#431: Howard Marks on the US Dollar, Three Ways to Add Defense, and Good Questions

Optimal minimal. At this altitude, I can run fly out for a half mile before my hands start shaking. So then I'll sort of question. Now it's in the time. A cybernetic organism, living tissue over metal and the scale. S

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Check it out. Hello, boys and girls, ladies and germs, this is Tim Ferris, and welcome to another episode of the Tim Ferris Show, where it is my job to interview People who are world class performers in their respective fields. And today my guest is Howard Marks. at Howard Marks Book on Twitter. Howard is co-chairman and co-founder of Oak Tree Capital Management, a leading investment firm with more than one hundred and twenty five billion in assets under management. He is the author of the book's Mastering the Market Cycle, subtitled Getting the Odds on Your Side. And the most important thing subtitle Uncommon Sense for the Thoughtful Investor, both critically acclaimed bestsellers. Warren Buffett has written of Howard Marks, quote, when I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something. So

He has some very bright minds who pay attention to his writing and Howard has been on the podcast before. This is round two, and we dig into all sorts of subjects, including the US dollar as reserve currency, investing, how to add defense to investment strategy, three different ways to do that, and much, much more. So without further ado, please enjoy. A wide ranging conversation with the Howard Marks.

Howard. Welcome back to the show. Thank you very much, Tim. It's a pleasure to be here. It's nice to hear your voice again and uh Of all the people I could speak to on the show during these

most exciting times and difficult times for many people. You were very much at the top of the list and There are a lot of different Topics and lot of different questions that I'd like to cover, but I thought we could start. I have a number of your memos in front of me. And there's one called You Bet. This is from January thirteenth, two thousand twenty.

And I I thought we could start with The story of arriving at first National City Bank in May of sixty eight and how that contrasted with what you then did in nineteen seventy eight. Would you mind

Telling that story for people listening. No, if you have some time. I do, I've all the time in the world. It'll take a while. Um

Well, as you say, uh I arrived at City Bank for a summer job in the investment research department. In May of nineteen sixty eight. between years of graduate school at the University of Chicago. And I was assigned

to the investment research department. Um The Bank And most of the

money center banks at the time. in their money management. Apartment. were adherents of what was called nifty fifty investing. And

They invested in what they considered to be the fifty best and fastest growing companies in America. Extremely high quality Companies. Where nothing

Could go wrong. And Uh you know, they the the th the idea of growth stock investing, investing in companies Because their earnings grew rapidly.

had been born In me. early nineteen sixties. And uh these uh companies epidemized.

That activity. Mm. IBM. Zero. Kodak, Poloy. Mark Lilly.

Hugh Packard, Burken Homer, Texas Instruments. Yeah, Avon, Coca-Cola. Uh A I G, et cetera.

And um You know, the The basic uh idea was you hitch yourself to a company with a bright future. And rapidly go all the yardings.

And uh if you If you uh did so the day I got there in nineteen sixty eight. And if you held those stocks Formally. For the next five years.

You lost Almost all your money. In the best comp in the best companies in America. Because One thing had been overlooked in the process.

Which was price. And nobody Talked about. The Fairness.

or attractiveness of the price. The belief was that these are companies which were so good But It didn't matter what you paid. And if you paid a price that was a bit high

the earnings would grow so fast That kind of a The stock would grow into the price. And um So

Of course this was uh painful education. these stocks. generally speaking fell from price earnings ratios of

Perhaps eighty. Which even today would be it. practically unheard of. Two Eight.

When the wheels came off the market in the early nineteen seventies. Now some of it Some of it was the collapse of the market, some of it was the collapse of uh these this particular uh field of investing and some was that

Function of the Um Flowering of uh rapid inflation, which was perplexing. uh the country at that time. But but for whatever reason

Yeah, here you are. you're you're investing in the best companies in America. And you lose. eighty or ninety percent of your money. Now fast forward as you suggest, Tim.

In nineteen seventy eight. In part because my Uh uh meanderings with equities. Had worked out so badly.

As part of the Um uh machinery that that ran this nifty fifty effort. I

Uh Left the investment research department. I always say I'm lucky I didn't get fired. And uh My boss.

asked me to join the bond department. Which was at that time uh Back water. Uh investing. And uh start up

fund that would invest in convertible bonds. which was something that very few people had ever heard of. And I started to do that and I loved it. So I went from being head of the department of Seventy five people with a

five million dollar budget and membership on all the bank's senior investment committees to working alone with no Colleagues, no budget, no committees. And I was ecstatic. Because

rather than no two sentences on four hundred companies I could know Everything. A barrel fuel. So I I loved money management.

And I love the fact that I was operating. And uncrowded area. And then in August of nineteen Seventy eight, I got the call to change my life.

the head of the bond department called up and he said, You know, there's a guy named Milken or something out in California And he deals with something called high yield bonds. Do you think you could figure out what that is? Because a client had asked for a high yield bond portfolio. So Uh I I researched high yield bonds. I met with Mike Milken.

