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Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway and.
I'm Joe Wisenthal.
So, Joe, we recently recorded an episode with Kevin Muhror where we were talking about concentration risk in stock indices, and I guess historical analogies with the dot com bubble of the two thousands, and I know that this is one of your favorite subjects. I think I said it was like your own personal catnip. That's right, And so I thought, you know what, I did not get Joe
a Christmas present this year. In fact, I don't think I've ever gotten you a Christmas present, But wouldn't it be nice if I got him a whole episode where we're talking to one of the world's most famous investors who correctly call the Internet bubble.
Let's do it. Let's jump right into it. No more intro. I'm so thrilled about this conversation. Let's just get it started, all right.
I will also admit this is a belated Christmas present to myself as well. So we are going to be speaking with Howard Marx. He is, of course the co founder and co chair of oak Tree Capital Management. He's famously a credit investor, but he did call, as I said, the dot com bubble correctly. So Howard, thank you so much for coming on the show.
It's a pleasure to be with you. Tracy, and also Joe.
Maybe just to begin with give us some context around what the early two thousand's late nineteen nineties were like for you. What were you doing and what were you observing at that time?
Well, the nineteen nineties were a slow time for credit investors. We're kind of opportunistic and bargain hunters, and bargains come from dislocation and you know, people feeling urgency to get out of positions. And the nineties were generally a placid period, except for the around ninety eight we had the evaluation of the Russian ruble and a Southeast Asian crisis, and we had the meltdown of a highly levered hedge fund called Long Term Capital Management. But those were all kind of
vidiosyncratic events, not macro and not broad based. Other than that, the investment environment was placid. Importantly, it was the best decade in history I think for stocks and the S and P five hundred rows an average of twenty percent a year for ten years, which is an astronomical an astronomical accomplishment. If you rise twenty percent a year for ten years, I would guess that something goes up roughly
eight times in ten years, which is incredible. And of course this was all powered by the what we call the TMT bubble, tech media and telecom bubble, some people call it the Internet bubble, which prevailed in ninety eight, ninety nine and into two thousand. So it was hot times, not for credit investors, hot times for equity investors.
You know, you recently wrote a memo that called back to a memo that you had written basically exactly twenty five years ago. So right at the start of two thousand, of course, the dot com bubble or the TMT bubble peaked, I think it was in March of that year. You got the timing right. And that's sort of extraordinary because there were a lot of people probably starting in nineteen ninety eight, the nineteen ninety nine, maybe even earlier, like
this is ridiculous. There's all these companies they literally don't have a penny in earnings, or perhaps don't even have a penny in revenue, they just have the name dot com in their name. They ipo at crazy prices. What is the experience like? I mean, that was very fortunate timing on your part, But there were a lot of people who you know, were famously correct in early and they had clients abandoned them and so forth, and they thought it was like, oh, you don't understand the new paradigm,
et cetera. What's that like in the years before that, as it feels like the market is becoming increasingly untethered from any sort of reality and yet there's no payoff in being correct, right.
Well, there's so much to say in response to your question. You know, I use a lot of quotes and adages and when I write, because you know, other people have said things so much better than we can. And one of the first adages I learned in the early seventies was that being too far ahead of your time is indistinguishable from being wrong. So yeah, it's painful to say something and predict something and then have to wait years
and years for it to come true. Alan Greenspand famously said I think it was in ninety six that we're beginning to see signs of irrational exuberance in this, and of course the market went straight up for the next four years. And you know, there are people who pronounced that we were in a stock market bubble. I think I can think of one in June of twenty twenty, and here we are almost five years later. And of
course we did stall out in twenty two. But if you went out in twenty and weren't smart enough to come back in in twenty two, you've missed a big ride. So I think, well, you know, one thing I argue strenuously Joe, is that in the investment business there's no place for certainty. And Mark Twain said, it ain't what you don't know that gets you into trouble. It's what
you know for certain that just ain't true. And so you can have opinions, but you should never be certain that you're right, and you should never arrange your financial affairs on the assumption that your forecast is right, because it can be right intellectually or factually irrationally, but just take a long time to materialize. And if you can't survive between when you take your position and when it when your expectation comes true, then obviously it's not something
you should do. And one of my colleagues once wrote a note to his clients. He says, if you name a price, don't name a date. And if you name a date, don't name a price.
