Speaker 1: John Well got a question for you.
Speaker 2: Where's the house price crash?
Speaker 3: It's the question we're all asking this question. We all
Speaker 3: want to know the answer promised us.
Speaker 2: You promised us the house price crash.
Speaker 3: I think you find that didn't. I think you're find
Speaker 3: that promised a healthy correction in real terms.
Speaker 2: Same thing.
Speaker 3: Yeah, interesting, Well certainly that's what people take it as. Yeah,
Speaker 3: well they what can't say the UK housing market is
Speaker 3: made of teflon. I mean it's it's down about fifteen
Speaker 3: percent in real terms over the last and that is
Speaker 3: a lot.
Speaker 2: Actually, which is a lot?
Speaker 3: That is that it's a lot, And to be fair,
Speaker 3: that probably is one reason why it hasn't fallen harder
Speaker 3: in kind of nominal terms, because at the end of
Speaker 3: the day, real wages are going up, you know, big
Speaker 3: spiking inflation and wages means that affordability improves ever so
Speaker 3: slightly but more if only nobody's lost their job, and
Speaker 3: nobody wants to sell the house if they don't think
Speaker 3: they can get peak price for it, And so people
Speaker 3: are sitting in their houses for longer, and the people
Speaker 3: who wanted to buy them can't borrow quite as much
Speaker 3: money to get hold of them. Then you get a
Speaker 3: crash in transactions, which is what happened. But the deals
Speaker 3: that do actually go through go through for a bit
Speaker 3: less money, but not a massive amount less. And I
Speaker 3: guess the tricky thing or sorthing, not the tricky thing,
Speaker 3: but the frustrating thing now for any first time buyers
Speaker 3: out there, is that you know, as we're coming into
Speaker 3: this year, mortgage rates are still they're a lot higher
Speaker 3: than they were kind of like eighteen months ago, but
Speaker 3: they're not as high as they were maybe six months ago.
Speaker 3: And at the same time, you no kind of wage
Speaker 3: growth has improved, so affordability has improved, is still you know,
Speaker 3: unbearable in lots of parts of the country, but there's
Speaker 3: no real trigger to kind of drive any force selling.
Speaker 4: Or to.
Speaker 3: The pressure we've seen kind of like the maximum pressure
Speaker 3: on the housing market in twenty twenty three, and it's
Speaker 3: not as bad now, and chances are the interest rates along.
Speaker 3: I don't think they're going to go much lower than
Speaker 3: they are. No mortgage rates, but the same thing, you.
Speaker 1: Know, they've gone down a lot, and they've gone down
Speaker 1: a lot more in some other countries. Germany has had
Speaker 1: the worst of it, haven't they German. We talked about
Speaker 1: German house prices a while ago, and they're down ten
Speaker 1: percent there, and if you look at some of the others,
Speaker 1: I've just pulled up the numbers well while he's been talking,
Speaker 1: because I got bored in the but of you explaining
Speaker 1: where we haven't had a proper crist Canada, Denmark's weed
Speaker 1: in Luxembourg career, they're down seven percent to nine percent, Australia,
Speaker 1: the Netherlands, Slovakia three percent, five percent, But everywhere else
Speaker 1: price has only felt a little bit and a lot
Speaker 1: of it seems to be about prices being propped up
Speaker 1: by rental growth, which I suspect is the case here,
Speaker 1: but then being pushed down again on the other side
Speaker 1: by regulatary change, which may again be the case here
Speaker 1: because we've got various rental forms on the way.
Speaker 3: Yeah, But I mean the other thing we all of
Speaker 3: those market says the interest rates sensitivity was higher than
Speaker 3: the UK for basically for two reasons. It's like we're Sweden. Effectively,
Speaker 3: as soon as the interest rate changes there, the rate
Speaker 3: on your mortgage changes almost immediately. But the other thing
Speaker 3: is that anywhere that didn't have a house price crash
Speaker 3: in two thousand and eight, like Australia or Canada, the consumers,
Speaker 3: the households were massively over leveraged. They are where we
Speaker 3: were in two thousand and eight. Whres one thing I
Speaker 3: think people don't appreciate, and we go on about it
Speaker 3: a lot on the podcast, is that after two thousand
Speaker 3: and eight, UK households their balance sheets have improved and
Speaker 3: we aren't as kind of, you know, over leveraged as
Speaker 3: we were back then, which is the other reason that
Speaker 3: we're not as rate sensitive as we were. But I
Speaker 3: think that's why, you know, the likes of Sweden, et cetera.
Speaker 3: I had proper crashes, and I mean, you know, I'll
Speaker 3: be interested to see what happens to the Canadian banking system,
Speaker 3: for example. That's just off the top of my head.
Speaker 3: I don't if any haven't looked at it in any
Speaker 3: great detail. But you'd think we all those more geez
Speaker 3: that was going to reset scandalously high rates, et cetera,
Speaker 3: that there'll be a problem there. But overall, I can
Speaker 3: see there's a good reason why the UK hasn't quite
Speaker 3: going the same way as those other countries I think.
Speaker 1: But we still got the lag, there's still a lot
Speaker 1: of people to remortgage. It's still not coming. There's regulation change,
Speaker 1: probably a new government at the end of the year.
Speaker 1: I'm telling everyone not get complacent yet. John's crash may
Speaker 1: still yet come.
Speaker 3: We need to know what we need to see.
Speaker 2: How I'm distincing myself from your.
Speaker 3: Crash, Yeah, the one, the one you tricked me into predicting.
Speaker 1: Yeah, Now, I'm basically I'm putting myself out there as
Speaker 1: a housing bubble, a housing a boomer and you're going
Speaker 1: to take all the flag for the next how many years?
Speaker 3: John, I'm I was going to see someone we should
Speaker 3: get back going the podcast at some point, or we
Speaker 3: should get one of the people that kind of talks
Speaker 3: about the eighteen year housing cycle, because if they are right,
Speaker 3: then this is the the Bier's remorse moment and like
Speaker 3: to is going to be when it all comes tumbling down.
Speaker 3: So I would be genuinely curious to all what that
Speaker 3: kind of group of people think is actually going on,
Speaker 3: and just know maybe I should talk to a while.
