Mastering The Market Cycle Quotes

“Over the course of my career I’ve heard investment in real estate rationalized by easily digested statements like “they’re not making any more” (in connection with land), “you can always live in it” (in connection with houses), and “it’s a hedge against inflation” (in connection with properties of all types). What people eventually learn is that regardless of the merit behind these statements, they won’t protect an investment that was made at too high a price.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“as usual they extrapolated it rather than question its durability. As in so many of the examples in this book, for most people, psychology-driven extrapolation took the place of an understanding of and belief in cyclicality.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“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.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“A while back I put together a concise synopsis of the way the cycle in bond issuance underlays the rise and fall of the distressed debt cycle. Here it is: Risk-averse investors limit quantities issued and demand high quality. High-quality issuance leads to low default rates. Low default rates cause investors to become complacent and risk-tolerant. Risk tolerance opens investors to increased issuance and lower quality. Lower-quality issuance eventually is tested by economic difficulty and gives rise to increased defaults. Increased defaults have a chilling effect, making investors risk-averse once more. And so it resumes.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“The ultimate purpose of this book isn’t to help you understand cycles after they’ve taken place, like the Global Financial Crisis as described at such great length. Rather it is to enable you to sense where we stand in the various cycles in real time, and thus to take the appropriate action.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“On the other hand, a generous capital market is usually associated with the following: fear of missing out on profitable opportunities reduced risk aversion and skepticism (and, accordingly, reduced due diligence) too much money chasing too few deals willingness to buy securities in increased quantity willingness to buy securities of reduced quality high asset prices, low prospective returns, high risk and skimpy risk premiums It’s clear from this list of elements that excessive generosity in the capital markets stems from a shortage of prudence and thus should give investors one of the clearest red flags. The wide-open capital market arises when the news is good, asset prices are rising, optimism is riding high, and all things seem possible. But it invariably brings the issuance of unsound and overpriced securities, and the incurrence of debt levels that ultimately will result in ruin. The point about the quality of new issue securities in a wide-open capital market deserves particular attention. A decrease in risk aversion and skepticism—and increased focus on making sure opportunities aren’t missed rather than on avoiding losses—makes investors open to a greater quantity of issuance. The same factors make investors willing to buy issues of lower quality. When the credit cycle is in its expansion phase, the statistics on new issuance make clear that investors are buying new issues in greater amounts. But the acceptance of securities of lower quality is a bit more subtle. While there are credit ratings and covenants to look at, it can take effort and inference to understand the significance of these things. In feeding frenzies caused by excess availability of funds, recognizing and resisting this trend seems to be beyond the ability of the majority of market participants. This is one of the many reasons why the aftermath of an overly generous capital market includes losses, economic contraction, and a subsequent unwillingness to lend. The bottom line of all of the above is that generous credit markets usually are associated with elevated asset prices and subsequent losses, while credit crunches produce bargain-basement prices and great profit opportunities. (“Open and Shut”)”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“As I described it in “Open and Shut,” the capital market cycle is simple in its operation, and its message is easy to perceive. An uptight, cautious credit market usually stems from, leads to or connotes things like these: fear of losing money heightened risk aversion and skepticism unwillingness to lend and invest regardless of merit shortages of capital everywhere economic contraction and difficulty refinancing debt defaults, bankruptcies and restructurings low asset prices, high potential returns, low risk and excessive risk premiums Taken together, these things are indicative of a great time to invest. Of course, however, because of the role played by fear and risk aversion in their creation, most people shy away from investing while they are in force. That makes it difficult for most people to invest when the capital cycle is negative, just as it is potentially lucrative.