That's anybody advice or journalist too.
But anybody who names a price and a date is probably going to get carried out of there sooner or later.
So what was it like then when you hit the published button on the note? I think it was called bubble dot com and you published it. I think it was right at the start of January first. Still, what was it, Yeah.
January, It was January second, two thousand. It was the first business day of two thousand.
And then start later that month.
Right, yeah, No, I think a little later that year. Joe said it was in March. I don't remember exactly. I thought it was a little later than that. But you know, i'd started writing these memos in nineteen ninety I've been writing for ten years. Of course, in those days they went out in the mail and to a limited audience, just my clients, and you know, for ten years I never had a response. And then I spent the fall of ninety nine working on this memo bubble
dot com and was ready to push the button. I guess I polished it over Christmas probably and sent it out the first day. And you know, let me just clarify one thing for the record and for the benefit of the listeners. If you read that memo, it does not predict the bubble, and it does not say you know, the market's going to collapse. All it did is describe the current conditions. And that's two different things. Now. I
don't make predictions. I only describe current conditions. And my motto is we never know where we're going, but we're sure as help or to know where we are. And I believe, you know, this is a little bit of a matter of semantics. I believe that where we are, if we properly assess it, informs where we're going. But I think people who waste their time figuring out making predictions,
which I'm strongly against, are wasting their time. I think that describing current conditions can be done accurately and obviously
has an impact on what the future holds. So as I say, read the memo, I think it reads well in retrospect, but don't expect to find a place where I say, get out of the market or the market's going to collapse or there or in a bubble that's going to pop. What I say there is I just want to call your attention to all these forms of excessive or overheated behavior and let you know what I think is going on. That's all it says.
So in the art of just identifying where we are, and when we're talking about financial markets, obviously we can use all kinds of ratios, etc. You know, price to earnings, price to forward earnings valuations, a million different ratios that you can come up with. And then you know there
are sort of cultural markers. And I remember in summer ninety nine, I would get lunch every day at the same pizza shop with the pizza shop owner head CNBC on and he was trading tech stocs at the time, and these other sort of indicators that people are just excited about the prospect of making money and making money fast.
And when you do an assessment and you say, okay, here's where we are, how much do you sort of hew strictly to the math, so to speak, and how do you systematically incorporate other indicators of exuberant which perhaps can't always be captured on a Bloomberg terminal for example.
No, look, I think you're absolutely on the right track, Joe. You read the memo. My observations are, I would say ninety nine percent what you call cultural markers, which I think is great, or behavioral indicators, and one percent math. And to me, it's the behavior that is so indicative.
And in my first book, which is called The Most Important Thing, I have something in there called the poor Man's Guide to Market Assessment, and it really takes culture, mostly cultural markers, and puts them on in two columns left and right, and whichever column is prevailing, it tells
you something. And for example, I say in there that if people like me are being invited to cocktail parties and are the center of attention and so forth, then it probably means that investing is has been doing well and everybody's optimistic about it. And it indicates that maybe things are too hot, and if people like me are shut, not invited, or shunt it off to the corner, maybe the markets are too cold, too cheap, and it's time to strike. So I think that these behavioral indicators are
extremely important. And I wrote a memo in I think it was the summer of twenty three called taking the Temperature, and I describe what I do in this regard as taking the temperature of the market to figure out if it's hot or cold. And when I was working on my second book, which is called Mastering the Market Cycle, and I was speaking with my son Andrew, who is a venture capitalist, I said to him, you know, I think my forecasts over the course of my career have
been about right. And he says to me, yeah, that's because you did it five times in fifty years. Five times in fifty years, I found the market either so crazy high or crazy low that you could make a logical case that was either overextended or too cheap, and you could do so with a high degree of confidence. And I recount the five times I did it and why.
But you know, if I had tried to do it five hundred times or five thousand times in my career, I mean I've probably been in an investment business for about almost twenty thousand days. If I tried to do it five thousand times every fourth day, you know, I'd probably be fifty to fifty at best. So to me, it's noting extremes of behavior. And that's what I was doing with bubble dot com. And that's what I did in the five other observations.