Speaker 1: Yeah, and now you've mentioned them, I'm almost certain they'll
Speaker 1: be in touch.
Speaker 3: All right, It's like kindy mine, it.
Speaker 1: Is welcome to Maren talks money the podcast in which
Speaker 1: people who know the markets explain the markets. I'm meren
Speaker 1: Sunset Web this week' bringing you a conversation with oak
Speaker 1: Tree Capital Management co founder Howard Marks. Oak Tree, founded
Speaker 1: in nineteen ninety five, is a distressed debt specialist now
Speaker 1: manages roughly one hundred and eighty billion dollars in assets,
Speaker 1: and Howard, as what many of you will know, is
Speaker 1: famous for the notes that he writes on his thoughts
Speaker 1: about investment. Howard, thank you so much for joining us today.
Speaker 1: We really appreciate it. It's good to have you with us.
Speaker 4: Good to be here. Thank you, Maren.
Speaker 1: I wonder if we can start by talking about your
Speaker 1: sea change things and the ideas behind that. I think
Speaker 1: a lot of listeners will read your notes very enthusiastically,
Speaker 1: and I know a bit about the way that you're thinking,
Speaker 1: but some won't. So it would be great if we
Speaker 1: can set the scene by talking about this big pendulum
Speaker 1: swing that you've seen in markets.
Speaker 5: Paul Samuelson, the great American economists who wrote the textbook
Speaker 5: that almost all of us read in college, said, when
Speaker 5: events change, I changed my mind, what do you do?
Speaker 5: That's a good question. You know, most people kind of
Speaker 5: assume that the way things are is the way they've
Speaker 5: always been and the way they'll always be, and so
Speaker 5: the tactics and strategies that have worked will continue working.
Speaker 5: As simple as that, I think for most people. The
Speaker 5: idea of the sea change arose for me fifteen months ago.
Speaker 5: I wrote about it thirteen months ago, and also eight
Speaker 5: months ago, and also a little bit last month for
Speaker 5: this month, and I still believe it. And basically what
Speaker 5: it says is that at the end of eight the
Speaker 5: FED took what we call a dubbsh stimulative monetary policy
Speaker 5: to get us out of the global financial crisis, and
Speaker 5: in particular, they took the FED funds rate, which is
Speaker 5: the benchmark rate of short term interest rates in the US,
Speaker 5: to zero for the first time. Surprisingly, they kept it
Speaker 5: there for almost seven years, and for the total of
Speaker 5: the thirteen years from nine through twenty twenty one.
Speaker 4: It averaged a half a percent.
Speaker 5: And the reason we watch the FED, and the reason
Speaker 5: the FED manipulates interest rates is that interest rates matter
Speaker 5: a great deal in determining the vibrance of business and
Speaker 5: the cultural Low interest rates had a very strong impact
Speaker 5: on those thirteen years. But I believe they're over, and
Speaker 5: that means that the climate ahead will be different from
Speaker 5: the last thirteen years. Now, what prevailed over the last
Speaker 5: thirteen years not the way it's always been. At the
Speaker 5: beginning of my career, in the late sixties and seventies,
Speaker 5: we had a different interest rates. They closer to I
Speaker 5: would say, five to six on average, and we had
Speaker 5: a different climate. But then the US had about of
Speaker 5: inflation in the seventies. The Fed Fund rate was taken
Speaker 5: to twenty by Paul Wolker, the Chairman of the FED,
Speaker 5: and that killed the inflation. Good news, killed the economy,
Speaker 5: bad news, and it set the tone for the next
Speaker 5: forty years. And I say in the memo which I
Speaker 5: published in December, and by the way, everything I'm going
Speaker 5: to say about the memos is available by a podcast
Speaker 5: if people would rather listen than read. In nineteen eighty
Speaker 5: I had a long outstanding from a bank and I
Speaker 5: got a piece of paper which said the rate on
Speaker 5: your loan now twenty two and a half percent. And
Speaker 5: forty years later, in twenty twenty, I was able to
Speaker 5: borrow at two and a half percent. And that decline
Speaker 5: and interest rates really set the tone for that forty
Speaker 5: year period and again, I think that the decline is over.
Speaker 1: In the latest note, you talk about reading Edward Chancellor's book.
Speaker 1: We're great fans of Edward Chancellor, and we've had him
Speaker 1: on the podcast in the past to talk about his
Speaker 1: books and his idea, but that he had in his
Speaker 1: most recent book, The Price of Time, and we've talked
Speaker 1: about that with him a lot. And you say in
Speaker 1: your latest note that reading his book clarified your thoughts
Speaker 1: again about how it is that very low interest rates
Speaker 1: affect the investment markets. And again you say in your note,
Speaker 1: and we've discussed here before, that there are all sorts
Speaker 1: of things that people attribute their investment's success over the
Speaker 1: last twenty thirty forty years to, in particular their personal brilliance,
Speaker 1: but you also say that you think, in fact, it
Speaker 1: is very low interest rates that have been the main
Speaker 1: driver of investment performance of asset markets over the last
Speaker 1: forty years. So it it's very much the case that
Speaker 1: if that changes, everything changes. So I wonder if you
Speaker 1: could just explain what it is that what it was
Speaker 1: in Edward's book that clarified your thinking, the key points
Speaker 1: that came out.
Speaker 5: That the reason I like Edward's books so much Edward,
Speaker 5: as far as I'm concerned, is not an economist. I
Speaker 5: would say, thank god, I don't. I'm not very sympathetic
Speaker 5: to economists. Edward is a financial historian. And you know,
Speaker 5: the philosopher Santayana said those who are ignorant of history
Speaker 5: are doomed to repeat it. And Mark Twain, the American
Speaker 5: humorist of the nineteenth century, said history does not repeat itself,
Speaker 5: but it does rhyme. What does that mean, to not
Speaker 5: repeat but to rhyme? And the answer is that the
Speaker 5: details of history are always different in every iteration, but
Speaker 5: there are themes that do rhyme from one iteration to
Speaker 5: the next. Edward does a great job of studying those
Speaker 5: and poising them out. The first of his books that
Speaker 5: I read was Devil Take the Highmost in the Fall
Speaker 5: of nineteen ninety nine, and he described the behavior in
Speaker 5: speculative bubbles, things like the South Sea bubble of the
Speaker 5: seventeen twenties, the Tulip bubble. You know, people engage in
Speaker 5: crazy behavior in speculative bubbles, and as a consequence, they
Speaker 5: buy things with no value for high prices, which is
Speaker 5: a good formula for losing a.
