John Well got a question for you.
Where's the house price crash?
It's the question we're all asking this question. We all want to know the answer promised us.
You promised us the house price crash.
I think you find that didn't. I think you're find that promised a healthy correction in real terms.
Same thing.
Yeah, interesting, Well certainly that's what people take it as. Yeah, well they what can't say the UK housing market is made of teflon. I mean it's it's down about fifteen percent in real terms over the last and that is a lot.
Actually, which is a lot?
That is that it's a lot, And to be fair, that probably is one reason why it hasn't fallen harder in kind of nominal terms, because at the end of the day, real wages are going up, you know, big spiking inflation and wages means that affordability improves ever so slightly but more if only nobody's lost their job, and nobody wants to sell the house if they don't think they can get peak price for it, And so people are sitting in their houses for longer, and the people
who wanted to buy them can't borrow quite as much money to get hold of them. Then you get a crash in transactions, which is what happened. But the deals that do actually go through go through for a bit
less money, but not a massive amount less. And I guess the tricky thing or sorthing, not the tricky thing, but the frustrating thing now for any first time buyers out there, is that you know, as we're coming into this year, mortgage rates are still they're a lot higher than they were kind of like eighteen months ago, but they're not as high as they were maybe six months ago.
And at the same time, you no kind of wage growth has improved, so affordability has improved, is still you know, unbearable in lots of parts of the country, but there's no real trigger to kind of drive any force selling.
Or to.
The pressure we've seen kind of like the maximum pressure on the housing market in twenty twenty three, and it's not as bad now, and chances are the interest rates along. I don't think they're going to go much lower than they are. No mortgage rates, but the same thing, you.
Know, they've gone down a lot, and they've gone down a lot more in some other countries. Germany has had
the worst of it, haven't they German. We talked about German house prices a while ago, and they're down ten percent there, and if you look at some of the others, I've just pulled up the numbers well while he's been talking, because I got bored in the but of you explaining where we haven't had a proper crist Canada, Denmark's weed in Luxembourg career, they're down seven percent to nine percent, Australia, the Netherlands, Slovakia three percent, five percent, But everywhere else
price has only felt a little bit and a lot of it seems to be about prices being propped up by rental growth, which I suspect is the case here, but then being pushed down again on the other side by regulatary change, which may again be the case here because we've got various rental forms on the way.
Yeah, But I mean the other thing we all of those market says the interest rates sensitivity was higher than the UK for basically for two reasons. It's like we're Sweden. Effectively, as soon as the interest rate changes there, the rate on your mortgage changes almost immediately. But the other thing is that anywhere that didn't have a house price crash in two thousand and eight, like Australia or Canada, the consumers, the households were massively over leveraged. They are where we
were in two thousand and eight. Whres one thing I think people don't appreciate, and we go on about it a lot on the podcast, is that after two thousand and eight, UK households their balance sheets have improved and we aren't as kind of, you know, over leveraged as we were back then, which is the other reason that we're not as rate sensitive as we were. But I think that's why, you know, the likes of Sweden, et cetera.
I had proper crashes, and I mean, you know, I'll be interested to see what happens to the Canadian banking system, for example. That's just off the top of my head. I don't if any haven't looked at it in any great detail. But you'd think we all those more geez that was going to reset scandalously high rates, et cetera, that there'll be a problem there. But overall, I can see there's a good reason why the UK hasn't quite going the same way as those other countries I think.
But we still got the lag, there's still a lot of people to remortgage. It's still not coming. There's regulation change, probably a new government at the end of the year. I'm telling everyone not get complacent yet. John's crash may still yet come.
We need to know what we need to see.
How I'm distincing myself from your.
Crash, Yeah, the one, the one you tricked me into predicting.
Yeah, Now, I'm basically I'm putting myself out there as a housing bubble, a housing a boomer and you're going to take all the flag for the next how many years?
John, I'm I was going to see someone we should get back going the podcast at some point, or we should get one of the people that kind of talks about the eighteen year housing cycle, because if they are right, then this is the the Bier's remorse moment and like to is going to be when it all comes tumbling down. So I would be genuinely curious to all what that kind of group of people think is actually going on, and just know maybe I should talk to a while.