So you've emphasized that you're describing current conditions, not necessarily making predictions. I'm curious how you translate those, you know, let's say, accurate assessments of the current environment into actionable investments or I guess another way of asking this is, you know, if you're looking at stocks and thinking they're overvalued or there might be signs of overvaluation, how does that translate into the credit space?
Good question, Tracy. To me, the main access along which one establishes one's behavior as an investor is the access that runs from aggressive to defensive. Each of us should figure out based on our personal conditions, our wealth, our income, our needs are dependents, our age plans, et cetera, and also ability to withstand fluctuations. Each of us should figure out what our normal risk posture should be. Normally, should I be a low risk person normal or a high
risk person? And then you should build the portfolio that responds to that decision. But then you might try to vary your position from time to time as conditions in the markets change. And I believe that as I said that the main access along which one should should think about varying one's position is between offense and defense. So you know, you establish a position which is your normal position, which has a certain amount of aggressiveness, is a certain
amount of defensiveness. But then are there times when you should become more aggressive and are times when you should become more defensive. And that's what I did on those five occasions. And I'll give you an example. And by the way, these are all described in Taking the Temperature. And I've mentioned or you've mentioned the memos from time to time, and I just want to note for the listeners that they're all available at Oaktreecapital dot com under
the heading of Insights. There's thirty five years at worth of memos. There about two hundred and there's no price of admission. They're all free and anybody wants to sign up for a subscription can do so. But you know, in Taking the Temperature, I described the way in nine in five oh six, I was getting really leary of the markets. What was my indicator, my indicator, or as
Joe would say, my cultural marker. My indicator was that I'm reading in the in the paper about new deals that are getting done, and the deals were crazy deals, deals that in my opinion, should not get done. They were too good for the issuer and in my opinion, too bad for the investor. And the deals were getting done anyway. And you know, one of the investor's main
jobs is to decline to engage in stupid deals. And you know, if somebody comes and says, you know, I'm going to sell you a gold mine and if you can put up a million dollars, you're going to make one hundred thousand dollars a month for the rest of your life. Your job is to say no, that's too good to be true. Or you know, if I say, I think there's a gold mine in Australia and if you put up a million dollars, it'll probably give you tay you a million dollars a year the rest of
your life. If we find gold, you should say no, that sounds too risky. You know, I just think that we're unlikely to find gold. But if you see those deals getting done, it tells you that investors are not applying vigilance. They're not doing their job of resisting deals that are too risky or structured not in their favor, and in five oh six, I was seeing these deals
done that made absolutely no sense. And I describe myself as wearing out the carpet between my office and my partner, Bruce carsh And you know, every day I would go and say, look at this piece of crap that you got issued yesterday. A deal like this shouldn't get done, and if a deal like this can get done, there's something wrong. Ninety nine percent of my observation at that time that investors were not being suitably skeptical, cautious, demanding,
and risk averse. And you know, Buffett has a great saying which feeds right into this. He says, the less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. And when others are wacky, we should head to the sidelines.