Speaker 4: Lot of money.
Speaker 5: And I was reading Devil Take the Highmost in the
Speaker 5: fall of ninety nine, and I said, wait a minute,
Speaker 5: this is the same behavior we're seeing today. In what
Speaker 5: we call the tech bubble of ninety eight, ninety nine,
Speaker 5: two thousand and again people acted like anything with Internet
Speaker 5: in the name, or any thing having to do with
Speaker 5: the e commerce would make them rich, which of course
Speaker 5: is a very dangerous expectation. I wrote a memo called
Speaker 5: Bubble dot Com about the bubble that was taking place
Speaker 5: in dot com stocks. It was well, I don't like
Speaker 5: to be self congraguatory, but it was right.
Speaker 2: It was right. You could be self congrassive. That's okay.
Speaker 2: Taking on this podcast we celebrate success well.
Speaker 5: And the great thing theren is that, you know, it
Speaker 5: attracted a lot of attention to the memos. I had
Speaker 5: started writing the memos ten years earlier, in nineteen ninety
Speaker 5: and for ten years I wrote without having one response,
Speaker 5: and as somebody who writes for a living, you would
Speaker 5: know that that's not very rewarding.
Speaker 2: No, we don't like that.
Speaker 5: But then thanks to Bubble dot com, I was recognized,
Speaker 5: and now nowadays the memos are popular. In twenty twenty three,
Speaker 5: I again spent the Fall. Reading another Chancellor book at
Speaker 5: this time, the price of time. What is the price
Speaker 5: of time? The price of time is interesting. It's the
Speaker 5: amount that we pay to have the use of somebody
Speaker 5: else's money for a period of time. Threat we rent
Speaker 5: the money, and the person who rents the money out
Speaker 5: gets the interest rate, and the person who pays the
Speaker 5: interest rate and gets the use of the money gets
Speaker 5: the benefits of putting that money over that time, whether
Speaker 5: it be losses or gains. It talks a lot in
Speaker 5: the book about the negative impact of rates being too low,
Speaker 5: and I said, wait a minute, this is the same
Speaker 5: thing we're seeing now, and ihaps seen for the last
Speaker 5: thirteen years. And so I wrote my memo called easy Money,
Speaker 5: which came out a couple of weeks ago, and again
Speaker 5: the same theme rhyming four hundred years later. And it's
Speaker 5: important to understand the themes of financial history. Is more
Speaker 5: important to understand the way they rhyme and have a
Speaker 5: recurring impact on generations over I think the impact of
Speaker 5: easy money ultra low interest rates is profiled.
Speaker 1: Yeah, so when you look at the list of things
Speaker 1: that you wrote in this memo, the things that low
Speaker 1: interest rates allow you make it easy to run a business.
Speaker 1: They make it easy for investors to see acid appreciation,
Speaker 1: They make it easy and cheap to levy your investments up,
Speaker 1: easy and cheap for business to businesses to obtain financing,
Speaker 1: and easy to avoid default and bankruptcy. And one of
Speaker 1: the effects of that is malinvestment. Is is capital being
Speaker 1: allocated to the wrong places, to businesses that shouldn't survive
Speaker 1: in a normal environment. So if we're now seeing this
Speaker 1: sea change and we flipping bank the other way, does
Speaker 1: this suddenly become hard to run a business, hard to
Speaker 1: make any money out of the markets, hard to levy
Speaker 1: your investments, hard to get financing, and really not easy
Speaker 1: at all to avoid DeVault and bankruptcy.
Speaker 2: The flip sounds really nasty.
Speaker 5: We had ultra low interest rates. I don't think we're
Speaker 5: going to ultra high interest rates. I think we're just
Speaker 5: going back to normal interest rates. I don't think it's
Speaker 5: going to be terribly hard to make money or avoid
Speaker 5: bankruptcy or get financing. I think it's going to be
Speaker 5: normally hard. You know, the people. The thing that people
Speaker 5: should bear in mind, both your listeners and normal economic participants,
Speaker 5: it's not supposed to be easy.
Speaker 1: So much nicer when it is.
Speaker 5: Well, it's nicer for a minute, but the point of
Speaker 5: the memo is that it being easy subsequently has bad effects.
Speaker 5: And you know, let's think of an example. Investors like
Speaker 5: myself or you are supposed to be risk averse. We're
Speaker 5: supposed to dislike riskiness and be attracted to safety, and
Speaker 5: as a consequence, we demand the opportunity to make higher
Speaker 5: returns from risky investments. If we have two investments and
Speaker 5: one is safe and one of risky, we'll demand that
Speaker 5: the risky one appear to offer a higher return, or
Speaker 5: we don't make the risky one, we'll make the safe one.
Speaker 5: If I said, mare, and I have two you know
Speaker 5: oak Tree funds to offer to you. One is one
Speaker 5: invest in treasuries and it will give you seven percent,
Speaker 5: and the other is adventure capital fund that will invest
Speaker 5: in high tech solutions and if things go right, will
Speaker 5: make seven percent. You'll say, I'll take the shore seven
Speaker 5: over the risky seven. Because you're a normal person, you're
Speaker 5: a risk averse. You have to be induced make risky investments. Now,
Speaker 5: what happens when people forget to be risk averse, And
Speaker 5: the answer is that they make risky investments without suitable incentives. Well,
Speaker 5: if the central Bank reduces the interest rate to zero,
Speaker 5: and the return on savings, for example, is zero, as
Speaker 5: it has most been most of the time for the
Speaker 5: last fifteen years in this country, then if you see
Speaker 5: a crazy high tech start up investment that offers five
Speaker 5: maybe you say, oh my god, that's near vine. I'll
Speaker 5: take that all day long. I love five percent when
Speaker 5: cash is zero. And so you can see that ultra
Speaker 5: low interest rates on short instruments like cash or treasuries
Speaker 5: drives people to make investments in risky things that still
Speaker 5: offer low absolute rates of return, just higher than the
Speaker 5: Measley what I think it was Edward Chanceller who said
Speaker 5: the Measley rates unsafety investors. So you can see that
Speaker 5: ultra low interest rates encourage risk taking and that's not good.
