Howard Marks Memo: It’s Greek to Me

Experience shows how radically markets fluctuate between seeing the proverbial glass half full and seeing it half empty. Rather than achieve a happy medium, sometimes the markets focus exclusively on good news (as during the twelve months through April) and sometimes exclusively on bad. Greece kicked off a turn to the negative in late April, which was exacerbated by the Gulf oil spill and rising concern over the possibility of an economic double dip. On May 8, after Greece’s troubles blossomed, The New York Times quoted Bill Gross as saying, “Up until last week there was this confidence that nothing could upset the apple cart as long as the economy and jobs growth was positive. Now, fear is back in play.”

Just a few months ago, no one seemed to have a problem with nations that ran chronic deficits and continuously increased their debt. Then investors changed their mind – as they tend to do – and today they take a dim view of these practices. Government solvency is considered a critical issue. Here’s how guest contributor and hedge fund analyst Andrew Marks (also my son) sums up current sentiment:

Sovereign debt has become like fiat currency, as it is supported only by people’s willingness to believe in other people’s willingness to refinance it. The debt of an issuer with no plan to repay and no underlying way to meet maturities other than through refinancing sounds eerily like a subprime mortgage.

Markets are safer when fear balances greed, and when worry about losing money balances worry about missing opportunity. We don’t like it when fear rears its head and stocks drop, but certainly that creates a healthier environment in which to be a holder, and one which should offer better buying opportunities. Over the first part of this year it was easy to say prices had gotten ahead of fundamentals; all things being equal, that now seems less true.

The current positives for investors include moderate valuations, rising corporate earnings and the likelihood we’re already in a recovery. On the other hand, I continue to feel consumers are too traumatized to resume spending strongly, and I see unpleasant and rarely contemplated long-term possibilities including those discussed above. In particular, conservatism, austerity and increased savings are good for economic units individually but bad for a stagnant overall economy. Bottom line: anyone who invests today in a pro-risk fashion out of belief in the recovery must be confident he’ll be agile enough to take profits before the long-term realities set in.

I’ve had a heck of a time pulling together all of these ideas, and I’ve found it even harder to come up with anything like answers. But I hope the discussion has been helpful, and that you’ll think about the questions I’ve raised and encourage others to do so as well. I don’t enjoy feeling like a worrywart, but I doubt my concerns are unfounded, and I can’t imagine silence would be preferable.