Yeah, and now you've mentioned them, I'm almost certain they'll be in touch.
All right, It's like kindy mine, it.
Is welcome to Maren talks money the podcast in which people who know the markets explain the markets. I'm meren Sunset Web this week' bringing you a conversation with oak Tree Capital Management co founder Howard Marks. Oak Tree, founded in nineteen ninety five, is a distressed debt specialist now manages roughly one hundred and eighty billion dollars in assets, and Howard, as what many of you will know, is famous for the notes that he writes on his thoughts
about investment. Howard, thank you so much for joining us today. We really appreciate it. It's good to have you with us.
Good to be here. Thank you, Maren.
I wonder if we can start by talking about your sea change things and the ideas behind that. I think a lot of listeners will read your notes very enthusiastically, and I know a bit about the way that you're thinking, but some won't. So it would be great if we can set the scene by talking about this big pendulum swing that you've seen in markets.
Paul Samuelson, the great American economists who wrote the textbook that almost all of us read in college, said, when events change, I changed my mind, what do you do? That's a good question. You know, most people kind of assume that the way things are is the way they've always been and the way they'll always be, and so the tactics and strategies that have worked will continue working. As simple as that, I think for most people. The idea of the sea change arose for me fifteen months ago.
I wrote about it thirteen months ago, and also eight months ago, and also a little bit last month for this month, and I still believe it. And basically what it says is that at the end of eight the FED took what we call a dubbsh stimulative monetary policy to get us out of the global financial crisis, and in particular, they took the FED funds rate, which is the benchmark rate of short term interest rates in the US,
to zero for the first time. Surprisingly, they kept it there for almost seven years, and for the total of the thirteen years from nine through twenty twenty one.
It averaged a half a percent.
And the reason we watch the FED, and the reason the FED manipulates interest rates is that interest rates matter a great deal in determining the vibrance of business and the cultural Low interest rates had a very strong impact on those thirteen years. But I believe they're over, and that means that the climate ahead will be different from the last thirteen years. Now, what prevailed over the last
thirteen years not the way it's always been. At the beginning of my career, in the late sixties and seventies, we had a different interest rates. They closer to I would say, five to six on average, and we had a different climate. But then the US had about of inflation in the seventies. The Fed Fund rate was taken to twenty by Paul Wolker, the Chairman of the FED, and that killed the inflation. Good news, killed the economy, bad news, and it set the tone for the next
forty years. And I say in the memo which I published in December, and by the way, everything I'm going to say about the memos is available by a podcast if people would rather listen than read. In nineteen eighty I had a long outstanding from a bank and I got a piece of paper which said the rate on your loan now twenty two and a half percent. And forty years later, in twenty twenty, I was able to
borrow at two and a half percent. And that decline and interest rates really set the tone for that forty year period and again, I think that the decline is over.
In the latest note, you talk about reading Edward Chancellor's book. We're great fans of Edward Chancellor, and we've had him on the podcast in the past to talk about his books and his idea, but that he had in his most recent book, The Price of Time, and we've talked about that with him a lot. And you say in your latest note that reading his book clarified your thoughts again about how it is that very low interest rates
affect the investment markets. And again you say in your note, and we've discussed here before, that there are all sorts of things that people attribute their investment's success over the last twenty thirty forty years to, in particular their personal brilliance, but you also say that you think, in fact, it is very low interest rates that have been the main driver of investment performance of asset markets over the last forty years. So it it's very much the case that
if that changes, everything changes. So I wonder if you could just explain what it is that what it was in Edward's book that clarified your thinking, the key points that came out.
That the reason I like Edward's books so much Edward, as far as I'm concerned, is not an economist. I would say, thank god, I don't. I'm not very sympathetic to economists. Edward is a financial historian. And you know, the philosopher Santayana said those who are ignorant of history are doomed to repeat it. And Mark Twain, the American humorist of the nineteenth century, said history does not repeat itself, but it does rhyme. What does that mean, to not
repeat but to rhyme? And the answer is that the details of history are always different in every iteration, but there are themes that do rhyme from one iteration to the next. Edward does a great job of studying those and poising them out. The first of his books that I read was Devil Take the Highmost in the Fall of nineteen ninety nine, and he described the behavior in speculative bubbles, things like the South Sea bubble of the
seventeen twenties, the Tulip bubble. You know, people engage in crazy behavior in speculative bubbles, and as a consequence, they buy things with no value for high prices, which is a good formula for losing a.