Speaker 5: It gets people into things they shouldn't do. And you know,
Speaker 5: the ultra low interest rate has effects on let's say people.
Speaker 5: It may not be people, maybe institutions or companies or
Speaker 5: what have you, but it has effects. And in particular,
Speaker 5: ultra low interest rates penalize lenders and safers and upside
Speaker 5: eyes risk takers and borrowers.
Speaker 4: And you know, is that.
Speaker 5: What we really want to do in our society. Let's
Speaker 5: say you have a worker who's been fortunate enough to
Speaker 5: save up half a million over the course of her career,
Speaker 5: and she's now retiring. If the bank offers five percent interest,
Speaker 5: which is pretty normal in the US, she makes twenty
Speaker 5: five thousand a year of retirement income. But if the
Speaker 5: interest rate is zero, as it has been most of
Speaker 5: the last fifteen years, she makes zero. And she says,
Speaker 5: I can live on zero. Most people can't. And so
Speaker 5: she says, well, I better invest in you know, high
Speaker 5: tech thocts or something like that. And it's probably inappropriate
Speaker 5: for her to be investing in something that risky given
Speaker 5: her limited resources in station in life, but she does
Speaker 5: it because the low interest rates drive her out of
Speaker 5: safe instruments. And you know, I in the memo, I
Speaker 5: caught my late other in law who used to refer
Speaker 5: to people like her as handcuff volunteers. They do not
Speaker 5: what they want to do. They do what they feel
Speaker 5: they have to do.
Speaker 1: What they're forced to do by the central banks, which
Speaker 1: gives them. A central bank is a level of responsibility.
Speaker 1: I'm not sure they always step up to.
Speaker 5: They may not sit down and say let's penalize the
Speaker 5: retiree and reward the speculator. But that is the impact
Speaker 5: of what they do. Maybe it's a byproduct of having
Speaker 5: a stimuli of monetary policy which with low interest rates
Speaker 5: and i availability of liquidity. But whether whether whether it's
Speaker 5: their intention or not, it is the effect.
Speaker 1: Well they don't do it unknowingly, that's for sure. So
Speaker 1: there are in that sense, there are many positives too,
Speaker 1: or return to a normal level of interest rates. And
Speaker 1: I know there is a view that we will see
Speaker 1: interest rates go back down to what younger people consider
Speaker 1: to be normal, back down to in a very low levels,
Speaker 1: as inflation falls back to two percent. That my view,
Speaker 1: nice suspect yours as well, is it they will stay
Speaker 1: at much more normal rates in the medium to long term.
Speaker 4: Yes.
Speaker 5: In the memo and in the podcast, I take the
Speaker 5: position that the rate for the next decades, shall we say,
Speaker 5: is on the FED funds rate, which is always the
Speaker 5: lowest rate there is because it is the rate that
Speaker 5: banks pay each other or paid on bank deposits at
Speaker 5: the FED, that the rate will be between two and four,
Speaker 5: not between zero and two.
Speaker 4: I don't believe in forecasts.
Speaker 5: I especially don't believe in my own forecast, but you
Speaker 5: have to believe something, and you know, I don't think
Speaker 5: it's heroic to cite such broad ranges, but I think
Speaker 5: I think that's true, and I think it's indicative it's
Speaker 5: going to be a different climate.
Speaker 4: It recalls for different actions.
Speaker 1: And it's fair to say, without making forecasts that historically
Speaker 1: it's incredibly unusual for inflation to get to the level
Speaker 1: it did and for then to fall back to two
Speaker 1: per cent and remain there. That would be if we're
Speaker 1: talking about history rhyming, that would be history, not rhyming.
Speaker 5: Asshle right, right, yeah, I mean, look, we haven't had
Speaker 5: high interest at high inflation much of the time since
Speaker 5: nineteen eighty and we got up to nine and a
Speaker 5: half in the US, and now as you say, it's
Speaker 5: around three or three and a half, and most people
Speaker 5: are confident it's going.
Speaker 4: To be two.
Speaker 5: You know, the FED has adopted restrictive monetary policy to
Speaker 5: cool off the inflation. Doesn't want the economy to overheat
Speaker 5: and be inflationary, so they rose in They raised interest
Speaker 5: rates and embarked on quantitative tightening, taking liquidity out of
Speaker 5: the system by selling bonds into the economy or merely
Speaker 5: letting them mature, both of which use up liquidity like
Speaker 5: a sponge. And so all the optimists who've been raising
Speaker 5: the stock market for the last fourteen months say, oh,
Speaker 5: you know what, inflation will soften. That means the Fed
Speaker 5: will not have to raise rates anymore, be able to
Speaker 5: start loving them. That means that it's not going to
Speaker 5: cause a recession. And I think you would say, they're
Speaker 5: and Bobs your uncle or Robert's your mother's brother.
Speaker 1: I would say, that's exactly what i'd say. But listen,
Speaker 1: there will be a lot of positive effects here, right.
Speaker 1: And one of the things that has been irritating for everybody,
Speaker 1: anyone with a vague valued value slant anyway, over the
Speaker 1: last decade has been watching companies expand into areas, for example,
Speaker 1: that they're not expert in, moving away from their core business,
Speaker 1: getting what you might get a little flatty, and with
Speaker 1: interest rates coming back to normal levels, in capital not
Speaker 1: being so cheap and available, you might expect to see
Speaker 1: companies behave in a more productive and a more efficient way.
Speaker 1: And perhaps you know John who is often this podcast
Speaker 1: with me, we were talking about this earlier, seeing various
Speaker 1: companies beginning to go through layoff programs, which of course
Speaker 1: is unpleasant in some ways but necessary in other ways,
Speaker 1: and pulling back from businesses that aren't their core area.