Uh I started Citibank's high yield bond fund. Late in nineteen seventy eight. Uh I believe that was the first high yield bond fund from a mainstream financial institution. And that was the very beginning of the High Bahn world.

And one of the great lessons, of course. That's Malcolm Gladwell. makes clear in his Book. Uh

Outliers. is that it's great to be first in line. And the Timing accident of my being assigned to the bond department in nineteen seventy eight, but me

At the beginning of the line. in high bonds. And high yo bonds are the bonds of companies which are not rated investment grade. They're considered speculative grade. by the rating agencies. At the time they were

Or button. By the vast majority. Of investors. And So I went from investing in

What everybody loved. to what everybody hated. From the best companies in America to the worst public companies in America. And now I'm making money safely. And steadily.

in the worst companies in America. Because They were so cheap. Because the interest rates they had to pay in order to

Secure financing as As uh a a uh disrespected group Well, Excessive.

Under the circumstances. So this was quite an epiphany. Um And it has

uh really directed my whole career. And you've you've written in uh this particular memo, success in gambling doesn't go to those who pick winners, but to those with the ability to identify superior propositions. The goal is to find situations where the odds are generous to one side or the other, whether favorite or underdog, in other words, a mispricing. And you Explore this in the context of different types of games. Some games of chance th some games that have different profiles and you

can categorize them. You have let's just say no hidden information, no luck. And skill, chess, no hidden information, luck and skill, backgammon, no hidden information, luck, no skill, roulette, hidden information, luck, skill, blackjack and poker. And Uh, you have quite a history with many different types of games and you I think are very good

at thinking about the future probabilistically framing good questions. If you were to look at our current circumstances as a game and perhaps compare it to two thousand eight What are the games that we're looking at?

It's a very interesting uh set of circumstances we find ourselves in. Because Nobody knows anything about the future. There's

You know, in the Fields that I'm involved in. economics and investing primarily. There is no such thing as knowledge of the future. Because the future does not

operate. According to a fixed schedule or the laws of nature, like physics and so forth. All we have is extrapolation.

From past patterns. Which help us. In terms of our expectations. For the future.

The problem we have now is that there is no history. for what we're engaged in. First of all We have I would say the worst.

public health crisis. So Come to America and Over a hundred years or certainly one of the worst. The worst.

Economy. since the Great Depression. More than eighty years old. the worst collapse of oil in history And the greatest

rescue and stimulus program. From the Fed and the Treasury. in history. So we have four things. Going on.

Which are unprecedented. And as a result, we really can't Say what lies ahead in any of them. And it is further complicated by the fact that

They all interact. And we Can't. No how they will interact and what that will produce.

So Uh I I would say that we are uh unusually Ignorant. with regard to the future. Today.

And uh w you know, one of the things I said to one of my colleagues, Tim is that we all have the same information. About the present. And we all have the same ignorance.

About the future. And today I think that ignorance is is greater than at other times. So We have to Um

uh uh to use the the uh outline you were posing. There's a lot of hidden information. We don't even know how many people really have it. We don't know how many people have died from it. Because there are unreported cases of infection.

And there are Death that took place. were not known to be Uh the result of infection.

So we have Uh We have Uh hidden information. And we have

Mm-hmm. So much about the future that we don't know. uh you know, will the d will the disease turn down? Will the the effect of warm weather be a positive. When will a A uh and

immunological test be developed and a vaccine. Um, if we reopen business. Will Uh the uh cases that

Strike up again. Yeah. And so forth. And to what extent. So uh we're really dealing with Uh a lot of ignorance.

And a lot of Uncertainty. And yet we have to take action. in positioning our capital for the future. when the future is unusually unpredictable.

And how do you how are you currently Thinking. in Beth to use the title of the Annie Duke book. That I know you are A fan of or

Uh Perhaps it's not the The best way to Address. the the the question really, but given the uncertainties, given the situation

How are you trying to navigate that or what questions are you finding most helpful? Well I think a lot of it goes back, Tim, to What you said uh about the memo you vet.

Is that it has to do with the quality of the proposition. Um I wrote a book. We talked about it a year and a half ago. Uh

Call uh Mastering the market cycle. And I thought that the tit the subtitle of that book was unusually helpful. The subtitle is Getting the Odds on Your Side.

When you're dealing with the future. Given the ignorance. Uh you can never have Certainty. There's nothing that's sure to work or sure to fail.

You only have probabilities. But sometimes the probabilities are very favorable. to the investor and sometimes they are very unfavorable to the investor.

And the whole thing about studying cycles. is trying to figure out. Which is which. So let's Let's talk about propositions.

And let's talk about picking winners. So You go to a horse race. And there's one horse. That stands out.

Among all the others. Yeah. Great. Lineage. Looks terrific. Quite recent.

Record. And this horse is by far the favorite. and everybody concludes that this horse will win the win the race. Does that mean that you should bet on this horse? That's really the key question.

in in investing. And The answer is it depends on the odds. because When one horse is in

Overwhelming. S. You may have to bet five dollars. To win a dollar. He's so sure to win that no nobody wants the

Yeah against them. And If you want to join the hordes who want to bet. On that horse. As I say, you may have to put up five bucks.