That was the foundation of that conclusion. Now what happened was it turned out we were in a housing bubble, and the housing bubble gave rise to a mortgage bubble, and the mortgages, the subprime mortgages issued to people who could not or would not document their income of their assets were packaged into mortgage backed securities, and the people who bought the riskier tranches of those securities, lost all their money, which the rating agencies rated very highly, because
they didn't understand it. And this was going on en mass, and it was the collapse of the mortgage backed securities, of which the banks had in many cases retained the risky portions when they structured them. It was the collapse that took you know, bear Stearns and Merrill Lynch and Lehman Brothers and other AIG, etc. Out of business as independent endings. I hastened to point out I didn't know anything about mortgage backed securities. I didn't understand subprime. I
didn't know what was going on. It was going on in a distant corner of the investment world which I was not in on. I just knew that the climate was too permissive and the mortgage backed developments were a manifestation of that. But your question, I always try to come back to the question. Your question was what do you do about? So what did we do? We sold most of our real estate holdings, We reduced holdings in
many areas. We liquidated holdings in large funds, our opportunistic debt funds that we had formed in two four ET cetera. We sold those holdings. We raised either small funds or no funds, and we waited for this behavior to produce opportunities. After it passed. On the first day of seven, Bruce and I sent the memo to our clients saying we'd like to have three and a half billion dollars for distress debt fund. The largest distress fund in history had
been two billion. It was our one fund. We wanted three and a half because we thought there was something big coming, and within a month we had eight billion. We went to our investors, we said we can't use eight billion, we'll take three and a half. We closed that fund in March of seven, but we said we'd like to have the rest of your appetite for a stand by fund, and we continued for a year to raise a stand by fund again in an area where
the biggest fund in history was two billion. We raised eleven billion and that was our fund seven B and we put it on the shelf and we said this is for when the stuff hits the fan, and we're not going to invest it until that time, and we're not going to charge any fees, and it's just commitments on the shelf. Because we'd like to have capital we can draw. And when Lehman went bankrupt on September fifteenth of eight, we had that eleven billion dollars. We had
only invested about ten one billion. We had ten billion that we could call on, and so unlike most people, we didn't have to worry about where are we going to get money, or can we invest or our client's going to withdraw their money. Rather than we had commitments, we were sure we could draw and so we could plunge in and we started to invest Bruce. Bruce does the investing, and we developed our position jointly and we decided to get down to work. So the next week
after the Lehman bankruptcy was Friday fifteenth. We started investing and he invested for that fund a loan four hundred and fifty million dollars a week on average for the next fifteen weeks, that seven billion in one quarter. Remember in an area where the biggest fund in history was two billions. Why because we had prepared mentally, we had noted the bad climate. We had prepared for a denoument,
and we swung into action when it arrived. And I was very proud of him for taking that position, and people on the street have told me that in that quarter we were the only buyer. Well, that's how you get good deals. If you can buy where nobody else is buying, you get your pick of the litter at low prices. So that's I just gave you a four or five year I guess four year description of a process.
But man, you have to be patient because in five to six we were doing nothing, just selling, and we were not rewarded in five or six for that behavior. The reward came at the end of eight. But you know, I think it's not everybody's in a position to apply that process to that extent, but I think it describes the process, and of course I use it as an example for one simple reason. It was successful.
Always a good always a good outcome when you have a success from it. Obviously, fantastic story your latest memo which inspired us to reach out and want to chat with you on Bubble Watch, And as you mentioned, is the twenty fifth anniversary of the bubble dot com memo, and so twenty five year anniversaries are just probably a
good time to go back. But on the other hand, there is also this moment that we alluded to in the intro of incredible enthusiasm really for like a handful of tech ai related names that's lifting the entire market up. Is this one of the moments? I mean, what is the temperature right now as you see it? You've mentioned you've had five moments sort of maybe five calls in your career. Is this a sixth right now?
No, it's not okay because you asked before. Behavioral or numerical. The main observations today are numerical. The peaking ratio on the S and P five hundred is elevated relative to historic norms, and the so called Magnificent seven, the biggest companies in the S and P dominate its behavior. Are you going up or have been going up rapidly? And they're hot stocks, And when you see one group perform especially well, you have to ask whether it's a bubble.
And the S and P, of course, has gone up more than twenty percent a year for the last two years, and it's only the I think the fifth time according to JP Morgan, the fifth time in history. So you have to ask these questions. But the troubling aspects those are numerical and what I say in the memo is that, in my opinion, it lacks the behavioral aspects.
Of a bubble.
