Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: I'm very pleased to say that joining us on this program,
Speaker 2: Howard Mark joins us for more. Howard, Welcome to the program, Sir.
Speaker 2: I want to start. We want to start with a
Speaker 2: central question that you pose yourself, why asset price is
Speaker 2: so strong in the face of what you view as
Speaker 2: negative developments? Howard, can you share your thoughts with us?
Speaker 3: I'm glad to be with you this morning.
Speaker 1: Of course, as the quote you just put on the
Speaker 1: screen indicates, you know, this is all just feeling and.
Speaker 3: An opinion.
Speaker 1: None of this is factual, but it does seem that
Speaker 1: stocks are expensive relative to what I call fundamentals or
Speaker 1: you might call reality. And you know, the outstanding reason,
Speaker 1: I think is that you know, there hasn't been a
Speaker 1: serious market correction in sixteen years, so people get out
Speaker 1: of the habit of thinking about market corrections. The biggest
Speaker 1: single mistake I've been thinking a lot what is the
Speaker 1: biggest single.
Speaker 3: Mistake investors make?
Speaker 1: And I've concluded that it is that they conclude that
Speaker 1: the way things are today is the way it will
Speaker 1: always be, and the things that have been happening will
Speaker 1: always continue to happen. Whereas reversion to the mean is
Speaker 1: much more likely. So I just think that it's worked
Speaker 1: very well. Being an equity investor has worked very well.
Speaker 1: Doing it on leverage has worked even better. Concentrating in
Speaker 1: a few stocks has gone very well. Investors are by
Speaker 1: nature optimistic, and that optimism dies hard. And you know,
Speaker 1: I just think that the fluctuations of the market are
Speaker 1: mostly related to psychological fluctuations, and people go from neutrality
Speaker 1: to liking stocks, to liking them a lot, to liking
Speaker 1: them a ton, to liking them too much, and that's
Speaker 1: the continuation that creates.
Speaker 3: Bubbles.
Speaker 1: And you know, we're we probably in the early days
Speaker 1: of that when.
Speaker 4: You talk about liking Howard, maybe liking these assets a
Speaker 4: little bit too much. Can you put into perspective the
Speaker 4: last time you saw this type of environment that left
Speaker 4: you thinking, maybe some of the opportunities aren't as great
Speaker 4: when it comes to buying some of these assets at
Speaker 4: the current valuations. Is there another time that this sort
Speaker 4: of reminds you of in any capacity?
Speaker 1: Well, I guess, Lisa, the last time was probably around
Speaker 1: a ninety ninety seven when the market was kind of
Speaker 1: falling in love with tech stocks, and you know, the
Speaker 1: market was rocking the long People were not worried about
Speaker 1: the level of valuations. People are extremely optimistic about the
Speaker 1: opportunities for the Internet. And you know, Alan Greenspan famously
Speaker 1: cautioned that there might be irrational exuberance.
Speaker 3: Now I picked ninety seven.
Speaker 1: Because even though green Span was concerned about exuberance, the
Speaker 1: market went on to rise for another two and a
Speaker 1: half to three years. So remember I said, we're in
Speaker 1: the early days. We're not at a critical at a nutty.
Speaker 3: Valuation.
Speaker 1: I'm certainly not ringing the alarm bells, as the quote
Speaker 1: that you had on the screen said, no reason to
Speaker 1: think there'll be a correction soon. But the point is
Speaker 1: that things are expensive.
Speaker 3: They may go on, they may go on to become.
Speaker 1: More expensive, but the fact that they're expensive it should
Speaker 1: not be lost.
Speaker 4: And Howard, I think a lot of people point to,
Speaker 4: in terms of the echoes of the late nineties, the
Speaker 4: tech sector of the market as being the most overvalued.
Speaker 4: What I thought was so interesting about your memo is
Speaker 4: that that wasn't your take, that that wasn't your bigger
Speaker 4: concern in the market at a time when people are
Speaker 4: counting on a certain robustness of growth and a certain
Speaker 4: kind of inflationary backdrop. Why is it that tech Is
Speaker 4: it the focus of your concern this time around?
Speaker 1: A tech contributes to the aura that surrounds the markets,
Speaker 1: And a lot of people have been citing the fact
Speaker 1: that this so called magnificent seven stocks I, Amazon, and
Speaker 1: Alphabet have been contributing disproportionally to the rise, and they
Speaker 1: responsible for more than seven stocks. Their dollar gains have
Speaker 1: been responsible for more than half of all the gains
Speaker 1: in the five hundred stocks in the S and P
Speaker 1: seven out of five hundred.
Speaker 3: But they're great companies, they're at high valuation. I think
Speaker 3: that I can't say those valuations are excessive.
Speaker 1: But the other four hundred and ninety three stocks are
Speaker 1: quite highly valued, not as highly as the magniz as seven,
Speaker 1: but nobody says they're the same quality companies, quite.
Speaker 3: Highly valued relative to history.
Speaker 1: And it is the the fact that high valuations are
Speaker 1: being applied to more average companies that I think is
Speaker 1: more alarming than the fact that exceptional valuations are being
Speaker 1: applied to exceptional companies.
Speaker 2: How there's a quote you use in this memo. I
Speaker 2: enjoyed this quote. He said, he who knows only his
Speaker 2: side his own side of the case knows little of that.