Speaker 1: And this would seem to be long term a good thing,
Speaker 1: in particular for productivity.
Speaker 4: No, I think that's right.
Speaker 5: The company should should stick to what they're good at
Speaker 5: rather than expand into new areas, and they should take
Speaker 5: prudent financial actions rather than risky And the only thing
Speaker 5: that ever makes them do that is fear of complications.
Speaker 5: You know, I said in one memo back in I
Speaker 5: Think twenty twenty that fear of bankruptcy is to capitalism
Speaker 5: as a fear of hell is to Catholicism. It is
Speaker 5: fear of bad outcomes that keeps participants in the economy
Speaker 5: and the markets on the straight and arrow. And when
Speaker 5: people believe that the interest rates will always be low
Speaker 5: and the central bank will always bail them out if necessary,
Speaker 5: that permits or encourages risky behavior, which is not good
Speaker 5: for society. And when risky behavior is well, when behavior
Speaker 5: is too risk too risky for too long, then you
Speaker 5: get a bubble. And when you get a bubble for
Speaker 5: too long, then you get a bus And a crisis.
Speaker 5: So you know, these are the extreme behaviors that produced
Speaker 5: extreme outcomes. And everybody likes a good bubble because most
Speaker 5: people make a lot of money, but nobody likes a
Speaker 5: bust and a crisis.
Speaker 1: Yeah, that brings us very very neatly to private equity.
Speaker 1: And one of the things that you say in one
Speaker 1: of your notes, I would venture that nearly one hundred
Speaker 1: percent of capital for private equity investing has been put
Speaker 1: to work since interest rates began their downward move in
Speaker 1: nineteen eighty. Now, back to what people have been telling
Speaker 1: us over the last couple of decades has been driving
Speaker 1: their success, and private equity is the obvious example here
Speaker 1: of a group of people who constantly tell us that
Speaker 1: their success is based on skill, on being able to
Speaker 1: take companies, improve them, make things better, and sell them
Speaker 1: on because they are fundamentally worth more. And as time
Speaker 1: goes past, it's increasingly obvious to those who hadn't grasped
Speaker 1: it previously that a lot of that success is based
Speaker 1: on the manipulation of debt as opposed to manipulation of
Speaker 1: cheap debt in particular, as opposed to on this special
Speaker 1: special management skill. So what happens to that now absolutely
Speaker 1: huge sector in this sea change.
Speaker 5: You talked, and I think in the in the second question,
Speaker 5: you talked about a tailwind benefit that has been behind
Speaker 5: the investors for the last forty years. And that tailwind,
Speaker 5: of course is the decline of interest rates and the
Speaker 5: low interest rates. And I thought you were going to say, Howard,
Speaker 5: what is that tailwind?
Speaker 4: You know?
Speaker 5: Oh yeah, I think you said, I use an analogy
Speaker 5: of metaphor whatevery English teacher would say is the right word.
Speaker 5: And that metaphor, of course, was the moving walkway at
Speaker 5: the areas. Yes, and I believe that the low and
Speaker 5: declining interest rates given investors, especially but especially private equity
Speaker 5: investors the tailwind of being on a moving walkway. And
Speaker 5: you go to the airport and you stand on the
Speaker 5: moving walkway, you do okay, But if you walk at
Speaker 5: a normal speed on the moving walkway, you make very
Speaker 5: quick progress and you say, boy, I'm really I'm really
Speaker 5: fit and in the same way, and if the listener
Speaker 5: wants to understand what I'm talking about with the impact
Speaker 5: of low interest rates, try that. So you're in your office,
Speaker 5: you're a private equity mogul, and you find a company
Speaker 5: and you say, I think if I buy this company
Speaker 5: for X dollars, i'll make ten percent a year. And
Speaker 5: you're interested in doing that. You consult your investment banker
Speaker 5: and she says, I can get you the money at
Speaker 5: eight percent a year, and you say, oh great, I
Speaker 5: can borrow at eight and invest at ten and make
Speaker 5: two for nothing, and then of course you can add
Speaker 5: the value to the company you make even more.
Speaker 4: So I do it.
Speaker 5: But then the central Bank takes down the interest rate. Now,
Speaker 5: reducing the interest rate makes a company more valuable because
Speaker 5: a company that produces a game and stream of cash flows,
Speaker 5: which in this case was postulated to be ten percent,
Speaker 5: those cash flows become more valuable. People see interest rates
Speaker 5: that four or two was zero, say man, I'd like
Speaker 5: to have something that cash flows at that rate every year.
Speaker 5: So the value of that company goes up, and rather
Speaker 5: than make ten percent a year, you make twelve because
Speaker 5: the asset appreciates. And then the borrowed money which you
Speaker 5: thought was going to cost you eight, only cost you six.
Speaker 5: So rather than borrow at eight and invested ten, you
Speaker 5: end up borrowing six and invest at twelve. And you say, boy,
Speaker 5: I'm smart, but wasn't it really the movie Warkway. So,
Speaker 5: as I said and you quoted, the private equity industry
Speaker 5: really was invented in the eighties. And as I mentioned,
Speaker 5: rates have come down from twenty to zero over the
Speaker 5: ensuing forty years. And I just described the benefit the
Speaker 5: impact of low interest rates. So that means that the
Speaker 5: private equity industry really has only existed in this period
Speaker 5: of declining or cultural low interest rates. People may think
Speaker 5: that it was their genius that made them fortunes in
Speaker 5: private equity, but maybe it was the moving walkway of rates.
Speaker 1: And if they're moving walkway jetters to a sudden halt,
Speaker 1: perhaps they all fall over.
Speaker 5: Yes, well, there you are to be completely accurate with
Speaker 5: regard to private equity. There are four ways to make
Speaker 5: money as a private equity investor. Buy companies at bargain prices,
Speaker 5: lever up your purchases with low cost borrowed money, add
Speaker 5: value to the company by improving its operations or its management,
Speaker 5: and then sell the company at a higher valuation in
Speaker 5: the end.
Speaker 4: Four way.