To get back six. There may be a long shot in that race that somebody can figure out, well, maybe that horse's gonna have his day. And that horse may be a ten to one shot. Or a fifty to one shot. Because

We're so sure the favorite will win that the that this that this uh long shot uh is is absolutely unpredicted to win. Nobody wants to bet on this horse. So if you will bet on this horse And you put up a dollar. You can get Fifty.

If you're right. So even though the horse is unlikely to win, it may be the better bet. Even though the favorite is overwhelmingly likely to win, it may be a bad bat. So it's not only what you think will happen. But it's also the payoffs.

So Let's take that through. What we were just discussing. Nineteen sixty eight. The

the uh nifty fifty companies were believed to be great companies with a bright future. And let's assume that their future success was assured. You still have to look at the

Proposition. And the answer is that it costs so much to bet on those companies That Betting on what were believed to be good companies. Turned out to be bad bets.

Nineteen seventy eight. I'm not. Now we're betting on what are believed to be bad companies. But because they're believed to be bad companies, the payoff is extremely generous. Not it.

Not expected to be favourites. But highly remunerative. If they pay off. So high yield bond.

Investing was Very successful. Um Now You come into the into the present.

And and life gets tough. But You know, we have to Make some Judgments about the future.

And the judgment you have to you have to say, how bad will it get now? How Quickly will we go back to work. What will be the experience when we go back to work.

Will there be Be a rebound in cases. How quickly will the economy Come back to life. What

will G N P do in the second quarter of this year, which is roundly believed to be the worst Recession quarter. In history. Uh And how fast will we get back to the

Twenty nineteen. levels of economic activity and surpass them. when will we have the vaccine. All the you know, there there are Dozens of questions. Um

And no answers. Um I've been quoting uh Mark Lipich. who's a uh epidemiologist at Harvard. who says that when in studying the virus there are there are facts There are

Inferences based on analogies. And there are opinions. And When we started off In this round there was no facts.

the highly skilled epidemiologists could make inferences. And the rest of us were left. To just guess. But You know, there's

There's some Um consensus. Developing. Which is the

Yeah, but the country will go back to work. in the next few months. Clearly. No agreement on the pace.

That There will be There are likely to be a rebound in new cases. But not as bad. That's the first.

Um And that Gradually the economy will recover. And uh It'll show

uh much better twenty twenty one than twenty twenty. twenty twenty one may or may not be back to the twenty nineteen levels. But by twenty twenty two. We'll be back to

was to pass. the twenty nineteen levels and with vaccines and treatments Um the Coronavirus. will be demoted to uh just another seasonal disease.

That's the consensus. And Of course the consensus opinion is reflected in the bidding for stocks.

And in the prices of Stocks and other securities. And that's where we are now. Uh And uh

You know that so that's I would say I would describe that as a fairly Uh Positive. Forward looking case. Um and it's incorporated in the prices of stocks.

And the prices of stocks are surprisingly high. Some of them or if you look at the uh the averages which are dominated by you know the great companies like Amazon and Microsoft. those averages like the S P five hundred are surprisingly high Okay. relative to

where they were on February nineteenth, which was the all time high. And we're probably down Um You know, low double digits of percent, twelve, thirteen, fourteen. Five percent.

Depending on The date you air this. Um And uh so you know The way I've described it, I would say.

Uh not a bad outcome. Not a bad future. Uh and uh So Uh stocks have recovered very substantially from their lows. They're up

Mm-hmm. twenty. Seven percent, I think, from their low. Uh because The consensus has settled on this

Uh good news. Uh now the i now let's talk for a minute, if I can go on. About proposition. The challenge today is that Yeah.

the favorable Unfolds. And twenty, twenty one or twenty two are Uh. healthy economically.

Versus nineteen. Nobody thinks the stock market Has That far to go on the upside. And if the

negative case unfolds. And Everything I've said so promisingly. uh fails to materialize or materialises less and later than hoped. Uh

There are pessimists who think that the market has far to fall. And it's hard to choose between the optimistic and the pessimistic case. So Mm-hmm.

The odds for buying here. The S P five hundred, for example. Do not seem to me to be tilted. Heavily.

In the investor favor. Now you have been thinking about uncertainty for a very, very long time. Uh you For instance, first red A book in nineteen sixty three.

Title Decisions Under Uncertainty, subtitled Drilling Decisions by Oil and Gas Operators by C Jackson Grayson Jr. And you've You've proven an ability to Act.

On a Sort of spectrum. of uncertainty over the uh subsequent decades. And I I think the way that you phrase Questions is part of that. Questions to yourself.

questions um among your team and I I just wanted to give an example of that uh from your Most recent. Nemo. This is Knowledge of the future.