Lot of money.
And I was reading Devil Take the Highmost in the fall of ninety nine, and I said, wait a minute, this is the same behavior we're seeing today. In what we call the tech bubble of ninety eight, ninety nine, two thousand and again people acted like anything with Internet in the name, or any thing having to do with the e commerce would make them rich, which of course is a very dangerous expectation. I wrote a memo called Bubble dot Com about the bubble that was taking place
in dot com stocks. It was well, I don't like to be self congraguatory, but it was right.
It was right. You could be self congrassive. That's okay. Taking on this podcast we celebrate success well.
And the great thing theren is that, you know, it attracted a lot of attention to the memos. I had started writing the memos ten years earlier, in nineteen ninety and for ten years I wrote without having one response, and as somebody who writes for a living, you would know that that's not very rewarding.
No, we don't like that.
But then thanks to Bubble dot com, I was recognized, and now nowadays the memos are popular. In twenty twenty three, I again spent the Fall. Reading another Chancellor book at this time, the price of time. What is the price of time? The price of time is interesting. It's the amount that we pay to have the use of somebody
else's money for a period of time. Threat we rent the money, and the person who rents the money out gets the interest rate, and the person who pays the interest rate and gets the use of the money gets the benefits of putting that money over that time, whether it be losses or gains. It talks a lot in the book about the negative impact of rates being too low, and I said, wait a minute, this is the same thing we're seeing now, and ihaps seen for the last
thirteen years. And so I wrote my memo called easy Money, which came out a couple of weeks ago, and again the same theme rhyming four hundred years later. And it's important to understand the themes of financial history. Is more important to understand the way they rhyme and have a recurring impact on generations over I think the impact of easy money ultra low interest rates is profiled.
Yeah, so when you look at the list of things that you wrote in this memo, the things that low interest rates allow you make it easy to run a business. They make it easy for investors to see acid appreciation, They make it easy and cheap to levy your investments up, easy and cheap for business to businesses to obtain financing, and easy to avoid default and bankruptcy. And one of
the effects of that is malinvestment. Is is capital being allocated to the wrong places, to businesses that shouldn't survive in a normal environment. So if we're now seeing this sea change and we flipping bank the other way, does this suddenly become hard to run a business, hard to make any money out of the markets, hard to levy your investments, hard to get financing, and really not easy at all to avoid DeVault and bankruptcy.
The flip sounds really nasty.
We had ultra low interest rates. I don't think we're going to ultra high interest rates. I think we're just going back to normal interest rates. I don't think it's going to be terribly hard to make money or avoid bankruptcy or get financing. I think it's going to be normally hard. You know, the people. The thing that people should bear in mind, both your listeners and normal economic participants, it's not supposed to be easy.
So much nicer when it is.
Well, it's nicer for a minute, but the point of the memo is that it being easy subsequently has bad effects. And you know, let's think of an example. Investors like myself or you are supposed to be risk averse. We're supposed to dislike riskiness and be attracted to safety, and as a consequence, we demand the opportunity to make higher
returns from risky investments. If we have two investments and one is safe and one of risky, we'll demand that the risky one appear to offer a higher return, or we don't make the risky one, we'll make the safe one. If I said, mare, and I have two you know oak Tree funds to offer to you. One is one invest in treasuries and it will give you seven percent, and the other is adventure capital fund that will invest in high tech solutions and if things go right, will
make seven percent. You'll say, I'll take the shore seven over the risky seven. Because you're a normal person, you're a risk averse. You have to be induced make risky investments. Now, what happens when people forget to be risk averse, And
the answer is that they make risky investments without suitable incentives. Well, if the central Bank reduces the interest rate to zero, and the return on savings, for example, is zero, as it has most been most of the time for the last fifteen years in this country, then if you see a crazy high tech start up investment that offers five maybe you say, oh my god, that's near vine. I'll take that all day long. I love five percent when
cash is zero. And so you can see that ultra low interest rates on short instruments like cash or treasuries drives people to make investments in risky things that still offer low absolute rates of return, just higher than the Measley what I think it was Edward Chanceller who said the Measley rates unsafety investors. So you can see that ultra low interest rates encourage risk taking and that's not good.