Speaker 5: But if interest rates are lining, you don't have to
Speaker 5: buy bargains. You can pay full prices because tomorrow they'll
Speaker 5: be higher. You don't have to add value because the
Speaker 5: return from just the levered purchase will be good enough.
Speaker 5: So if all you have to do is buy, borrow, sell,
Speaker 5: and you can serve on the market trends. To do
Speaker 5: those things, you don't have to make genius decisions.
Speaker 1: Do you think that the boom in ESG is also
Speaker 1: somehow a function of low interest rates?
Speaker 4: I never thought of it.
Speaker 1: Yes, well, and that it gives again, the abundance of
Speaker 1: easy money and cheap capital gives people the luxury to
Speaker 1: focus on things that might not previously been part of
Speaker 1: their core.
Speaker 5: Well, that's one way to say it. Another way to
Speaker 5: say it, Marin, might be that the tailwind of declining
Speaker 5: its just rates makes it tends to make investing successful.
Speaker 5: So people can invest in the ESG, put an over
Speaker 5: emphasis on ESG and do very well financialie and think
Speaker 5: that the two are linked.
Speaker 2: So we may see something of a sea change there
Speaker 2: as well.
Speaker 5: Now, well, again, I'd have to take it through, but
Speaker 5: it certainly seems possible.
Speaker 1: Can we go back to the pandemic? I'd rather not
Speaker 1: one of my Okay, not in that sense. But you
Speaker 1: had a nice time with your son Andrew in the pandemic, right,
Speaker 1: and you wrote a really lovely memo about your conversations
Speaker 1: with him, which I enjoyed enormously, And I enjoyed it
Speaker 1: in particular because I'd actually written a column at some
Speaker 1: point long ago about value and growth and saying that
Speaker 1: really we shouldn't divide them up because there is only
Speaker 1: value investing, because nobody buys something if they think it
Speaker 1: doesn't give them value. We just disagree about what represent value, right,
Speaker 1: And I think that was roughly the point that you
Speaker 1: were making. We're all looking to discount future cash flows.
Speaker 1: We just have different ideas about how far out they
Speaker 1: should be and where they come from, etc. So they're
Speaker 1: kind of the same thing. But in that one of
Speaker 1: the things that interesting was the value softening slightly towards
Speaker 1: cryptocurrency's bitco am, very high growth tech, etc. Has that
Speaker 1: stayed with you, that softening towards crypto.
Speaker 5: Well, again, Maren, kind of what I said about business
Speaker 5: the business environment. I'm not positive. I'm only not so negative,
Speaker 5: as Maren says. My son Andrew, who's a venture capitalist
Speaker 5: and his family moved in with us during the pandemic,
Speaker 5: and we spend a lot of time together, and of
Speaker 5: course that resulted in investment. Should we say discussions or
Speaker 5: should we say, arguments, and he's a very good thinker,
Speaker 5: and he said that this dichotomy between value and growth
Speaker 5: is a false one. Everybody wants to growth and everybody
Speaker 5: wants value, but the question is where you think it
Speaker 5: comes from.
Speaker 4: One way to make money is to buy a company.
Speaker 5: Today which is actually worth more than everybody thinks and
Speaker 5: take advantage of that discount, and that has been come
Speaker 5: to be described as value investing, take advantage of momentary underpricings.
Speaker 5: And another way to get value, as you say, Meren,
Speaker 5: is to buy a company today whose earnings will be
Speaker 5: ten times higher in thirty years, and that pursuit has
Speaker 5: come to be called growth investing, investing based on a
Speaker 5: high rate of earnings or cash flow growth.
Speaker 4: In the future.
Speaker 5: The formal investing world did adopt that dichotomy, and Andrew
Speaker 5: argued that it's a false one. And by the way,
Speaker 5: it is true that one of the worst things you
Speaker 5: can do in some way is to say we do this,
Speaker 5: then we don't do that, because the investment world is
Speaker 5: very fluid and the investor should be somewhat fluid. And
Speaker 5: I argue to this day. We had this discussion two
Speaker 5: weeks ago that there are people. Not everybody can do everything,
Speaker 5: and not everybody is equally good at doing everything. So
Speaker 5: there are some people who are very good at ferreting
Speaker 5: out under current underpricings, and there are some people who
Speaker 5: are better than others. I don't know if anybody's really
Speaker 5: good at it, but there are some people who are
Speaker 5: better than others at knowing or sensing what high tech
Speaker 5: companies will look like thirty years from now. So some
Speaker 5: investment situations derive much of their value from their current
Speaker 5: assets and cash flows, and some derive more of their
Speaker 5: value from a high rate of growth in cash flows
Speaker 5: and earnings over the long term. And so obviously the
Speaker 5: people who are good at the ladder should do that,
Speaker 5: and the people who are bad at it.
Speaker 4: Shouldn't do it.
Speaker 5: You know, ironically, one of the I know you wanted
Speaker 5: me to talk about crypto.
Speaker 1: But I just not picking it up.
Speaker 5: You got away, you know, ironically, I was going to
Speaker 5: say the greatest bubbles we see with the greatest consequent
Speaker 5: losses when people overstate the far distant increase in cash flows.
Speaker 5: We had the tech bubble in two thousand and we
Speaker 5: had the we had the bubble in the nifty to fifty,
Speaker 5: which I also was privileged to live through in nineteen
Speaker 5: sixty nine or seventy three, depending on when you want
Speaker 5: it need it. So every once in a while people say, well,
Speaker 5: you know, I've changed my mind. Trees will grow to
Speaker 5: the sky, and I'd like to buy one today as
Speaker 5: a saplink. And usually it turns out that trees don't
Speaker 5: grow to the sky, and doing so called what they
Speaker 5: call growth investing turns out to be a mistake.
Speaker 4: So Bitcoin, well, you know.
Speaker 5: Andrew who was more neutral or positive actually to bitcoin
Speaker 5: in twenty twenty, and by the way, it did great.
Speaker 5: I can't say it didn't. He bordered I think the
Speaker 5: four thousand in March or twenty and it went to
Speaker 5: seventy thousand dollars.
Speaker 4: That's pretty good, and even.