And it's it's a paragraph that's discussing the word limitless. which was uh used I think in quoting Fed chairman or uh s some someone of that type. And here's the the wording, is the program really limitless and is that okay? The stimulus, loans, bailouts, benefits, and bond buying that have been announced thus far add up to several trillion dollars. What are the implications of the resultant additions to the federal deficit in the Fed's balance sheet? Here's the part that I want to highlight just because I think it's a useful I think it's a useful framework for looking at a lot of these a lot of these elements. Okay, so here we go. To be facetious, the government could send every American a check for one million at a cost of three hundred and thirty trillion. Would there be any negative consequences from doing this, such as burgeoning inflation, a downgrade of US creditworthiness, or the dollar losing its status as the world's reserve currency?

If the answer is yes, is there a point below three hundred and thirty trillion at which those ramifications might kick in? And if so, where could we be there already? Uh I I'd be very curious to hear how you've attempted to answer or think about any of those things that were mentioned in that paragraph. We could pick one certainly if it's helpful, such as the US

Dollar the status of the dollar as a reserve currency. In uh in in these Wildly unusual times. But How have you continued to Think about those questions or

Attempt to tackle some of those unknowns. Well, this is the sixty four dollar question these days, Tim. Uh I wanna make it clear before I Try to do so. That I'm not saying the Fed is wrong.

to do what it's doing. The Fed is Throwing everything in the kitchen sink. That's the problem. And the problem has to be

Has to be solved. Uh you know, back if if if if I go back to March, uh let's say eighteen or nineteen, I think it was. You know, I was actively considering the possibility Yeah. with my partner Bruce Carsh.

of a global depression. comparable to the nineteen thirties and you recall that we had We had a decade with Uh unemployment in excess of fourteen percent in the US.

Um And uh a total absence of growth and Widespread suffering. And uh You know, we were talking about

the possibility of that as this Economy. Uh contract it. Includes. So the the Fed and the Treasury came along. They threw

everything at it. They used all the lessons learned in the global financial crisis of of oh eight, oh nine. uh things that were developed over the course of months At that time. were implemented in weeks this time.

Uh and uh certainly Yeah. You know, the I think it was the uh New York Times describing That's it.

Uh Jake Powell. statement. As saying that the resources thrown at the problem would be limitless. And I think that's the right thing. Because the alternative

uh the you know, back in the thirties they were judicious. in trying to fight. the uh depression almost austere. And um As a result.

A decade of. suffering a generation truly scarred. Um And um you know Arguably we only got out of the depression because of the arrival of World War Two.

We don't want to Wait for that as a curative. So I say strongly. That the Fed

And treasury. were right in doing. What they did. But uh the fact that there may be negative unintended consequence.

Doesn't mean That they weren't right. But you know, again We are we're battling problems we've never seen before.

with weapons. We've never seen before. And We It certainly can't

Say. That they don't Have negative. Potential. uh unintended consequences.

Um we just we don't know what they are. We will we would probably bear them nevertheless. But For example. Yep.

The government floods prints money. The normal reflex reaction is to say that if they print a lot of money That causes the currency to be devalued.

And uh Yeah. That That is a lockstep relationship that has always

Okay. Consider. Uh. Now In the last

You know, we've been running. Th. Deficits. For a long time. And extremely

big deficits in recent years. Uh And Yeah.

We don't have serious inflation. Which is the normal Sign. Oh.

of of a currency being debased. If a currency is to be being debased and people think less of it. And if then if they if you if you want to buy a goat Yeah. Pay more dollars. To get the goat.

Or a car or a bar. Gold or whatever. And For it. You know. Bunch of bananas.

And In recent years, we haven't had inflation. Even though we've been running huge deficits. Vastly increasing the national debt.

And and so forth. So You know, economics is not a mechanical process. Which works. According to a schematic

in a dependable fashion. And All the print of money. that has taken place in recent years. Has not

Brought on inflation. Yeah. Inflation is supposed to What in response to the unemployment rate. The less unemployment there is in the country, the higher the inflation is supposed to be because There's less slack in the economy.

And the uh workers, for example, can demand higher wages. Hasn't happened. That was this is just something um Called the Phillips curve.

And it's And Having the sixty years. And Just doesn't work.

So we don't know. Uh Budget. You know That's why I use that extreme and I say to said in the memo facetious example.

If the government sent everybody a cheque for a million dollars. And it cost three hundred and thirty. Trillion. Would there be? In effect.

Um The value of the dollar on inflation. Et cetera. And you have to believe there would. Well I have to believe they would, but Where is the negative

Affect. Cut in. Short of that. Since we're not gonna do that. But

You know, the government is probably spending. Um buying securities. and pumping into the economy. Yeah.

You know, close to ten trillion this year. Is that enough? To cause an impact. The answer is we don't know.

But I would just say, you know It's clear that We all have our biases and we deal with our uncertainty with regard to the future. Implementing our biases.

