Mastering The Market Cycle: Getting the Odds on Your Side

by Howard Marks

What was the basis on which we did this? In retrospect it was easy . . . although it never seems as easy in real time. All you really had to do in 2005–07 was make the following general observations: the Fed had reduced the base rate of interest to very low levels in order to ward off the depressing effects of the tech bubble’s bursting, as well as concern over Y2K; because of the low yields available on Treasurys and high grade bonds, as well as the disenchantment with equities that had resulted from their three-year decline in 2000–02, investors were eager to put money into alternative instruments; investors had shrugged off the pain of the collapse of the tech bubble in 2000 and the telecom meltdown and corporate scandals of 2001–02; thus little risk aversion was present (especially in areas other than equities, which remained out of favor), rendering investors generally eager for investments in exotic, structured and synthetic instruments; and as a result of all the above, the markets were wide open for the issuance of low-quality debt, poorly structured instruments and untested alternatives.