Speaker 5: Today, after being wrung out, it's still forty three thousand.
Speaker 5: But you know, he convinced me with success that I
Speaker 5: shouldn't appint on things I don't know.
Speaker 4: Anything about it.
Speaker 5: And when I came out extremely negative on bitcoin, it
Speaker 5: was twenty seventeen. I really didn't know anything about it,
Speaker 5: and he said that you've done very well in your
Speaker 5: career coming out against files that have no substance, and
Speaker 5: so one develops a knee jerk reaction and says, oh,
Speaker 5: there's one I'll come out negative against that one. Well,
Speaker 5: you should do it without investigating thoroughly. That was his point.
Speaker 5: But my point is that, Maren, there are two kinds
Speaker 5: of investments in the world, broadly speaking, not growth and value.
Speaker 4: There are two kinds.
Speaker 5: The ones that have intrinsic value that you can calculate
Speaker 5: and buy on the basis of a discount from intrinsic value,
Speaker 5: and the ones that don't have intrinsic value. They can
Speaker 5: be calculated. So what has intrinsic value? Stocks, bonds, companies,
Speaker 5: buildings all have intrinsic value. And you can look at
Speaker 5: a piece of land for farmland, and you can say, well,
Speaker 5: that acre will produce you know, ten thousand in cash
Speaker 5: flows in the next year in terms of its crops,
Speaker 5: and it's worth fifty thousand. That's the intrinsic value. That's
Speaker 5: a great thing to be able to invest on that basis,
Speaker 5: and that's basically what I do. But you know, there
Speaker 5: are things that don't have intrinsic value, mainly because they
Speaker 5: don't have catflows.
Speaker 4: And what are those things? Gold?
Speaker 5: Diamonds, art, furs, oil. People say, well, oil is going
Speaker 5: to go up, oil is going to go down. What
Speaker 5: is the intrinsic value of a barrel of oil? The
Speaker 5: answer is you can't calculate it because it doesn't have
Speaker 5: a cash low. And then, of course the other thing
Speaker 5: that has no cash flow and can be calculated as
Speaker 5: an intrinsic value is bitcoin. Well, crypto, it has no
Speaker 5: intrinsic value. It's only worth what people will pay for it.
Speaker 5: And you know, if you buy it and you put
Speaker 5: it in the drawer at the end of ten years,
Speaker 5: it'll still be sitting there, but it won't have attracted
Speaker 5: any cash flows, any dividends, any dividends, or interest. So
Speaker 5: making money in cryptocurrency is only a matter of appreciation
Speaker 5: in price. But appreciation in price cannot reasonably be predicted
Speaker 5: for ATHLETs that don't have cash lows. That's the bottom
Speaker 5: for me, that's the bottom line. So you can invest
Speaker 5: in crypto because fun or kind of. I wrote a
Speaker 5: memo about gold twelve years ago called all the Glitters
Speaker 5: You can invest in gold kind of out of superstition,
Speaker 5: and people who have been doing that.
Speaker 2: How don't you take gold over crypto? Well, crypto over gold.
Speaker 2: If you had to no, no, Well I had to
Speaker 2: choose one, which would it be?
Speaker 4: I mean, I mean, look, I think you know.
Speaker 5: I mean if I say I would I tend to
Speaker 5: say yes, but Andrew would kill me because they both
Speaker 5: have limited supply. You know, the amount of gold you
Speaker 5: can get out of the ground is limited, and the
Speaker 5: amount of bitcoin you can mine is limited because by
Speaker 5: the by the algorithm to a certain number of coins.
Speaker 5: I think it's twenty one million.
Speaker 4: You know.
Speaker 5: Gold is a little more tried and true, but it
Speaker 5: also lacks any kind of analytical rais on debt trick.
Speaker 1: Yeah, yeah, I'm gonna put I'm gonna put.
Speaker 2: I'm going to put you down for gold. I'm going
Speaker 2: to put down for gold.
Speaker 1: And then everyone will get irritated with us if we
Speaker 1: talk about this for too long. So can I move
Speaker 1: on to asking you then about at the very end
Speaker 1: of your last memo, you say, if you agree with me,
Speaker 1: which of course we do.
Speaker 2: We have a host of solutions to propose.
Speaker 1: So if our listeners, ordinary retail investors out there right
Speaker 1: now looking at their portfolios, going, I've listened to what
Speaker 1: Marion Howard are saying, I'm a little nervy what am
Speaker 1: I going to do with my money? And one of
Speaker 1: the things that you've said recently, and I know you
Speaker 1: didn't mean it to people to actually go out and
Speaker 1: do it, was do you know, sell everything by bonds?
Speaker 1: What would you tell the ordinary person to do?
Speaker 4: Now?
Speaker 5: Look, the upshot of the whole thing is that when
Speaker 5: interest rates were zero, things that pay interest were not rewarding.
Speaker 5: And now the interest rates are a few hundred basis points,
Speaker 5: which we meet a few percentage points higher. The returns
Speaker 5: are substantial. And whatever you had in what we call
Speaker 5: fixed income bonds, notes, loans, however, you fixed income credit,
Speaker 5: whatever words you want to use, whatever you had four
Speaker 5: years ago, you should have more now than it was puny.
Speaker 5: Now it's substantial two years ago. HIO bonds, which is
Speaker 5: one of you know, that's what I started cut my
Speaker 5: teeth on in nineteen seventy eight. I started City banks
Speaker 5: Hio bond department. Two years ago, HIO bonds paid four percent,
Speaker 5: not very attractive, especially given some of the companies are
Speaker 5: quite risky. Today they pay eight percent. Well, if you
Speaker 5: if you had any at four, you should.
Speaker 4: Have more at eight.
Speaker 5: If you didn't have any at four if you'd have
Speaker 5: some at eight. So there's an example. Fixed income securities
Speaker 5: offer substantial yields today, and the return or yield on
Speaker 5: a fixed income security is virtually by definition, safer than
Speaker 5: it is on an equity instrument a stock, and so
Speaker 5: people should own some today today. You can get a
Speaker 5: very suitable return with decent safety by going into, for example,
Speaker 5: a HIO bond fund.