It's very hard to get away from that. And I worry. I'm not a dreamer, I'm not a Pollyanna, I'm not the person who says, Oh, they'll find a solution. I worry. And so

Uh. You know, I worry that there will be some Negative. Mm-hmm.

effects that I can't predict or Or describe or quantify. And so that would Among other things. uh tend to

caused me to implement some caution. And uh d you were right that the Fid Chairman J Powell to his his ex his quote was When it comes to lending we're not going to run out of ammunition, which was uh in the Wall Street Journal. That's on March Thirtieth.

Uh what what form might that caution take, or perhaps m more specifically, if we look at The uh Fed buying All sorts of things that historically it would

would not necessarily be associated with purchasing junk bonds to stress debt, et cetera. How does how does that affect Your playbook and how you think about crowded versus uncrowded. Opportunities. Sure.

So many things. That question. Um First.

Let me say that I think every investor has to make a choice. They have to balance offense and defense. Just like Just like a uh A soccer team. that that a coach feels to play against another team.

Uh you know, you have to have Mm-hmm. Players on the field. Oh in Totality.

Can both. If then Their goal. and attack the other side's goal. Uh so your portfolio

uh the for the investor. Has to Strike a balance. between Trying to make money.

And trying to avoid losing money. At the same time. And The way I

Dope it out. Tim is to say that every investor faces two risks. Every day. The risk of losing money? Which is obvious.

and the risk of missing opportunity. Which is a little more subtle. Now you can eliminate either risk. If you are willing to totally surrender to the other risk.

So I can If you wanna if you wanna eliminate the risk of losing money, you can put all your money into T bills. And then you will miss all the opportunities.

Or if you want to make sure you don't miss any opportunities, you can make sure that all your investments are uh aggressive and yet there are no T bills or cash. In which case you're exposed heavily to the possibility of losing money. So most people compromise.

Most people say well I don't want to lose a lot of money, but on the other hand, I don't want to miss all the opportunities, so I'm gonna strike a balance. between offence and defence. That's what we all have to do. If we're not crazy. And

So the question is How do you strike that balance today? And Um Oak tree, my firm.

in recent years has been concerned. About The market. And About the fact that

Uh we thought that it was exposed to significant uncertainties and risks, although we didn't enumerate a pandemic. Asset prices were high that prospective returns were low because

interest rates. In the environment. have been so low for so long. And because a lot of investors were engaging in risky behavior in order to make a good return.

in a low return world. So you put all that together and we thought that made the world a risky low return place. in which one should Emphasize

Defense over offense. And and we did. uh we we adopted a mantra, move forward but with caution. And that has guided us. Now we are cautious investors. So when I say with caution

I mean more than usual. And that's what we've done. Next question. How do you implement defence? And there are basically three ways.

that an investor can Uh add to defense in his portfolio. Or her portfolio. The first, the obvious one.

And you sell some assets. And you Go to Cash. In part or in whole. Now this is very hard to do.

Because this is Black or white. Wrong or right. Um And

Really? Is it right? to be overwhelmingly in cash. And on the rare occasions when it's right. Most people can't find those occasions.

So so going to cash is problematic. And by the way, if you go to cash and you're wrong. And you you miss good performance in the market for a couple of years. uh you know, the individual investor will rule the day and the professional investor Might be out of work. So cash is tough.

The next thing you can do is you can go into more defensive asset classes. We know what they are. More bonds rather than stocks. larger companies rather than small. Value rather than growth.

Stable rather than cyclical. US rather than foreign. Developed world rather than emerging. Um And uh you know, there are many, many

Ways. So increase the defensiveness of your asset allocation. And then the third form of going defensive. doesn't even require you to disturb your asset allocation.

It's just that everything you want to do In investing. Can be done. in a more aggressive or more defensive way. So you might say, Well I have

forty percent of my portfolio in stocks and I wanna keep it that way. But you can buy more defensive stocks. Or you can put your money with a more defensive manager.

Or you can put your money in a mutual fund Which has a record Oh. not making so much money in the up years.

but protecting money in the down years. So there are three ways. To be defensive, go to cash. take a more defensive asset allocation. Or use more defensive tactics.

Um and uh we've been doing the latter. Our asset allocation is assigned, our clients give us money and they say, Here put this in this or put this in that. For the most part. We don't choose our asset allocation. But what we've been doing is in in recent years we have been fulvested And so we

participated as the market rose. But with a portfolio that we think was more defensive Than most. And So we came into

Yes. Uh Uh virus episode. With a Higher quality

more defensive portfolio. And that stood us. Quite well. Yeah. in in the uh in the first quarter.

But Frankly. with the risks on the table. and a lot of securities now cheaper than they used to be.

And a lot of risky behavior now discouraged. Mm. I don't think one has to be as defensive as we were. Uh so we have

shifted the balance in our portfolios. uh move more on on to offense. to take advantage. And if if you're looking towards Offense.

uh capitalizing on some of your historic strengths. What does the How does the Fed purchasing all sorts of asset classes that it might not normally purchase affect how you look at those

opportunities. If uh Mm-hmm. That was part of your original question, which I forgot. But Um Well, you know, as as it should be clear

You know, we're specialists And None Guilt edge test. Guilt edge is an old fashioned term. Non investment grade debt, speculative grade debt.