And I talk about some of them, and I say that a bubble is not just a numerical it is behavioral. And a bubble is really it's not a rise. It's that's a bull market. It's not high prices. A bubble is a temporary MEMI in which people are so agog at things that they throw over all discipline, all caution, and I just don't. It just doesn't feel to me like we're there. We're high priced, I say, lofty, but
not nutty. And the bubbles I've seen and I've lived through, starting with the day I joined this business in sixty nine, we had what we call was called the nifty to fifty. What you see going on is what they call in literature the willing suspension of this belief. You know, I know it's high, but if I don't go in, I could miss something. Or I know it's high, but I don't think it's going to end tomorrow. And by the way,
it's if it ends, I'll just get out. And of course, as I mentioned in the memo, the real hole mark of a bubble is when people say it's so great this thing we're talking about, whether it's the nifty to fifty stocks in sixty nine or Nvidia today or TMT in ninety nine, they say it's so great that there's no price too high. And that was the official dictum in the money center banks in sixty nine. With God
to the nicety fifty. It was the official victim. With regard to the Internet in ninety nine, what do people say? The Internet will change the world, and so for the stocks, there's no price too high. Well, guess what. The Internet did change the world. But because they bid up the stock so high, the people who invested in them lost
almost all their money. So, you know, people become psychologically unhinged and not tethered to reality, and their portfolios slipped their moorings, and they think that they found the perpetual motion machine or a tree that'll grow to the sky. And I just don't see those psychological or behavioral aspects today.
So one of the things that Joe likes to emphasize when it comes to well the tech bubble specifically, is the importance of stories or narratives. So one of the things that will drive this kind of behavior is you'll see a company come out with like this huge ambition. I think Joe's favorite example wasn't there like a car company that claimed to have found the cure to AIDS.
That's right, this is a good story. This was nineteen ninety nine, and people were just so up mystic that they thought he used car dealership in Nevada head in their back office founding cure for AIDS.
That never sees a story story.
Yeah, well, I'll tweet out a link when this episode comes out.
So nowadays, there's an argument that some people make that we have a faster tech cycle than ever, and that means more stories can be generated more quickly. And given that you're a veteran in the space, can you maybe compare and contrast the tech cycle now to previous history.
Well, listen, Tracy number one, I'm not an equity guy. Number two, I'm not a tech person. I have no personal knowledge of the tech companies of today. I have an idea about AI. I've seen it do wonderful things. So far. Most of my direct experience is with what I would call parlor games. You know, I did an interview like this one with a Korean media company that I've worked with over the over the years. They sent me a video clip of it, and in the video clip,
I'm sitting there speaking Korean. It wasn't titles, it wasn't dabbed. I'm speaking Korean, and not only it, and it's it's not somebody else's voice coming out of my mouth. It's my voice coming out of my mouth in Korean, and my lips are moving correctly. Now that's an incredible accomplishment.
I don't know if it's a money maker, but so I guess what I'm saying is, I don't know exactly how AI is going to be used in the future, but I can imagine that it's going to have a significant impact when when computers can start thinking and doing things like that, it will change the world and jobs are going to be created, jobs are going to be lost, efficiencies are going to be created, maybe whole new products.
But I listed the memo a couple of the mistakes people make, and I saw it with the nifty fifty by the way, so that in nineteen sixty nine, this was a list of roughly fifty companies the best and fastest growing companies in America, Companies that were so great that number one nothing bad could ever happen A number two. As I said, there was no price too high. And if you bought those docks in sixty nine, you held
them for five years. As I recall, you lost about ninety five percent of money because the price turned out to have been to I, and it came down by ninety percent the pe ratio. And some of them ran into fundamental problems and had to be rescued, or went through bankruptcy or disappeared from existence. So people assume that the trends that are underway will continue. One is the trend toward the internet in ninety nine, another is the trend toward AI today, and that it will be of
great consequence, and I'm sure it will. They also believe, however, that the companies that are successful today will continue to be successful, that they won't be challenged or disrupted or displaced. When the thinking really gets optimistic, they conclude that every company can succeed, and we know that that's highly unlikely. There are going to be winners and losers. We can't
always predict which is which. If we find a company that's that's a leader today and dominant, and we pay a price consistent with that dominance, and they turn out not to be dominant. Price may turn out to have been excessive, and then ultimately people engage in what's called lottery thinking, or what I call lottery, which is, well, it's nowhere as a competitor in this new thing, but you know, maybe it has a two percent chance of being becoming a big one. Are in going up a
thousand times? And if it could go up a thousand times, then I can pay a pe ratio of one hundred x because I'll still make money. So they will buy into things that have a very low probability of producing a very good outcome. And that's like buying a ticket in the lottery, and most lottery tickets are losers. But this is what happens in bubbles. Now. You asked me to differentiate. Since I'm not an expert on AI, I can't differentiate. But I think there's a very good comparison
to the Internet. We expected the Internet to change the world. We can't imagine today living in the pre ninety five world without all the tech we have today. And yet the vast majority of internet and e commerce companies that were minted in ninety eight, ninety nine, two thousand are out of business and worthless. I'm not sure it's going to be the case with AI, but it has to give you a caution. That's all I'm saying. Just keep your eyes open and don't drop all reason in a
rush to get in. And by the way, one of the great differences in a bubble is that usually people are afraid of losing money. But one of the hallmarks of the bubble is that people forget to worry about losing money and only worry about missing out FOMO. When Fomo takes over it, people say, you know, yeah, well, you know, the price seems high. But if my competitor or my golf buddy or my brother in law buys it and I don't buy it and it triples, I'm
going to kill myself. So I got to buy it regardless. And you know, so, I think, I guess, maybe to sum up on bubbles, a great way to characterize that is that it's when say I gotta buy it regardless, and I would argue prudently that nobody should ever do something regardless.
