty five of those that can't. Do you agree with that?
I generally do? You know?
This is not the crazy markets are few and far between. When you get a real soaring bullmarkt, a bubble, or a crash, those are when they stop being discerning. And as we say, throw out the baby in the bath water. Most of the time markets are sane, especially a market like this which is being buffeted by good news and bad news at the same time. So yeah, I think we're in the middle ground. I've been saying for a long time that we're in what I call the zone
of reasonableness. And I don't think there's anything much to.
Do zone of reasonableness, and I want to get into that. There's not much to do but a zone of reasonableness. For there's a strong consensus, and you pointed to and John Ladwi this idea that consensus last year was completely wrong. So this year you said there's a feeling that smacks of goldilocks thinking, how do you work with that as an investor?
Okay, I don't think the consensus is necessarily not wrong. I just think that most people can improve upon it. That's really the criterion. You know what I learned in school, the efficient market ipocesis. Markets are efficient. That doesn't mean they're right. That just means that most people can't improve upon the market's consensus judgments.
So now tell me your question.
Well, I guess that I am wondering where are we in the cycle and the credit cycle.
Well, following from Jonathan's question, you know, Buffett says it best when the tide goes out, we find out who's been swimming naked.
Nothing.
The tide hasn't gone out. We're still in generally salutary period. Economy functioning well, earnings pretty good, interest rates coming down recently, money available. So under those conditions you don't have a test. The question is which companies and industries do okay when conditions get tougher, can.
We work through some of the more quotes in this Mammo as well, there's this great line and you've said it's an old line, but I still love it. The worst of loans made of the best of times. This quote from you. I love Hieke's word malinvestment because of the validity of the idea behind it. In low return times, investments are made that shouldn't be made, Buildings are built that shouldn't be built. Can we talk about buildings that
were built that shouldn't have been built? Is that an error of focus for you at the moment as you think about prospective weakness down the road.
Well, I think that commercial real estate office buildings in big cities in particular are a focus area.
For investment people.
The post pandemic behavior of people not going to the office so regularly calls the sector into question, as does AI and the question.
Of how many employees.
You know you're going to have a Am I going to be talking in five years to a machine over there?
I don't know. Maybe you are right now, there you go.
Maybe this is aim right now at Lisa top.
Of me as always, So, I mean, there are questions about real estate. But on the other hand, most people won't touch real estate with the ten football, and they may be underestimating the intrinsic value. So that you know, Jonathan It's important that everybody you understand. The question is not is everything going great in a sector or is it going terribly in a sector? The question is do prices in that sector reflect the reality overestimated or underestimated.
I've made a living buying things that nobody else thought was a good idea. But if you buy them cheap enough, they become a good idea. And you know, if you have the right real estate in the right place. If if you're differentiating and other people haven't, yep, then that's the time for bargain hunting.
See for the story and the price of the story. Can I ask if you like the price of the story?
You know there's not a lot of price discovery going on in the real estate industry. There are very few transactions. So when you say do I like the price of the story, I don't see a lot of prices in order? You know, I see all the people say, oh, worth anything?
But where will they trade it? Will?
If you know, if if the quoted price for a New York office building is down fifty percent, let's say, will any sense sell there?
Will all the buyers buy there?
If a lot of people are willing to buy and nobody's willing to sell. That says to me, the real price isn't down fifty, So we have to have price discovery, which.
It brings us to kind of the fact that the tide hasn't gone out yet exactly, and that when the tide goes out, then we're going to start to get some real price discovery, because then there will be some people left naked. You don't like to make rate projections. You do have a model roughly in your head where you say in the memo that you don't think that rates are high, they're kind.
Of going high relative to my experience.
So if that's the case, you kind of game out three to three and a half percent FED funds rate over the next five to ten years. What then does that mean for returns to smart generally? Does that mean that they're better in credit and better in your world? Or are they kind of worse because the overhang that we've had of that easy money policies is going to take a lot.
To work through. It's a complex question, but.
Those you know, we're at five or to five and a half on the FED funds right now, that's uh a measure determined to crimp the economy to uh uh kill off the excess inflation. The target is two. We're above two, cool off the economy until it moves toward to By the way, in in f in t Pal's remarks on Monday, he said we won't cut rates until we see we're making progress towards two percent. I thought
that the we're toward was very important. He didn't say until we're at two percent, So uh, I think that uh, you know, if if in if inflation starts going you know, uh three two in three quarters, two and a half, maybe he'll start cutting. I don't know, but the the
the word two toward was important. The The only thing I'm sure of is that if if interest rates are higher, the people who invest in credit instruments, which is what we do, UH, are buying in at higher yields, and invariably we'll have higher returns than they have in the
recent past. So today's rates are not high historically, but they're certainly higher than we had from nine through twenty one, which means the returns on credit investing, fixed income investing, bond investing, loan investing will be higher than those in that period, which were you know, really poultry.
Always sypathol filam, think pretty. Howard marks