Howard Marks Memo: The Race Is On

I’ve written a lot of memos to clients over the last 24 years – well over a hundred.   One I’m particularly proud of is The Race to the Bottom from February 2007.  I think it provided a timely warning about the capital market behavior that ultimately led to the mortgage meltdown of 2007 and the crisis of 2008.  I wasn’t aware and didn’t explicitly predict (in that memo or elsewhere) that the unwise lending practices that were exemplified in sub-prime mortgages would lead to a global financial crisis of multi-generational proportions.  However, I did detect carelessness-induced behavior, and I considered it worrisome.

As readers of my memos know, I believe strongly that (a) most of the key phenomena in the investment world are inherently cyclical, (b) these cycles repeat, reflecting consistent patterns of behavior, and (c) the results of that behavior are predictable.

Of all the cycles I write about, I feel the capital market cycle is among the most volatile, prone to some of the greatest extremes.  It is also one of the most impactful for investors.  In short, sometimes the credit window is open to anyone in search of capital (meaning dumb deals get done), and sometimes it slams shut (meaning even deserving companies can’t raise money).  This memo is about the cycle’s first half: the manic swing toward accommodativeness.

An aside: I recently engaged in an exchange with a reader who took issue with my use of the word “cycle.”  In his view, something is a cycle only if it’s so regular that the timing and extent of its ups and downs can be predicted with certainty.  The cycles I describe aren’t predictable as to timing or extent.  However, their fluctuations absolutely can be counted on to recur, and that’s what matters to me.  I think it’s also what Mark Twain had in mind when he said “History doesn’t repeat itself, but it does rhyme.”  The details don’t repeat, but the rhyming patterns are extremely reliable.