I guess I'm interested a little bit more in why you don't see those characteristics today, because all people talk about is AI we just had the president, you know, make this big announcement We're gonna spend half a trillion on data centers and so forth. It's, you know, just
this dominant mode of conversation. You know, I'm sort of two minds of this, because you know, I've been hearing people, you know, regular people on the street talk about their speculations or their Robinhood accounts or their crypto accounts whatever for years now, and mostly the prices have been going up. It certainly feels to me like some of the indicators that you describe of fear of missing out and so
forth currently exists in this incredible this incredible hype. I'd like to hear you talk a little bit more about why right now, Mostly you just see, yes, the math is expensive, the numbers are expensive, but you don't feel that sort of that sort of euphoria that has characterized past bubbles.
Well, you know, I guess, Joe, part of it is that I don't I don't live in that world. You know, since I'm a credit guy and not a tech person, I don't spend much time talking to people who who are interested in AI stocks okay, or who are doing AI businesses. So it might just be that I'm missing that. So you know, some of the conditions, some are all of the conditions of a bubble might be present in a few stocks or in the AI and related niche. I'm just saying that I don't feel it across the world.
And if you take the magnificent seven out of the equation, I think things are rich, but not crazy. I did read an article on that subject. I did read an article about a month or two ago which said that if you look at the S and P and leave out the magnificent seven, and you compare the S and P companies with their non US equivalent in something like the MSCI Index of Non US equities, you'll find that the US equities in every industry just about sell at
higher PE ratios than their counterparts outside the US. So I think the US is more expensive than the rest of the world. Again, not crazy. And by the way, I'm convinced that the US has the best economy in
the world. And you know all these questions, especially in the stock market, in the bond market where I mostly work, the credit market, you have an indicator of value, which is the yield, and you look at the promised return from a given investment, and you say, well, you know, I think that's sufficient to reward for the risk or not. In otherwords, I think the price is fair or it's
not fair, or it's too cheap or too high. In the stock market, it's hard to do that because in the stock market you can enumerate the pluses and minuses of a given company or industry or a phenomenon like AI. But it's hard to say, you know, but the current price is fair or too high or too low. It's hard to turn the recitation of merit into the fairness of value. And so yeah, people may be too excited about AI, and that may result in prices that are too high for their stocks. And you know, I spent
in twenty twenty during the pandemic. I spent a lot of time living with my son and his family. And one thing he talked me out of he says, Dad, Yoda, stop talking about things you don't know anything about. Only a son can say that to his father. But I think it's good advice. As we get more specific in this conversation and it goes from stock market to SMP to AI, you know, I become more reticent to say
anything concrete, because I really don't have superior knowledge. And my hero John Kenneth Galbraith said that one of the shortcomings of the market is the species relationship between money and intelligence, and most people tend to look at somebody who's made money, and especially who's made money in the markets, and credit them with general intelligence, which is usually a mistake.