And Um you know that means high yield bonds. uh leverage loans, convertible bonds, which I uh mentioned before. um you know emerging market debt Lots of

Lots of um Let's say less than stellar. quality. Yeah. And usually in a crisis like this

That stuff. Would be hurt. More than most. Which meant that we could pick it up cheaper than most. Perhaps our one of our flagship strategies

is investing in distress debt. the debt of companies that are Either. Bankrupt. In default.

or highly likely Debate. in the opinion of the market. And we've been investing in distress debt. Uh

since nineteen eighty eight. uh my partner Bruce Carsh joined me in eighty seven. He's been running these portfolios since then. And uh In the thirty two years there were five periods. uh when there were very high defaults among high yield bonds.

A lot of distress. And when we got to uh take advantage of very good opportunities. And those were nineteen ninety, ninety one. Two thousand and one.

And oh eight, those were crisis years. And in the crises. the low quality, risky That tended to melt down? And we tended to

Yeah. great buying opportunities. So your question is well what does it mean that the Fed is involving itself in these areas and the answer is it's If we we wish they'd go away. Uh you know because because it you know, historically in in negative times

Uh And this is something we haven't discussed much, but maybe we should. All right. Most people get discouraged. Most people

uh shrink to the sidelines and uh you know when when when these things would cascade down in price we would be able to buy them very cheaply. If the Fed comes in and buys in those markets. Then it makes our lives more difficult. Because

Things don't fall. the way they otherwise would have. We don't get the bargains. We otherwise would have. When you look uh well, I mean I I mean I I want to ask if you think

the Fed is truly With infinite ammo. I mean it I I don't know if they have the the sort of bandwidth to participate super widely indefinitely. in high volume, but possibly they do. This is way outside of my area of expertise, so it's a bit above my pay grade. But w where would you thinking probabilistically, where would you

How do you look at the possible outcomes and probabilities that this type of Spending. Continues. For a long period of time. I think that the

The the F the Fed and the Treasury. Want to soften. The impact. On American. And its economy.

And I think they're gonna continue to spend Um Until The economy is can take over for itself. I think one way to think of this, Tim

Is it You know, many times if a patient has a serious disease They'll put the patient into a coma. So that they can treat the disease.

And while the patients in the coma they keep'em on life support. And Uh then when the patient is

the disease has been healed, the patient can be brought back. And the life support can be removed. So The disease is the virus. In order to

Fight the virus. We had to close businesses. Freeze Economic activity. And

Help people stay home. Just the worst. movies. And hotels and Airlines.

And concerts and sports all Stop. Oh. And That's

Putting the economy into a coma. And we have twenty six million people. Who has? filed for unemployment insurance in the last uh five weeks. And uh we are expecting a decline of GDP.

uh in the second quarter here. Oh. Well, most people say twenty to thirty percent. Which would Take it.

the worst quarter in history by a Order of magnitude. So They have to. Keep it on life support.

until they can bring the economy back to And the light support. is all this injection. From the said. And the treasury.

And they're gonna continue it until they're highly confident that they're out of the woods. They're not gonna Take a chance. And say, Well, if we Let's let's suspend it now and see if the economy can pick up. They're gonna wait until the economy

is operating with some strength. And uh Growing. from this depressed face. Before they withdraw it.

I'm confident of that. Wha what are the as someone who's I I d I've never taken an economics class, which is not something I brag about. It's quite uh something uh a source of embarrassment for me, but what are the markers or metrics that they would look to to assess whether the patient can be taken off of life support. Well, unemployment is is usually the best Yeah.

Short term indicator. You know, uh Remember that unemployment We can Ten percent in the global financial crisis.

Um and it was uh Down to five percent. Five Five to five and a half. is is has generally been considered something like uh a structural level of unemployment. In other words, there are people

There are some people who can't get a job'cause they're unqualified. There are people who can't get a job'cause they can't pass a drug test. There are people who just quit a job, there are people in the process of looking for a job. So Transactional. frictionally, most people assume that five Five ish percent.

is is uh is structural and the Obama administration uh over eight years did get the unemployment rate, I believe, down to five percent. Uh Bye.

twenty sixteen. And then uh uh the Trump administration came in and uh continued uh very aggressive stimulus. uh pro business uh environment. reduction of regulation and the unemployment got down to three and a half.

So It's a barometer of how the economy is doing. And I would think that the They they'll want Well, it's you see, it's not gonna be all or nothing. It's not th they're not gonna

Spend, spend, spend, and then stop. They'll flak off. The term we use it it In the in the discipline you never studied. Economics is taper.

And they'll taper. Uh but You know, I think that they'll support The economy. Certainly.

aggressively until the unemployment rate gets into single digits. And perhaps until it gets into mid single digits. Then of course they'll look at GDP. They'll you know Uh GDP's been growing at around two percent and Donald Trump has been trying to Say he'll get it to three or four.

Um But GDP will be deceptive because You know, it's gonna be so horrible. In the second quarter.