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“The Global Financial Crisis shows the credit cycle at the greatest extreme since the Great Depression. Debt markets historically had been marked by general conservatism, meaning excesses on the upside were limited and most bubbles took place in the equity market. Certainly it was the site of the Great Crash of 1929. But the creation of the high yield bond market in the late 1970s kicked off a liberalization of debt investing, and the generally positive economic environment of the subsequent three decades provided those who ventured in with a favorable overall experience. This combination led to a strong trend toward acceptance of low-rated and non-traditional debt instruments. There were periods of weakness in debt in 1990–91 (related to widespread bankruptcies among the highly levered buyouts of the 1980s) and in 2002 (stemming from excessive borrowing to fund overbuilding in the telecom industry, which led to prominent downgrades that coincided with several high-profile corporate accounting scandals). But the effects of these were limited because of the isolated nature of their causes. It wasn’t until 2007–08 that the financial markets witnessed the first widespread, debt-induced panic, with ramifications for the entire economy. Thus the GFC provided the ultimate example of the credit cycle’s full effect.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“By the end of 2008, however, the ingredients for a solid market recovery were in place. The over-levered funds that had received margin calls either raised additional capital, sold assets to de-lever as required, or liquidated. Funds and investment managers that received notices from investors desiring to withdraw at year-end either put up “gates” postponing withdrawals or completed the asset sales needed to meet them. The prices of debt securities reached a point where they implied yields so high that selling was unpalatable and buying became attractive. And, ultimately, market participants demonstrated that when negative psychology is universal and “things can’t get any worse,” they won’t. When all optimism has been driven out, and panicked risk aversion is everywhere, it becomes possible to reach a point where prices can’t go any lower. And when prices eventually stop going down, people tend to feel relief, and so the potential for a price recovery begins to arise.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“As you can see from the above, virtually all the conditions on which the GFC was built were endogenous to the financial system and the credit cycle. The developments that constituted the foundation for the Crisis weren’t caused by a general economic boom or a widespread surge in corporate profits. The key events didn’t take place in the general business environment or the greater world beyond that. Rather, the GFC was a largely financial phenomenon that resulted entirely from the behavior of financial players. The main forces that created this cycle were the easy availability of capital; a lack of experience and prudence sufficient to temper the unbridled enthusiasm that pervaded the process; imaginative financial engineering; the separation of lending decisions from loan retention; and irresponsibility and downright greed.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“In making investments, it has become my habit to worry less about the economic future—which I’m sure I can’t know much about—than I do about the supply/demand picture relating to capital. Being positioned to make investments in an uncrowded arena conveys vast advantages. Participating in a field that everyone’s throwing money at is a formula for disaster.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and on and on.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“As suggested in the citation just above, the credit cycle can be easily understood through the metaphor of a window. In short, sometimes it’s open and sometimes it’s closed. And, in fact, people in the financial world make frequent reference to just that: “the credit window,” as in “the place you go to borrow money.” When the window is open, financing is plentiful and easily obtained, and when it’s closed, financing is scarce and hard to get. Finally, it’s essential to always bear in mind that the window can go from wide open to slammed shut in just an instant. There’s a lot more to fully understanding this cycle—including the reasons for these cyclical movements and their impact—but that’s the bottom line.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“The longer I’m involved in investing, the more impressed I am by the power of the credit cycle. It takes only a small fluctuation in the economy to produce a large fluctuation in the availability of credit, with great impact on asset prices and back on the economy itself.