It gets people into things they shouldn't do. And you know, the ultra low interest rate has effects on let's say people. It may not be people, maybe institutions or companies or what have you, but it has effects. And in particular, ultra low interest rates penalize lenders and safers and upside eyes risk takers and borrowers.
And you know, is that.
What we really want to do in our society. Let's say you have a worker who's been fortunate enough to save up half a million over the course of her career, and she's now retiring. If the bank offers five percent interest, which is pretty normal in the US, she makes twenty five thousand a year of retirement income. But if the interest rate is zero, as it has been most of the last fifteen years, she makes zero. And she says,
I can live on zero. Most people can't. And so she says, well, I better invest in you know, high tech thocts or something like that. And it's probably inappropriate for her to be investing in something that risky given her limited resources in station in life, but she does it because the low interest rates drive her out of safe instruments. And you know, I in the memo, I caught my late other in law who used to refer to people like her as handcuff volunteers. They do not
what they want to do. They do what they feel they have to do.
What they're forced to do by the central banks, which gives them. A central bank is a level of responsibility. I'm not sure they always step up to.
They may not sit down and say let's penalize the retiree and reward the speculator. But that is the impact of what they do. Maybe it's a byproduct of having a stimuli of monetary policy which with low interest rates and i availability of liquidity. But whether whether whether it's their intention or not, it is the effect.
Well they don't do it unknowingly, that's for sure. So there are in that sense, there are many positives too, or return to a normal level of interest rates. And I know there is a view that we will see interest rates go back down to what younger people consider to be normal, back down to in a very low levels, as inflation falls back to two percent. That my view, nice suspect yours as well, is it they will stay at much more normal rates in the medium to long term.
Yes.
In the memo and in the podcast, I take the position that the rate for the next decades, shall we say, is on the FED funds rate, which is always the lowest rate there is because it is the rate that banks pay each other or paid on bank deposits at the FED, that the rate will be between two and four, not between zero and two.
I don't believe in forecasts.
I especially don't believe in my own forecast, but you have to believe something, and you know, I don't think it's heroic to cite such broad ranges, but I think I think that's true, and I think it's indicative it's going to be a different climate.
It recalls for different actions.
And it's fair to say, without making forecasts that historically it's incredibly unusual for inflation to get to the level it did and for then to fall back to two per cent and remain there. That would be if we're talking about history rhyming, that would be history, not rhyming.
Asshle right, right, yeah, I mean, look, we haven't had high interest at high inflation much of the time since nineteen eighty and we got up to nine and a half in the US, and now as you say, it's around three or three and a half, and most people are confident it's going.
To be two.
You know, the FED has adopted restrictive monetary policy to cool off the inflation. Doesn't want the economy to overheat and be inflationary, so they rose in They raised interest rates and embarked on quantitative tightening, taking liquidity out of the system by selling bonds into the economy or merely letting them mature, both of which use up liquidity like a sponge. And so all the optimists who've been raising the stock market for the last fourteen months say, oh,
you know what, inflation will soften. That means the Fed will not have to raise rates anymore, be able to start loving them. That means that it's not going to cause a recession. And I think you would say, they're and Bobs your uncle or Robert's your mother's brother.
I would say, that's exactly what i'd say. But listen, there will be a lot of positive effects here, right.
And one of the things that has been irritating for everybody, anyone with a vague valued value slant anyway, over the last decade has been watching companies expand into areas, for example, that they're not expert in, moving away from their core business, getting what you might get a little flatty, and with interest rates coming back to normal levels, in capital not being so cheap and available, you might expect to see companies behave in a more productive and a more efficient way.