Of twenty. that it's gonna be easy to show growth. in the second quarter of twenty one. But we we have to take that growth with a grain of salt. And I think what they'll look for is for the GDP

To the getting close back to the track. That it was on the If this virus hadn't

You're uh you you've listed some questions that uh debt traders on the oak tree team, uh Justin Quaglia, if I'm saying that correctly, Sam Rotato, that are related to behavioral change uh more than anything else. So assuming that quarantine is lifted, when will you take your first flight? How will you react when the person next to you starts coughing? What has to happen to make you feel it's safe to send your child back to school. Uh, one of my favorites is the when you go to a dinner with your wife, husband, friend, family, do you want to be served by a waiter or waitress wearing mask and gloves. Uh so so these are behavioral questions and Uh you seem to be a connoisseur.

Of questions. And I I wanna bring up a quote that also Was

Uh featured in the You Can't Predict You Can Prepare memo, which was what the wise man does in the beginning, the fool does And these these might not be. Totally uh Apples to apples, but

W what types of questions Uh or the wise Asking. these days are are are any particular

types of thinking or questions. uh present in those people you had you admire as good thinkers right now. Well the you know, the future the outlook for the economy.

has been mostly described as a V. Mm. Sharpdown. in the first and second quarter. Uh um

twenty twenty, maybe some lingering effects in the third. And then sharp up. And uh you know, there's a lot of debate about How? Uh sharp.

the the recovery will be. Um You know, I think I I personally think we're gonna come back. Gradually.

I think that people who have a choice are not gonna rush back to work. One of the questions that you didn't a ask from that memo. Tim was was mine. Uh for New York or when are you gonna get back on the subway? Right. That's a great question. And and and and be in close contact with all those other people.

Uh. And uh you know, taking an airplane flight is is a big deal because uh you know, they want you to be six feet away from the next person and I the way I calculated it Uh

At best you could have one person for every nine seats. And they're not gonna do that. Of course they'll fill the seats and they'll have people wearing masks. Uh But Um

You know, uh I think that people who have a choice are gonna wait a while. before they get on a on a full airplane. Uh another question of course is assuming that there is a reopening and assuming that the

that the virus hasn't been killed off. And we don't have yet a v vaccine. Um Will uh people engage in there. Um

previous activities. I think that people who have a choice Will not. Rush back. Um And then

Yeah, I I read about one state that that passed a rule that restaurants can reopen, but only one out of every four tables. Can be occupied. But also an article yesterday which said that a business which is operating at a low level of its capacity is probably not more profitable.

than it was when it was closed. Yeah, that's definitely true. That's definitely true here in Austin. Yeah. A lot of restaurants are opting not to open With tw twenty five percent capacity. Right. So

You know, uh The the expectation that we're gonna come back is Probably right.

Button. Nobody knows the pace. Uh the and these are important questions to ask. Um But

You know, one of these days I assume It w I assume we'll have a vaccine. It's not easy to produce three hundred and thirty million doses. And get them.

I into distribution. Or if we need to, like you do for shingles, for example, the six hundred and sixty million doses. And um You know, these are massive issues and they don't happen overnight. Um

And then of course Um you know, we have uh large numbers of people who don't you know, only Only half of Americans, I think, get flu shots. uh where where flu shots are well flu kills a lot, you know. Kills a lot of Americans. I think flu probably averages

Forty to fifty thousand deaths a year. And yet only half the people get the shots. Um Will people get the shots? Um

And uh You know, as a as an anti vaccine. uh cohort in America and and will they get them and so forth. And and if they don't, what is it imply for everybody else. So

I just think that it You know, when Uh what I say about these unprecedented events, Tim, is that if you haven't seen something happened in the past. You can't Say you know how it's gonna turn out.

And we have to We have to allow windage. Now A warrior like me. Allows For the

possibility of bad outcomes. An optimist. Wants to make sure he contemplates. The possibility of good outcomes. Surprisingly good outcomes.

And so Uh that's why we have a differences of opinion. That's a Mm-hmm. That's why um You know, the that we have markets.

in which people can can meet and express their opinions through price. Uh, just just a few more questions, Howard. I I appreciate the all the time today. The The question of Informational filtering is one I'd like to chat about for a second. What I mean by that is how do you choose Amongst the

deluge of possible books, articles, sources of information uh what you read these days, for instance. Or a better question is probably what are some of the higher sources of information, books, people, anything that you're paying attention to these days. Well, you know. There there are no I don't think there are

useful topical books. on the subject. of this episode. Yet. It's too new. We have to You know

always review our thinking, how we think about propositions and odds and that. and probabilities and how we think about making decisions under uncertainty and these kinds of things. And you've talked about some of those. Um, you know, I think that we all have to Taken A lot of

Input. Primarily through the newspapers. And of course we have to be Uh Aware of the biases.

of the newspapers. uh when uh when I was a boy I used to believe that if it was in in the newspaper it was true. Um but you know, newspapers have slants too. And then importantly, we have to be very aware of our own plants.