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“The Global Financial Crisis of 2007–08 represented the greatest financial downswing of my lifetime, and consequently it presents the best opportunity to observe, reflect and learn. The scene was set for its occurrence by a number of developments. Here’s a partial list: Government policies supported an expansion of home ownership—which by definition meant the inclusion of people who historically couldn’t afford to buy homes—at a time when home prices were soaring; The Fed pushed interest rates down, causing the demand for higher-yielding instruments such as structured/levered mortgage securities to increase; There was a rising trend among banks to make mortgage loans, package them and sell them onward (as opposed to retaining them); Decisions to lend, structure, assign credit ratings and invest were made on the basis of unquestioning extrapolation of low historic mortgage default rates; The above four points resulted in an increased eagerness to extend mortgage loans, with an accompanying decline in lending standards; Novel and untested mortgage backed securities were developed that promised high returns with low risk, something that has great appeal in non-skeptical times; Protective laws and regulations were relaxed, such as the Glass-Steagall Act (which prohibited the creation of financial conglomerates), the uptick rule (which prevented traders who had bet against stocks from forcing them down through non-stop short selling), and the rules that limited banks’ leverage, permitting it to nearly triple; Finally, the media ran articles stating that risk had been eliminated by the combination of: the adroit Fed, which could be counted on to inject stimulus whenever economic sluggishness developed, confidence that the excess liquidity flowing to China for its exports and to oil producers would never fail to be recycled back into our markets, buoying asset prices, and the new Wall Street innovations, which “sliced and diced” risk so finely, spread it so widely and placed it with those best suited to bear it.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“When investors in general are too risk-tolerant, security prices can embody more risk than they do return. When investors are too risk-averse, prices can offer more return than risk.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“For me, the bottom line of all this is that the greatest source of investment risk is the belief that there is no risk. Widespread risk tolerance—or a high degree of investor comfort with risk—is the greatest harbinger of subsequent market declines. But because most investors are following the progression described just above, this is rarely perceived at the time when perceiving it—and turning cautious—is most important.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“When positive events occur as described in the last chapter and euphoria, optimism and greed rise, investors tend to become less risk-averse than usual and less risk-averse than they should be. What are the effects (following on from the list of the functions investors perform on page 106–107)? Since they feel better about the environment and are more optimistic about likely outcomes, they reduce the amount of caution they bring to the investing process. Since they no longer consider investing to be risky, they don’t see the need for painstaking analysis. They tend to make assumptions that are more generous, and they replace skepticism with credulousness. They’re willing to make do with a reduced margin of safety. Viewing risk as less worrisome, they no longer demand risk premiums as cushy as in the past. They behave less as sticklers, since they’re more attracted to the returns on risky investments and less leery of the risk they involve.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“Risk aversion is an essential element in investing. People’s aversion to loss causes them to police the markets. Because most people are averse to risk: they approach investing with caution, they perform careful analysis when considering investments, and especially risky ones, they incorporate conservative assumptions and appropriate skepticism into their analysis, they demand greater margins of safety on risky investments to protect against analytical errors and unpleasant surprises, they insist on healthy risk premiums—the expectation of incremental returns—if they’re going to undertake risky investments, and they refuse to invest in deals that make no sense.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“As a social psychologist, I have long been amused by economists and their curiously delusional notion of the “rational man.” Rational? Where do these folks live? Even 50 years ago, experimental studies were demonstrating that people stay with clearly wrong decisions rather than change them, throw good money after bad, justify failed predictions rather than admit they were wrong, and resist, distort or actively reject information that disputes their beliefs.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“The continuation of the movement past the midpoint and toward the opposite extreme is highly dependable. For example, markets rarely go from “underpriced” to “fairly priced” and stop there. Usually the fundamental improvement and rising optimism that cause markets to recover from depressed levels remain in force, causing them to continue right through “fairly priced” and on to “overpriced.” It doesn’t have to happen, but usually it does.”
― Howard Marks, Mastering The Market Cycle: Getting the odds on your side

“The fact is that the performance of these things is heavily influenced in the short run by, among other things, the involvement of people, and people are far from steady. Rather they fluctuate from time to time, often because of things we can lump under the broad heading of “psychology.” Thus people’s behavior varies … certainly as the environment varies, but sometimes in the absence of changes in the environment, too.”