Well, I just have one more question, and I guess it's about the aftermath of bubbles, and it's based on a conversation that you had with Mike Milkin at the Milking Conference, and both of you were on stage and reminiscing about your time in the markets, and one of the stories you were telling was about the bursting of the nifty fifty bubble and its impact on the development
of the financial industry. And I think the idea was that all these people had put their money into things that were, you know, expected to be quite reliable, reliable stocks, stalwarts of corporate America, and then they lost virtually all their money. And that development ended up catalyzing the money management industry because if you could lose money on boring stuff like blue chip stocks, then why not you know,
try high yield or some alternative credit instead. And I guess I'm curious, do you see any interesting developments in the finance industry right now? Perhaps not in the immediate aftermath of a bubble, but you know, maybe related to a paradigm shift like higher interest rates.
First of all, I have been writing something about something called the sea change. I met Mike in seventy eight. That's when Citybank asked me to look into hio bonds, and I was very fortunate. It was maybe the luckiest day in my life that I got that called, because you know, that put me at the front of the line. That that's kind of the year that the hio bond
market began and became very important. And here I was no fault of my own, you know, working there, And the higo bond fund that I started at City in seventy eight might have been the first one from a mainstream financial institution. And as Malcolm Gladwell said in his book Outliers, you know, it's great to be demographically lucky.
So in nineteen eighty, the FED funds rate each twenty. Vulcar, as head of the FED, put the FED funds there to battle the inflation that was rampant at the time, and it worked, and I had a loan from the bank and I got a slip in the mail saying that the rate on your loan is now twenty two and a quarter, And that was eighty and in twenty twenty I was able to borrow at two and a quarter. So rates came down by two thousand basis points over
forty years. I believe that was a paradigm shift and that it changed the whole world, and it made a lot of people a lot of money. But I published a memo in December of twenty two called seat Change, saying that it's over. We're no longer in an environment where declining rates and ultra low rates are going to be the rule. We're going to have higher rates and they're going to be essentially stable, not downward trending all
the time. The other thing that you know is that prior to the meltdown of the nifty to fifty, the simplistic thought in investing was that it's responsible to buy a high quality assets and it's irresponsible to buy low quality assets, and the job of the fiduciary was to buy high quality assets. Well, here the best companies in America is lost almost all your money, and then I
shifted to hijo bonds. Now I'm investing in arguably the worst public companies in America and making money steadily and safely. So it did occasion a sea change in how investing is done, and it was a very important lesson that I was happy to learn at the very beginning of my career. You know, I was twenty three years old when I started working sixty nine, and I lived through this whole collapse in my twenty and it's very important
to learn your lessons early. And the lesson I learned was that successful investing doesn't come from buying good things, but from buying things well and if you don't know, and the difference, it's more than dramatical, and that it's not what you buy that matters, it's what you pay. The price has to be fair. And there is no asset which is so good that it can't become overvalued and dangerous, and there are very few assets that are so bad that they can't become cheap enough to be attractive.
It was an epiphany for me, and I think it changed the whole world, and we no longer say is it a good asset or a bad asset or a good company or a bad asset. We say, is it risky? How risky is it? What return do we expect? Is the return sufficient to compensate for the risk? And that is the change that has dominated the investment world to the last I would say, forty seven years since seventy eight.
And you know, we do so many things today like venture capital and private equity and transecurities which entail conscious risk bearing that couldn't have been done in the old world of good and bad or safe and risky.
I just have one last question. I was gonna let Tracy have the last question, but you said one thing that's that hit something that's been on my mind. And you mentioned in the summer of twenty twenty being able to borrow money for two percent. One of the questions that's been debated the last several years is why haven't the interest rate increases that we've seen across the curve had a more dampening effect on the strength of the
US economy. And one story that gets put out is that a lot of borrowing entities, whether their households like yourselves or various firms, locked in very low borrowing in those couple of years, and that the effect of higher rates therefore has been muted, hasn't transmitted to the real economy. Have we felt that adjustment yet? Is there something coming because those rates can't stay locked in forever, especially for
shorter term borrowing. Have we felt the impact of this seed change yet on the economy or is there more to come downstream from this reversal of what may be a forty plus year trend.
