Howard Marks: The Bull and Bear cases

Following Marks’ last memo, many media sources (though not this author) reported that Marks was ‘ultra-bearish’. Some even went as far as to report that he’d said, “it’s time to get out”, when he’d said quite the opposite. In an effort to set the record straight, Marks’ latest memo looks at both the positives and negatives for investors in the current markets.

As usual, we’ve pulled out some choice quotes that should give you a good overview of the article. A link to the full memo is available at the bottom of this article.

The bull case:

“The U.S. economy is chugging along, and the recovery that started in 2009 has become one of the longest in history (103 months old at this point).  The rest of the world’s economies are joining in for that rare thing, worldwide growth.  Most economies seem to be gaining rather than losing steam, and they don’t appear likely to run out of it anytime soon.”

“Except in pockets, investor psychology can’t be described as euphoric and imprudent (although it has been strengthening of late).  For years the markets have been “climbing a wall of worry,” an old-fashioned phrase used to describe a healthy ascent that’s occurring not because of euphoria and risk-obliviousness, but rather despite a catalog of perceived ills.”

“The known catalysts for a market downturn – recession, ballooning inflation, much-higher interest rates, major central bank missteps, a governmental breakdown in Washington, and war – can’t be assigned probabilities that are more than modest.”

The bear case:

“Some of the elements characterizing the macro-economic environment can be described as “long in the tooth” or “unusually elevated.”  For example, the current recovery is one of the longest ever; the GDP growth rate is at the top of the range for the last decade; and profit margins are well above average.  Things like these can continue or even get better, but the odds are against it.  It feels as if we may get through the next 18 months without a recession, but if we do, that’ll make this the longest recovery since the 1850s.  Certainly not impossible, but against the odds.”

“Most valuation parameters are either the richest ever (Buffett ratio of stock market capitalization to GDP, price-to-sales ratio, the VIX, bond yields, private equity transaction multiples, real estate capitalization ratios) or among the highest in history (p/e ratios, Shiller cycle-adjusted p/e ratio).  In the past, levels like these were followed by downturns.  Thus, a decision to invest today has to rely on the belief that “it’s different this time.””

“The potential catalysts for decline that we have to worry about most may be the unknown ones.  And although I read recently that bull markets don’t die of old age or collapse of their own weight, I think sometimes they do (a dollar for anyone who can identify the catalyst for the collapse of the bull market and tech bubble in 2000 – it’s not easy).”

In summary:

“The bottom line of the above is that some people are excited about the fundamentals, and others are wary of asset prices.  Both positions have merit, but as is often the case, the hard part is figuring out which one to weight more heavily.”

“Most people (and certainly the media) want definite answers: in or out?  buy or sell? risk-on or risk-off?  But it’s rare for answers that simple to be correct.  There’s a wide range of possible stances that investors might adopt.  At one end of the spectrum there’s maximum aggressiveness (100% invested in high-beta, high-risk assets, or maybe more than 100% through the use of leverage), and at the other there’s maximum defensiveness (100% cash, or perhaps being net short).  Most investors are never either of those.”

“It’s impossible to say the negatives will win the tug-of-war anytime soon, but that doesn’t mean caution should be discarded . . . especially now.”

The full memo can be accessed here.