― Howard Marks, Mastering The Market Cycle: Getting the odds on your side

“The economic theory propounded by John Maynard Keynes in the 1930s dwelled heavily on the role of governments vis-à-vis cycles. Keynesian economics focuses on the role of aggregate demand in determining the level of GDP, in contrast with earlier approaches that emphasized the role of the supply of goods. Keynes said governments should manage the economic cycle by influencing demand. This, in turn, could be accomplished through the use of fiscal tools, including deficits. Keynes urged governments to aid a weak economy by stimulating demand by running deficits. When a government’s outgo—its spending—exceeds its income—primarily from taxes—on balance it puts funds into the economy. This encourages buying and investing. Deficits are stimulative, and thus Keynes considered them helpful in dealing with a weak economy. On the other hand, when economies are strong, Keynes said governments should run surpluses, spending less than they take in. This removes funds from the economy, discouraging spending and investment. Surpluses are contractionary and thus an appropriate response to booms. However, the use of surpluses to cool a thriving economy is little seen these days. No one wants to be a wet blanket when the party is going strong. And spending less than you bring in attracts fewer votes than do generous spending programs. Thus surpluses have become as rare as buggy whips.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“The bottom line is that most central bankers have two jobs: to limit inflation, which requires restraining the growth of the economy, and to support employment, which calls for stimulating economic growth. In other words, their dual responsibilities are in opposition to each other, and thus their job requires a delicate balancing act.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“Since inflation results from economic strength, the efforts of central bankers to control it amount to trying to take some of the steam out of the economy. They can include reducing the money supply, raising interest rates and selling securities. When the private sector purchases securities from the central bank, money is taken out of circulation; this tends to reduce the demand for goods and thus discourages inflation. Central bankers who are strongly dedicated to keeping inflation under control are called “hawks.” They tend to do the things listed above sooner and to a greater extent. The problem, of course, is that actions of this kind are anti-stimulative. They can accomplish the goal of keeping inflation under control, but they also restrain the growth of the economy, with effects that can be less than beneficial. The issue is complicated by the fact that in the last few decades, many central banks have been given a second responsibility. In addition to controlling inflation, they are expected to support employment, and, of course, employment does better when the economy is stronger. So central banks encourage this through stimulative actions such as increasing the money supply, decreasing interest rates, and injecting liquidity into the economy by buying securities—as in the recent program of “quantitative easing.” Central bankers who focus strongly on encouraging employment and lean toward these actions are called “doves.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“And sometimes inflation can increase without these things being present. There is a large psychological component that influences all of this.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“When the demand for goods increases relative to the supply, there can be “demand-pull” inflation. When inputs to production such as labor and raw materials increase in price, there can be “cost-push” inflation. Finally, when the value of an importing country’s currency declines relative to that of an exporting country, the cost of the exporter’s goods can rise in the importing country.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“Extreme economic cyclicality is considered undesirable. Too much strength can kindle inflation and take the economy so high that a recession becomes inevitable. Too much weakness, on the other hand, can cause companies’ profits to fall and can cost people their jobs. Thus it is part of the job of central bankers and Treasury officials to manage cycles. Since cycles produce ups and downs that can be excessive, the tools for dealing with them are counter-cyclical and applied with a cycle of their own—ideally inverse to the economic cycle itself. However, like everything else involving cycles, managing them is far from easy. If it weren’t, we wouldn’t see the extremes we do.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side

“Here is what I believe to be the bottom line on economic cycles: The output of an economy is the product of hours worked and output per hour; thus the long-term growth of an economy is determined primarily by fundamental factors like birth rate and the rate of gain in productivity (but also by other changes in society and environment). These factors usually change relatively little from year to year, and only gradually from decade to decade. Thus the average rate of growth is rather steady over long periods of time. Only in the longest of time frames does the secular growth rate of an economy significantly speed up or slow down. But it does. Given the relative stability of underlying secular growth, one might be tempted to expect that the performance of economies would be consistent from year to year. However, a number of factors are subject to variability, causing economic growth—even as it follows the underlying trendline on average—to also exhibit annual variability. These factors can perhaps be viewed as follows: Endogenous—Annual economic performance can be influenced by variation in decisions made by economic units: for consumers to spend or save, for example, or for businesses to expand or contract, to add to inventories (calling for increased production) or sell from inventories (reducing production relative to what it might otherwise have been). Often these decisions are influenced by the state of mind of economic actors, such as consumers or the managers of businesses. Exogenous—Annual performance can also be influenced by (a) man-made events that are not strictly economic, such as the occurrence of war; government decisions to change tax rates or adjust trade barriers; or changes caused by cartels in the price of commodities, or (b) natural events that occur without the involvement of people, such as droughts, hurricanes and earthquakes. Long-term economic growth is steady for long periods of time but subject to change pursuant to long-term cycles. Short-term economic growth follows the long-term trend on average, but it oscillates around that trendline from year to year. People try hard to predict annual variation as a source of potential investing profit. And on average they’re close to the truth most of the time. But few people do it right consistently; few do it that much better than everyone else; and few correctly predict the major deviations from trend.”
― Howard Marks, Mastering The Market Cycle: Getting the Odds on Your Side