No, I think it clearly hasn't worked a twelve way through because when you borrow money, you borrow for a period of time, and if you borrow at a fixed rate, there's also a flooding rate borrowing. But if you borrow at a fixed rate, you fix your rate for a maturity of five or seven years, then even if rates go up, you're immune to it. You don't feel the impact until your debt matures and has to be rolled over. You know, people in this business are in the business
world in general, are not brain dead. And many of them, as you say, rolled over their debts in twenty twenty or twenty one, and you know, locked up costs debt until twenty six or twenty seven, so they're fine. But you know, maybe they took on too much debt when debt was cheap and readily available, and maybe they won't be able to refinance all of it, or some of them may not be able to refinance all of it when it rolls over in twenty six or twenty seven.
That's what we call a credit crunch, when you can't roll over your debts. Nobody ever repays their debts. They just roll them over, and sometimes you can't. You know, we believe that they're I mean, look there there are already some defaults, not many compared to the crises in the past, but you know, when maturities start coming due in twenty six, twenty seven, and if Wall Street or the banks are a little less generous and optimistic, maybe
there'll be some difficulty rolling it over. And then you know, and it's just the cost of money. So you know, the federal government has a portfolio of debt. They don't own a portfolio. They owe a portfolio of debt, some of which is long and some of which is short. And you know, so they're paying the low rates on the long debts. But you know when that when again, when that comes due, they'll have to roll that over
at higher rates, and it'll cost the money. And so if the interest rate merely stays where it is, the cost of capital to the US government will rise over time as they replace low rate, low cost debt with high cost debt. So this has not fully worked itself through through the economy yet, and there's more of it to.
Come, all right, Howard marks, We could easily keep going for a couple more hours, probably longer than that, but this has been an absolute treat. Thank you so much for coming on the show.
Well, thank you for your good questions, and I'd be glad to do it too, and let's do it again sometimes.
Absolutely love to thank you so much those I.
Guess Joe, I thought that was so interesting. So first of all, you know that I love just listening to like wartime financial crisis stories, so that was great. And then I thought one thing that was really interesting. Well, first of all, there aren't as many cross asset investors as you might think out there, and so it's really interesting to hear someone that is, you know, firmly in the credit space, but is also looking at other asset
classes in order to judge current market conditions. And then the other thing I thought was the emphasis on action being sort of a spectrum of caution and risk. So it's not the tech bubble is about to come and you know, sell all your tech exposure. It's more like, maybe I should ratchet down a little bit, maybe start raising you know, some dry powder for a rainy day.
That was really interesting the specific story this sequence, Yeah, raising that dry powder starting with the warning in two thousand and five that didn't get deployed or wasn't able to be paid off for years. But the idea of okay, if you see something coming down to the horizon is not enough to say, well, yes something there's going to be an opportunity. The idea of you know, raising one fund and then having that other fund on the shelf, cash that can be callable for the day that it comes.
You know, there were a lot of people that probably thought, oh, there are really good deals to be had in September two thousand and eight or March two thousand and nine or whatever. But there's no good in having stuff being cheap if you don't have any cash available to buy it.
Do people still call it patient capital? I remember people used to call you know, dry powder patient capital because the idea was you set it aside, and it might be a long time until you're actually able to invest in you.
Also, you know, this also strikes me as where like brand value of a firm really matters, right, because you're not going to get billions and excess commitments into that. You know, you and I aren't going right. It's like Tracy and I was like, oh, we think AI is going to crash in a few years or want to get buy bill We want to buy data center real
estate on the chief, so give us a billion. But you know that's the only that's a thing that you can monetize only after having you know, years of success. I thought it's interesting this idea of you know, there's a difference between expensive and a bubble, and that in his assessment, we're not there yet. And I really appreciate his perspective because it's easy for me to say on the day, oh, everyone's to talk about AI all the time, et cetera. I'm therefore, you know, we must be near
the top or a bubble. But I don't have you know, experience in markets going back to the nineteen sixties of like what that actually feels like.
Well, when a car company or car rental company in Nevada says that it's like a model.
Yeah, yeah, that's going to start.
I don't know that's going to revolutionize the world. Yeah, then maybe that's the time to be concerned.
That's how well.
No, all right, shall we leave it there.
Let's leave it there.
This has been another episode of the Audots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and.
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