Mastering The Market Cycle: Getting the Odds on Your Side

by Howard Marks

Why does this cycle have the importance I ascribe to it? First, capital or credit is an essential ingredient in the productive process. Thus the ability of companies (and economies) to grow usually depends on the availability of incremental capital. If the capital markets are closed, it can be hard to finance growth. Second, capital must be available in order for maturing debt to be refinanced. Companies (as well as most other economic units, such as governments and consumers) generally don’t pay off their debts. Most of the time they merely roll them over. But if a company is unable to issue new debt at the time that its existing debt comes due, it may default and be forced into bankruptcy. Where we stand in the credit cycle—whether credit is readily available or difficult to obtain—is the greatest determinant of whether debt can be refinanced at a given time.