Um and um You know, we tend to w we have what's called confirmation bias. And we all tend to Read

The things we agree with. More than the things we disagree with. And believe. the things that support our bias position.

More than the things that throw it into question. Uh and this is uh This is a great challenge. Um

So we we should try to read uh uh broadly. Uh we should try to read from the newspaper whose e editorial slant we agree with and the one we disagree with. Um we should try to

Appreciate all the input. But I think it's This is a great challenge. And um You know, if you

If you If you read broadly and Everybody on the On the internet every Every brokerage and securities house is putting out its own

Covid. Report nowadays and See Such Disparate.

information. By the way. There are probably I don't know. We've been you've been talking to me about questions today, Tim. There are probably A hundred or two hundred.

Three hundred. Questions. That bear on The future. And nobody can take'em all into account.

So Which ones Do you Think about it. Well number one.

your selection of the questions to ponder will be shaped by your bias. Uh'cause you can't do'em all. So i it you know, it's it's it's a terribly challenging thing. Uh and um

I think a lot about bias. Um And Uh let's go back to what I said earlier.

Quoting Professor Lutzich. Of Harvard. Facts. Analogies.

Guesses. Um you know, when I read Laman. Investment people. Talking about the likely

Medical. Course. Oh. Development. You know, I I say well w where's their expertise?

But You know, everybody Has an opinion. And You can't argue you're right, but on the other hand

You can't. Say Well I I'm not an expert, so I'm not gonna have an opinion. And uh Yeah, it's very, very

Difficult. to decide these things. Yeah, Uniquely. uncertain environment like today's.

Well, Howard, I I I I uh really appreciate you carving out time for the conversation. Uh I th I think that uh we could cover a thousand additional topics, but I'll I'll just ask one more or maybe two more and that is w what would you hope people would think more about Uh or what aren't people paying enough attention to in your mind? Is there anything?

Does anything occur to you? Well just in the in the narrow field of investing. Um You know

Most people want to hear somebody like me say by yourself. Um but it's it's a much more nuanced question than that. uh you know, uh you the the person who wants advice has to think for themselves. Do I want to

But a lot of emphasis on making sure I don't lose money. Or do I wanna make a lot of Put a lot of emphasis on making sure that I take advantage of the opportunities. And those two things work in the opposite directions.

as I explained before. So The the the Person. has to decide for themselves. uh how they feel about these things. Now they can

They can ask for advice. But Yeah, thank you. Everybody has to have uh decide this on a personal basis.

And Uh the other thing is whether you should buy or sell has a lot to do with Um N number one, your current position.

So I I mentioned that that oak tree became more aggressive. Because we had been very defensive. If you have been Aggressive. Until now.

That doesn't mean you should necessarily become even more aggressive. So You know, what's what becoming increasing aggressiveness for us.

May not be. right for everybody. And then the other thing is is uh the investor has to ask themselves And be Tough on themselves.

to spec out what their time frame is. Because You know, if you say to me How how are we gonna look in five years? I think in five years we're gonna be okay. And so

You know, uh if you if you said to me I'm gonna put on a position today and I'm not gonna look at it for five years, I say, Okay, well then you You should have a pretty normal non defensive investment posture. If you're gonna look

Every Okay. And If you're gonna get upset. If the market goes down

then you might want to have a little more defensiveness than normal. So Again, the the same answer is not right for everybody'cause it depends on Their ability to uh take a long term view rather than short and their ability to live with the agita

Oh uh short term ups and downs. Well thank you very much. Howard. Uh People can find you on Twitter at Howard Marksbook.

Uh certainly I'll link to your writing to your book and everything else in the show notes, including any of the memos. And references that we made. In uh this conversation. That

people uh take a look at. No, uh you know, we Tim's good to link to all the memos. There's a Thirty years worth. in the archive at Oak Tree Capital dot com.

Uh it's free. Uh so you can the the price is right and and y you can look at what I was what I was thinking at various points in time in the last thirty years. Uh I I wanna thank you, Tim, for inquiring about these things and asking such good questions. Uh these are difficult topics they're even

difficult to Frame the question. Uh and I wanna apologize for the length of my answers, but There are never. easy answers and that's especially true today. So thank you for having me with you.

Oh my pleasure, Howard. And to everybody listening. As always, everything will be in the show notes, tune.blog forward slash podcast. And until next time, thanks for tuning in. Hey guys, this is Tim again. Just a few more things before you take off. Number one, this is Five Bullet Friday. Do you want to get a short email from me? Would you enjoy getting a short email from me every Friday that provides a little morsel of fun before the weekend? And Five Bullet Friday is a very short email where I share the coolest things I've found or that I've been pondering over the week. That could include favorite new albums that I've discovered. It could include gizmos and gadgets and all sorts of weird shit that I've somehow dug up. in the uh the world of the esoteric as I do, it could include favorite articles that I've read and that I've shared with my close friends, for instance. And it's very short. It's just a little tiny bite of goodness before you head off.

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