And perhaps you know John who is often this podcast with me, we were talking about this earlier, seeing various companies beginning to go through layoff programs, which of course is unpleasant in some ways but necessary in other ways, and pulling back from businesses that aren't their core area. And this would seem to be long term a good thing, in particular for productivity.
No, I think that's right.
The company should should stick to what they're good at rather than expand into new areas, and they should take prudent financial actions rather than risky And the only thing that ever makes them do that is fear of complications. You know, I said in one memo back in I Think twenty twenty that fear of bankruptcy is to capitalism as a fear of hell is to Catholicism. It is fear of bad outcomes that keeps participants in the economy
and the markets on the straight and arrow. And when people believe that the interest rates will always be low and the central bank will always bail them out if necessary, that permits or encourages risky behavior, which is not good for society. And when risky behavior is well, when behavior is too risk too risky for too long, then you get a bubble. And when you get a bubble for too long, then you get a bus And a crisis. So you know, these are the extreme behaviors that produced
extreme outcomes. And everybody likes a good bubble because most people make a lot of money, but nobody likes a bust and a crisis.
Yeah, that brings us very very neatly to private equity. And one of the things that you say in one of your notes, I would venture that nearly one hundred percent of capital for private equity investing has been put to work since interest rates began their downward move in
nineteen eighty. Now, back to what people have been telling us over the last couple of decades has been driving their success, and private equity is the obvious example here of a group of people who constantly tell us that their success is based on skill, on being able to take companies, improve them, make things better, and sell them
on because they are fundamentally worth more. And as time goes past, it's increasingly obvious to those who hadn't grasped it previously that a lot of that success is based on the manipulation of debt as opposed to manipulation of cheap debt in particular, as opposed to on this special special management skill. So what happens to that now absolutely huge sector in this sea change.
You talked, and I think in the in the second question, you talked about a tailwind benefit that has been behind the investors for the last forty years. And that tailwind, of course is the decline of interest rates and the low interest rates. And I thought you were going to say, Howard, what is that tailwind?
You know?
Oh yeah, I think you said, I use an analogy of metaphor whatevery English teacher would say is the right word. And that metaphor, of course, was the moving walkway at the areas. Yes, and I believe that the low and declining interest rates given investors, especially but especially private equity
investors the tailwind of being on a moving walkway. And you go to the airport and you stand on the moving walkway, you do okay, But if you walk at a normal speed on the moving walkway, you make very quick progress and you say, boy, I'm really I'm really fit and in the same way, and if the listener wants to understand what I'm talking about with the impact
of low interest rates, try that. So you're in your office, you're a private equity mogul, and you find a company and you say, I think if I buy this company for X dollars, i'll make ten percent a year. And you're interested in doing that. You consult your investment banker and she says, I can get you the money at eight percent a year, and you say, oh great, I can borrow at eight and invest at ten and make two for nothing, and then of course you can add the value to the company you make even more.
So I do it.
But then the central Bank takes down the interest rate. Now, reducing the interest rate makes a company more valuable because a company that produces a game and stream of cash flows, which in this case was postulated to be ten percent, those cash flows become more valuable. People see interest rates that four or two was zero, say man, I'd like to have something that cash flows at that rate every year.
So the value of that company goes up, and rather than make ten percent a year, you make twelve because the asset appreciates. And then the borrowed money which you thought was going to cost you eight, only cost you six. So rather than borrow at eight and invested ten, you end up borrowing six and invest at twelve. And you say, boy, I'm smart, but wasn't it really the movie Warkway. So, as I said and you quoted, the private equity industry
really was invented in the eighties. And as I mentioned, rates have come down from twenty to zero over the ensuing forty years. And I just described the benefit the impact of low interest rates. So that means that the private equity industry really has only existed in this period of declining or cultural low interest rates. People may think that it was their genius that made them fortunes in private equity, but maybe it was the moving walkway of rates.
And if they're moving walkway jetters to a sudden halt, perhaps they all fall over.
Yes, well, there you are to be completely accurate with regard to private equity. There are four ways to make money as a private equity investor. Buy companies at bargain prices, lever up your purchases with low cost borrowed money, add value to the company by improving its operations or its management, and then sell the company at a higher valuation in the end.
Four way.