Speaker 2: And then I worked through the rest of the memo
Speaker 2: and there was a conclusion there about credit. And I
Speaker 2: just wonder whether you focus on equities in this note
Speaker 2: offers you a credit perspective on how much value is
Speaker 2: offered in credit right now?
Speaker 1: Well, you know, it's it's as John Stewart Mill said,
Speaker 1: and I believe it was eighteen fifty nine, you have
Speaker 1: to know all the sides of the story to understand
Speaker 1: whether your side holds water. And I cite the bull
Speaker 1: case there for why the market isn't overvalued. I think
Speaker 1: that's that's part of the job. But as you say,
Speaker 1: you know, my conclusion is that it's it's not. As
Speaker 1: I said before, I'm not raising an alarm bell, but
Speaker 1: I do think it's time for some caution. And you know,
Speaker 1: this is a little bit of what we call on
Speaker 1: Wall Street talking your own book. But you know what
Speaker 1: I do, what oak Tree does, is mostly something called
Speaker 1: credit buying the debts of companies, and debt is inherently
Speaker 1: more defensive than equities. And you have a promise of payment,
Speaker 1: you know what your return will be if they pay interest.
Speaker 3: In principle has promised, and most of the time they do. So.
Speaker 1: I just think that this is a time to put
Speaker 1: a little more defense into your portfolio, and investing in
Speaker 1: credit as opposed to equities is one way to do it.
Speaker 4: Is it still defensive?
Speaker 2: Howard?
Speaker 4: If you're looking at credit spreads the tightest since nineteen
Speaker 4: ninety eight, I'm looking at investment grade credit spreads, you're
Speaker 4: thought to be a more defensive part of the credit market.
Speaker 4: I mean, is that sort of question what it means
Speaker 4: for it to be defensive where the evaluations are high
Speaker 4: there as well?
Speaker 3: Well?
Speaker 1: First of all, it's what you see debt or fixed
Speaker 1: income or bonds or what I call credit, all different
Speaker 1: words for the same thing. Is different in nature from
Speaker 1: equities because you do have a promised contractual rate of return.
Speaker 1: And you can say that the promised contractual return isn't
Speaker 1: as high as it has been historically, or the increment
Speaker 1: that it provides over treasuries to compensate for the credit
Speaker 1: risk isn't it as higher as high as it has
Speaker 1: been historically. But you can't say that they don't promise
Speaker 1: seven and a half percent, and a promise of seven
Speaker 1: and a half percent, you're going to pay for some
Speaker 1: fees here once in a while, going to encourage encounter
Speaker 1: a credit loss. I think it's highly likely to provide
Speaker 1: let's say, a return in the sixties over the next
Speaker 1: ten years, a contractual guarantee approaching something in the sixes
Speaker 1: over the next ten years. Is I think more defensive
Speaker 1: than being in the stock market at these elevated valuations.
Speaker 3: That's the point.
Speaker 1: And you know you just said tighter than they have
Speaker 1: been since ninety eight. And if you looked at where
Speaker 1: they were in ninety eight, and you hypothesize that put
Speaker 1: an investment in a portfolio hyio bonds in ninety eight,
Speaker 1: how did you do over the last seventeen years, twenty
Speaker 1: seven years?
Speaker 3: And I think you did fine. That's my point. It
Speaker 3: has a high.
Speaker 1: Probability of doing fine, whereas stocks, if the valuations are elevated,
Speaker 1: have some reasonable probability of doing less than fine.
Speaker 4: Is the United States still the focal point for defensive investments?
Speaker 3: You know?
Speaker 1: I think I said in the memo that I think
Speaker 1: the US is still the best place in the world
Speaker 1: to invest. The things that make the US exceptional the
Speaker 1: spirit of innovation, the free markets, the rule of law,
Speaker 1: the capital markets, the growth and dynamism, the great companies.
Speaker 3: These things are still all true.
Speaker 1: But as I said in the memo, we're the best place,
Speaker 1: we may be a little less best than we used
Speaker 1: to be. The world is thinking that maybe the US
Speaker 1: is a little best less best than it used to be,
Speaker 1: and I can't argue against that. I mean, fundamentally, as
Speaker 1: an investment environment, I think things are a little bit deteriorated.
Speaker 4: Is there a place that you see has more opportunities
Speaker 4: right now just based on valuations and based on maybe
Speaker 4: affirming up of contract law and other aspects that really
Speaker 4: lead to a robust investment backdrop.
Speaker 1: Well, as I say, I still think we're the best
Speaker 1: place in the world to invest.
Speaker 3: And you know, we're a great car at a high price.
Speaker 1: You can get some cars around the world that are
Speaker 1: not as great as ours cheaper.
Speaker 3: Which do you prefer.
Speaker 1: Less good at a cheaper price or better at a
Speaker 1: more expensive price.
Speaker 3: So you know, other parts of the world do not
Speaker 3: have our.
Speaker 1: Dynamism, and lots of places in the world are overregulated
Speaker 1: compared to the United States, But if they're on sale
Speaker 1: relative to the US, it's not unreasonable to want to
Speaker 1: have some representation there.
Speaker 2: Howard wonderful to get your thoughts. As always so you've
Speaker 2: been generous with your time. We appreciate it. Thank you
Speaker 2: very much, the legendary Howard Marks there of O Tree
Speaker 2: Capital Management. Following the release of his latest memo in
Speaker 2: the last week or so,