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Howard Marks expressed concerns over a range of different assets and indicators in his last memo, which caused quite a media uproar. So he’s expanded and clarified some of his views. More interesting though, was his change of opinion on Bitcoin. His key quotes from this new memo are below.

And if you missed it last time, his July memo, ‘There they go again… again’, was 23 pages on why it’s time to exercise caution in the markets. Access our highlights here.

Marks admits his mistake with Bitcoin

“I had been thinking about digital currencies like Bitcoin as investing sardines, and that may have been a mistake.”

“Bitcoin fans argue that it qualifies as a currency under these criteria: most importantly, it’s something that parties can agree to accept as legal tender and a store of value.  That actually seems right.”

“Being willing to agree that Bitcoin may become an accepted medium of exchange is not the same as saying you should buy it now to make money.”

“Marc Andreessen wrote an excellent article in The New York Times’ Dealbook, titled “Why Bitcoin Matters” (January 21, 2014).  The article outlined Bitcoin’s potential as a payment system and described many of the advantages listed above.  But it didn’t include one word about why these advantages give Bitcoin appreciation potential.”

“Several of the “seeds for a boom” that I listed in “There They Go Again . . . Again” are at work in the Bitcoin surge: (a) there is a grain of underlying truth as set out above; (b) there’s the prospect of a virtuous circle: widespread demand will lead to wider acceptance as legal tender, which will lead to widespread demand; and (c) thus this tree may grow to the sky, as there is no obvious limit to this logic. None of these things necessarily make Bitcoin a mistake. They merely say elements that contributed to past bubbles can be detected today regarding Bitcoin.”

The current state of the market

“If it’s true, as I believe, that (a) the easy money in this cycle has been made, (b) the world is a risky place, and (c) securities are priced high, then people should probably be taking less risk today than they did three, five or seven years ago.  Not “out,” but “less risk” and “more caution.””

“Fear of missing out has taken over from value discipline, a development that is a sure sign of a bull market.”

“We may not know where we’re going, but we sure as heck ought to know where we stand.”

“Clearly isn’t easy, and if average investors (i.e., the people who drive cycles to extremes) could do it, the extremes wouldn’t be as high and low as they are.  But investors should still try.  If they can’t be explicitly contrarian – doing the opposite at the extremes (which admittedly is hard) – how about just refusing to go along with the herd?”

Expensive doesn’t mean we’re in a bubble

“I wouldn’t use the word “bubble” to describe today’s general investment environment.  It happens that our last two experiences were bubble-crash (1998-2002) and bubble-crash (2005-09).  But that doesn’t mean every advance will become a bubble, or that by definition it will be followed by a crash.”

FAANGs as an indicator

“My point about the FAANGs was not that they are bad investments individually, or that they are overvalued.  It was that the anointment of one group of super-stocks is indicative of a bull market.  You can’t have a group treated like the FAANGs have been treated in a cautious, pessimistic, sober market.  So that should not be read as a complaint about that group, but rather indicative .”

If the market’s expensive, what should I do?

“In the low-return world I described in the memo, the options are limited:

  1. Invest as you always have and expect your historic returns.
  2. Invest as you always have and settle for today’s low returns.
  3. Reduce risk to prepare for a correction and accept still-lower returns.
  4. Go to cash at a near-zero return and wait for a better environment.
  5. Increase risk in pursuit of higher returns.
  6. Put more into special niches and special investment managers.”

“These things are all embodied in our implementation of the mantra that has guided Oaktree in recent years: “move forward, but with caution.””

Read the full memo here.

Robert Triggs

I suspect that the critical issue with any currency is that in the long run it has to be controlled by government. Otherwise government loses control. So at some stage bitcoin currencies will taken over by governments through legislation.

Andrew Brown

In the midst of the usual excellent piece from Marks, there are two screaming factual inaccuracies which are worrisome to see from such a fastidious thinker - both in the bitcoin section. "Bitcoin can’t be debased by unlimited issuance, since the blockchain process has been set to permit only a gradual increase from today’s 16 million, to 21 million in 2140.". WRONG. Bitcoin has just been "debased" by a hard fork creating 21m new Bitcoin cash (worth ~$10bn) - nothing to stop another and another. "Since the blockchain exists on each person’s individual computer, rather than in a central location, it can’t be hacked, and thus Bitcoin can’t be stolen...". WRONG Howard has obviously been living under a rock. Mt. Gox, Bitfinex, Bitstamp (twice)..etc plus the DPRK is now allegedly going all out to hack given two of the bigger markets are Japan and South Korea (the latter more for ETH). Interesting his comments came out days before the Chinese Government decided they'd had enough of this "dark alley" trading and have effectively shut it all down. I believe BTC has some intrinsic value but that it's not even close to prevailing prices and that it has too many hallmarks of a fraud. Disc: I am short.