But if interest rates are lining, you don't have to buy bargains. You can pay full prices because tomorrow they'll be higher. You don't have to add value because the return from just the levered purchase will be good enough. So if all you have to do is buy, borrow, sell, and you can serve on the market trends. To do those things, you don't have to make genius decisions.
Do you think that the boom in ESG is also somehow a function of low interest rates?
I never thought of it.
Yes, well, and that it gives again, the abundance of easy money and cheap capital gives people the luxury to focus on things that might not previously been part of their core.
Well, that's one way to say it. Another way to say it, Marin, might be that the tailwind of declining its just rates makes it tends to make investing successful. So people can invest in the ESG, put an over emphasis on ESG and do very well financialie and think that the two are linked.
So we may see something of a sea change there as well.
Now, well, again, I'd have to take it through, but it certainly seems possible.
Can we go back to the pandemic? I'd rather not one of my Okay, not in that sense. But you had a nice time with your son Andrew in the pandemic, right, and you wrote a really lovely memo about your conversations with him, which I enjoyed enormously, And I enjoyed it in particular because I'd actually written a column at some point long ago about value and growth and saying that really we shouldn't divide them up because there is only value investing, because nobody buys something if they think it
doesn't give them value. We just disagree about what represent value, right, And I think that was roughly the point that you were making. We're all looking to discount future cash flows. We just have different ideas about how far out they should be and where they come from, etc. So they're
kind of the same thing. But in that one of the things that interesting was the value softening slightly towards cryptocurrency's bitco am, very high growth tech, etc. Has that stayed with you, that softening towards crypto.
Well, again, Maren, kind of what I said about business the business environment. I'm not positive. I'm only not so negative, as Maren says. My son Andrew, who's a venture capitalist and his family moved in with us during the pandemic, and we spend a lot of time together, and of course that resulted in investment. Should we say discussions or should we say, arguments, and he's a very good thinker, and he said that this dichotomy between value and growth
is a false one. Everybody wants to growth and everybody wants value, but the question is where you think it comes from.
One way to make money is to buy a company.
Today which is actually worth more than everybody thinks and take advantage of that discount, and that has been come to be described as value investing, take advantage of momentary underpricings. And another way to get value, as you say, Meren, is to buy a company today whose earnings will be ten times higher in thirty years, and that pursuit has come to be called growth investing, investing based on a high rate of earnings or cash flow growth.
In the future.
The formal investing world did adopt that dichotomy, and Andrew argued that it's a false one. And by the way, it is true that one of the worst things you can do in some way is to say we do this, then we don't do that, because the investment world is very fluid and the investor should be somewhat fluid. And I argue to this day. We had this discussion two weeks ago that there are people. Not everybody can do everything,
and not everybody is equally good at doing everything. So there are some people who are very good at ferreting out under current underpricings, and there are some people who are better than others. I don't know if anybody's really good at it, but there are some people who are better than others at knowing or sensing what high tech
companies will look like thirty years from now. So some investment situations derive much of their value from their current assets and cash flows, and some derive more of their value from a high rate of growth in cash flows and earnings over the long term. And so obviously the people who are good at the ladder should do that, and the people who are bad at it.
Shouldn't do it.
You know, ironically, one of the I know you wanted me to talk about crypto.
But I just not picking it up.
You got away, you know, ironically, I was going to say the greatest bubbles we see with the greatest consequent losses when people overstate the far distant increase in cash flows. We had the tech bubble in two thousand and we had the we had the bubble in the nifty to fifty, which I also was privileged to live through in nineteen sixty nine or seventy three, depending on when you want it need it. So every once in a while people say, well,
you know, I've changed my mind. Trees will grow to the sky, and I'd like to buy one today as a saplink. And usually it turns out that trees don't grow to the sky, and doing so called what they call growth investing turns out to be a mistake.
So Bitcoin, well, you know.
Andrew who was more neutral or positive actually to bitcoin in twenty twenty, and by the way, it did great. I can't say it didn't. He bordered I think the four thousand in March or twenty and it went to seventy thousand dollars.
That's pretty good, and even.
