Mastering The Market Cycle: Getting the odds on your side

by Howard Marks

As you can see, the rise and fall of opportunities in the market for distressed debt stems from the interaction of other cycles: in the economy, investor psychology, risk attitudes and the credit market. The economic cycle influences investor psychology, company profitability and the incidence of default. The cycle in psychology contributes to fluctuations in credit market conditions and the desire of investors to lend, buy and sell. The cycle in attitudes toward risk facilitates the issuance of weak bonds at the top and denies capital for refinancing at the bottom. The credit cycle has a profound effect on the availability of refinancing and the degree to which would-be debt issuers are subjected to stringent credit standards. Hopefully it’s clear that multiple underlying cycles have effects on the distressed debt market that are far from discrete and isolated. As I wrote earlier, each of these cycles rises and falls; each causes the others to rise and fall; and each is affected by the rise and fall of others. But the result of all of this is a dramatic cycle in distressed debt opportunities, and one that is subject to explanation.