Speaker 1: How it thank you very much, incredibly kind of you
Speaker 1: to view with us today.
Speaker 4: Well, it's a pleasure, will always marit.
Speaker 2: Thank you, John.
Speaker 1: You listened to that interview, right, You listened to me
Speaker 1: talking about talking to Howard. We had a great chat.
Speaker 1: I really liked talking to Howard. What did you think?
Speaker 3: Oh it was great. He's up there with Jimmy Grantham
Speaker 3: on my fanboy list. It's kind of like what I think,
Speaker 3: you know, I mean, you know, we get piles and
Speaker 3: piles and piles and stuff to read, and his memos
Speaker 3: are basically among like maybe like five people's things that
Speaker 3: I make sure I just read them every single time
Speaker 3: they come in. And you know, and you know, part
Speaker 3: of that's core information bias, because it's nice to hear
Speaker 3: someone who's acknowledged as a highly successful, intelligent investor basically
Speaker 3: saying what you would like to say about interest rates
Speaker 3: and things like that. But you know, it makes a
Speaker 3: lot of sense. And it's also the fact that he
Speaker 3: he is obviously an older kind of guy. He's been around,
Speaker 3: he started his career kind of like at the same
Speaker 3: time as people like Bill Gross and all the rest
Speaker 3: of it. So they've seen this long, long bull market
Speaker 3: and bonds and interest rates, and they're aware that a
Speaker 3: big things do sometimes change. And he's not somebody that
Speaker 3: makes a lot of predictions at all. I mean, that
Speaker 3: whole sea change thing he was talking about is quite
Speaker 3: an unusual thing for him to just turn them to say, actually,
Speaker 3: I specifically think that this is going to happen, and
Speaker 3: that this is not going to happen. So I think
Speaker 3: that's also another reason it's worth listening to.
Speaker 1: Yeah, I wish his members religiously as well. And we
Speaker 1: talked about that one that he did with his son Andrew,
Speaker 1: and that was it was fascinating because well, a lot
Speaker 1: of if you go back and read it, you know,
Speaker 1: a lot of it turned out exactly as these things
Speaker 1: normally do. You know a lot of the things that
Speaker 1: Andrew was saying, turned out we bubbly things to say,
Speaker 1: no price at which he might sell, thiss all that,
Speaker 1: et cetera. But what they showed was the open mindedness
Speaker 1: of long term successful investors such as Howard Marks. So
Speaker 1: instead of instead of just saying, well, this is the
Speaker 1: way I just love, this is the way I've always
Speaker 1: done stuff, and I dismissed anything else, He's ope, I
Speaker 1: suppose you have to be open minded if your son
Speaker 1: comes and lived with you for a couple of months
Speaker 1: in a point, I mean closed minded, dread that's really
Speaker 1: going to make dinner and pleasant. But I like the
Speaker 1: way he had these very open conversations with his with
Speaker 1: his son, and the very different styles of investing, and
Speaker 1: how his.
Speaker 2: So thought process evolved as a result.
Speaker 1: You know, he talked about bitcoin having no intrinsic value,
Speaker 1: for example, but he at the same time wasn't actually
Speaker 1: down on bitcoin.
Speaker 3: No, he wasn't. And I mean, I think I feel
Speaker 3: slightly more or less was it. I don't I'd basic
Speaker 3: agree with my take his point. I'd I'm still more
Speaker 3: inclined to gold than baitcoin. But I do see that
Speaker 3: coin has got, you know, our kind of purpose and
Speaker 3: a kind of some sort of value. I just don't
Speaker 3: know how you would go about thinking about that. And
Speaker 3: the difference is that calls it a long term track record,
Speaker 3: so you can actually have some idea whether or not
Speaker 3: it's expensive relative to at least to its own history.
Speaker 1: I do think I eventually believe him into choosing gold.
Speaker 1: Do you think I got there in the end? I
Speaker 1: think I compt him Nanna's gold of a bitcoin, you think.
Speaker 3: Well, I think so, I think. But by the way,
Speaker 3: that that was interesting in itself. I mean, that's that
Speaker 3: thing like pal Charlie Morris, I think would be very
Speaker 3: very pleased to hear, you know, heard Mark saying that
Speaker 3: basically golden bitcoin are kind of sort that almost the
Speaker 3: same thing. It's just that one's kind of old school
Speaker 3: and one's one's newer. Still struggles slightly with that idea.
Speaker 3: But I mean, the other thing I would say, obviously
Speaker 3: is that you know, it's like a bond market, especially
Speaker 3: so at the end of the day, you know, I'm
Speaker 3: sure he kind of takes a curious interest in something
Speaker 3: like gold or something like baitcoin, probably thinks they're both
Speaker 3: basically novelty acts. You know, he has not as a
Speaker 3: boind guy he is, and the you know cash floors,
Speaker 3: you know credit worthiness, you know, all of those kind
Speaker 3: of kind of good things, and I don't know even
Speaker 3: when it kill me, Equity he wasn't. You was kind
Speaker 3: of like, well that's not that's not really yeah.
Speaker 1: Yeah, trying trying to get him to say by UK
Speaker 1: Equity can quite get him over the line. Thanks for
Speaker 1: listening to this week's Marin Talks Money. We will be
Speaker 1: back next week.
Speaker 2: In the meantime.
Speaker 1: If you like our show, rate review and subscribe wherever
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Speaker 1: your friends. Thanks to all of those who've been commenting
Speaker 1: and emailing John ideas for shows, we are taking note,
Speaker 1: and we'll have a show email live scenes so you
Speaker 1: can email the team directly with your suggestions and of
Speaker 1: course your complaints. There'll be a special hate mail section.
Speaker 1: This episode was hosted by me Maren sumerset Web. It
Speaker 1: was produced by Some Society, additional editing by Blake Maples.
Speaker 1: Special thanks to Howard Marx and John Stuff. Be sure
Speaker 1: to sign up for John's daily newsletter, Money Distilled. The
Speaker 1: link is in the show notes, so we'll also put
Speaker 1: in the show notes by the way a link to
Speaker 1: Oakcree's website so you can go and read how its
Speaker 1: nurch directly