Today, after being wrung out, it's still forty three thousand. But you know, he convinced me with success that I shouldn't appint on things I don't know.
Anything about it.
And when I came out extremely negative on bitcoin, it was twenty seventeen. I really didn't know anything about it, and he said that you've done very well in your career coming out against files that have no substance, and so one develops a knee jerk reaction and says, oh, there's one I'll come out negative against that one. Well, you should do it without investigating thoroughly. That was his point.
But my point is that, Maren, there are two kinds of investments in the world, broadly speaking, not growth and value.
There are two kinds.
The ones that have intrinsic value that you can calculate and buy on the basis of a discount from intrinsic value, and the ones that don't have intrinsic value. They can be calculated. So what has intrinsic value? Stocks, bonds, companies, buildings all have intrinsic value. And you can look at a piece of land for farmland, and you can say, well, that acre will produce you know, ten thousand in cash flows in the next year in terms of its crops,
and it's worth fifty thousand. That's the intrinsic value. That's a great thing to be able to invest on that basis, and that's basically what I do. But you know, there are things that don't have intrinsic value, mainly because they don't have catflows.
And what are those things? Gold?
Diamonds, art, furs, oil. People say, well, oil is going to go up, oil is going to go down. What is the intrinsic value of a barrel of oil? The answer is you can't calculate it because it doesn't have a cash low. And then, of course the other thing that has no cash flow and can be calculated as an intrinsic value is bitcoin. Well, crypto, it has no intrinsic value. It's only worth what people will pay for it.
And you know, if you buy it and you put it in the drawer at the end of ten years, it'll still be sitting there, but it won't have attracted any cash flows, any dividends, any dividends, or interest. So making money in cryptocurrency is only a matter of appreciation in price. But appreciation in price cannot reasonably be predicted for ATHLETs that don't have cash lows. That's the bottom for me, that's the bottom line. So you can invest
in crypto because fun or kind of. I wrote a memo about gold twelve years ago called all the Glitters You can invest in gold kind of out of superstition, and people who have been doing that.
How don't you take gold over crypto? Well, crypto over gold. If you had to no, no, Well I had to choose one, which would it be?
I mean, I mean, look, I think you know.
I mean if I say I would I tend to say yes, but Andrew would kill me because they both have limited supply. You know, the amount of gold you can get out of the ground is limited, and the amount of bitcoin you can mine is limited because by the by the algorithm to a certain number of coins. I think it's twenty one million.
You know.
Gold is a little more tried and true, but it also lacks any kind of analytical rais on debt trick.
Yeah, yeah, I'm gonna put I'm gonna put.
I'm going to put you down for gold. I'm going to put down for gold.
And then everyone will get irritated with us if we talk about this for too long. So can I move on to asking you then about at the very end of your last memo, you say, if you agree with me, which of course we do.
We have a host of solutions to propose.
So if our listeners, ordinary retail investors out there right now looking at their portfolios, going, I've listened to what Marion Howard are saying, I'm a little nervy what am I going to do with my money? And one of the things that you've said recently, and I know you didn't mean it to people to actually go out and do it, was do you know, sell everything by bonds? What would you tell the ordinary person to do?
Now?
Look, the upshot of the whole thing is that when interest rates were zero, things that pay interest were not rewarding. And now the interest rates are a few hundred basis points, which we meet a few percentage points higher. The returns are substantial. And whatever you had in what we call fixed income bonds, notes, loans, however, you fixed income credit, whatever words you want to use, whatever you had four years ago, you should have more now than it was puny.
Now it's substantial two years ago. HIO bonds, which is one of you know, that's what I started cut my teeth on in nineteen seventy eight. I started City banks Hio bond department. Two years ago, HIO bonds paid four percent, not very attractive, especially given some of the companies are quite risky. Today they pay eight percent. Well, if you if you had any at four, you should.
Have more at eight.
If you didn't have any at four if you'd have some at eight. So there's an example. Fixed income securities offer substantial yields today, and the return or yield on a fixed income security is virtually by definition, safer than it is on an equity instrument a stock, and so people should own some today today. You can get a very suitable return with decent safety by going into, for example, a HIO bond fund.
How it thank you very much, incredibly kind of you to view with us today.
Well, it's a pleasure, will always marit.
Thank you, John.
You listened to that interview, right, You listened to me talking about talking to Howard. We had a great chat. I really liked talking to Howard. What did you think?
Oh it was great. He's up there with Jimmy Grantham on my fanboy list. It's kind of like what I think, you know, I mean, you know, we get piles and piles and piles and stuff to read, and his memos are basically among like maybe like five people's things that I make sure I just read them every single time
they come in. And you know, and you know, part of that's core information bias, because it's nice to hear someone who's acknowledged as a highly successful, intelligent investor basically saying what you would like to say about interest rates and things like that. But you know, it makes a lot of sense. And it's also the fact that he he is obviously an older kind of guy. He's been around, he started his career kind of like at the same time as people like Bill Gross and all the rest
of it. So they've seen this long, long bull market and bonds and interest rates, and they're aware that a big things do sometimes change. And he's not somebody that makes a lot of predictions at all. I mean, that whole sea change thing he was talking about is quite an unusual thing for him to just turn them to say, actually, I specifically think that this is going to happen, and that this is not going to happen. So I think that's also another reason it's worth listening to.
Yeah, I wish his members religiously as well. And we talked about that one that he did with his son Andrew, and that was it was fascinating because well, a lot of if you go back and read it, you know, a lot of it turned out exactly as these things normally do. You know a lot of the things that Andrew was saying, turned out we bubbly things to say, no price at which he might sell, thiss all that, et cetera. But what they showed was the open mindedness
of long term successful investors such as Howard Marks. So instead of instead of just saying, well, this is the way I just love, this is the way I've always done stuff, and I dismissed anything else, He's ope, I suppose you have to be open minded if your son comes and lived with you for a couple of months in a point, I mean closed minded, dread that's really
going to make dinner and pleasant. But I like the way he had these very open conversations with his with his son, and the very different styles of investing, and how his.
So thought process evolved as a result.
You know, he talked about bitcoin having no intrinsic value, for example, but he at the same time wasn't actually down on bitcoin.
No, he wasn't. And I mean, I think I feel slightly more or less was it. I don't I'd basic agree with my take his point. I'd I'm still more inclined to gold than baitcoin. But I do see that coin has got, you know, our kind of purpose and a kind of some sort of value. I just don't know how you would go about thinking about that. And the difference is that calls it a long term track record, so you can actually have some idea whether or not it's expensive relative to at least to its own history.
I do think I eventually believe him into choosing gold. Do you think I got there in the end? I think I compt him Nanna's gold of a bitcoin, you think.
Well, I think so, I think. But by the way, that that was interesting in itself. I mean, that's that thing like pal Charlie Morris, I think would be very very pleased to hear, you know, heard Mark saying that basically golden bitcoin are kind of sort that almost the same thing. It's just that one's kind of old school and one's one's newer. Still struggles slightly with that idea.
But I mean, the other thing I would say, obviously is that you know, it's like a bond market, especially so at the end of the day, you know, I'm sure he kind of takes a curious interest in something like gold or something like baitcoin, probably thinks they're both basically novelty acts. You know, he has not as a boind guy he is, and the you know cash floors, you know credit worthiness, you know, all of those kind of kind of good things, and I don't know even
when it kill me, Equity he wasn't. You was kind of like, well that's not that's not really yeah.
Yeah, trying trying to get him to say by UK Equity can quite get him over the line. Thanks for listening to this week's Marin Talks Money. We will be back next week.
In the meantime.
If you like our show, rate review and subscribe wherever you listen to your podcast, and of course do tell your friends. Thanks to all of those who've been commenting and emailing John ideas for shows, we are taking note, and we'll have a show email live scenes so you can email the team directly with your suggestions and of course your complaints. There'll be a special hate mail section.
This episode was hosted by me Maren sumerset Web. It was produced by Some Society, additional editing by Blake Maples. Special thanks to Howard Marx and John Stuff. Be sure to sign up for John's daily newsletter, Money Distilled. The link is in the show notes, so we'll also put in the show notes by the way a link to Oakcree's website so you can go and read how its nurch directly