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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: We'll begin this hour with our top story, No news

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Speaker 2: is good news, stocks edging, KaiA as Sham, and Powertow's Congress.

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Speaker 2: He's expecting rate cuts this year, even as a strong

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Speaker 2: economy keeps the FED on hold for now oh trees.

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Speaker 2: Howard Mark's writing this in his latest MAMO. I find

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Speaker 2: it interesting that the current stock market rally began as

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Speaker 2: a result of optimism powered by consensus thinking that was

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Speaker 2: generally off target. Investors motivated by their belief that the

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Speaker 2: FED would pivot to dubbishness and start cutting rates in

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Speaker 2: twenty three.

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Speaker 3: That was wrong.

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Speaker 2: We'll get into consensus in just a moment. The legendary

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Speaker 2: Howard Marx joins to surround the table. Howard, good morning

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Speaker 2: to you. Good mine, fantastic MAMO. Really enjoyed the read

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Speaker 2: earlier this year, Easy Money. You reflect on the easier

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Speaker 2: times fueled by easy money, lunning investors into a false

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Speaker 2: sense of intellectual superiority. I want to know, and I

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Speaker 2: think Lisa wants to know too. Have we fully realized

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Speaker 2: the pain associated with some of the loans, some of

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Speaker 2: the things we did ten years ago.

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Speaker 4: No, clearly not it's early. The economy is still good.

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Speaker 4: That keeps shaky loans aloft.

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Speaker 3: The maturities.

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Speaker 4: You know, any company that was not asleep at the

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Speaker 4: switch pushed off its debt maturities in twenty twenty one

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Speaker 4: twenty two, when rates were still close to zero, pushed

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Speaker 4: them off. So the maturities start for real in twenty five.

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Speaker 4: There are not substantial maturities this year. And you know

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Speaker 4: there are three ways you can default. You can breach

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Speaker 4: a covenant that specifies levels for your financial statements, you

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Speaker 4: can fail to make an interest payment, or you can

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Speaker 4: fail to meet a maturity. Well, the eager lenders let

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Speaker 4: companies exclude covenants in recent years, so you can't do that.

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Speaker 4: Interest rates mean that the coupons are low. Interest coupons

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Speaker 4: are low, so it's hard to miss one of those.

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Speaker 4: And in a positive climate, you can borrow.

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Speaker 3: To make your interest payments.

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Speaker 4: So we're really talking about maturities which have been pushed

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Speaker 4: off to next year. And if you get maturities spiking

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Speaker 4: in a weak economic period or week for certain groups,

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Speaker 4: that's when you get defaults.

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Speaker 3: They're still running low.

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Speaker 1: A lot of people have come on the show Howard

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Speaker 1: and said that this market is discerning. It's not necessarily

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Speaker 1: just buying everything with abandon It isn't exuberant, There isn't euphoria.

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Speaker 1: There's sort of a separation of those zombies or those

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Speaker 1: that are likely to default in twenty five, that can't

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Speaker 1: survive until twenty twenty five of those that can't. Do

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Speaker 1: you agree with that?

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Speaker 3: I generally do? You know?

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Speaker 4: This is not the crazy markets are few and far between.

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Speaker 4: When you get a real soaring bullmarkt, a bubble, or

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Speaker 4: a crash, those are when they stop being discerning. And

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Speaker 4: as we say, throw out the baby in the bath water.

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Speaker 4: Most of the time markets are sane, especially a market

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Speaker 4: like this which is being buffeted by good news and

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Speaker 4: bad news at the same time. So yeah, I think

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Speaker 4: we're in the middle ground. I've been saying for a

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Speaker 4: long time that we're in what I call the zone

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Speaker 4: of reasonableness. And I don't think there's anything much to.

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Speaker 1: Do zone of reasonableness, and I want to get into that.

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Speaker 1: There's not much to do but a zone of reasonableness.

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Speaker 1: For there's a strong consensus, and you pointed to and

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Speaker 1: John Ladwi this idea that consensus last year was completely wrong.

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Speaker 1: So this year you said there's a feeling that smacks

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Speaker 1: of goldilocks thinking, how do you work with that as

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Speaker 1: an investor?

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Speaker 4: Okay, I don't think the consensus is necessarily not wrong.

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Speaker 4: I just think that most people can improve upon it.

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Speaker 4: That's really the criterion. You know what I learned in school,

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Speaker 4: the efficient market ipocesis. Markets are efficient. That doesn't mean

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Speaker 4: they're right. That just means that most people can't improve

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Speaker 4: upon the market's consensus judgments.

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Speaker 3: So now tell me your question.

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Speaker 1: Well, I guess that I am wondering where are we

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Speaker 1: in the cycle and the credit cycle.

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Speaker 4: Well, following from Jonathan's question, you know, Buffett says it

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Speaker 4: best when the tide goes out, we find out who's

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Speaker 4: been swimming naked.

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Speaker 3: Nothing.

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Speaker 4: The tide hasn't gone out. We're still in generally salutary period.

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Speaker 4: Economy functioning well, earnings pretty good, interest rates coming down recently,

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Speaker 4: money available. So under those conditions you don't have a test.

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Speaker 4: The question is which companies and industries do okay when

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Speaker 4: conditions get tougher, can.

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Speaker 2: We work through some of the more quotes in this

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Speaker 2: Mammo as well, there's this great line and you've said

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Speaker 2: it's an old line, but I still love it. The

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Speaker 2: worst of loans made of the best of times. This

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Speaker 2: quote from you. I love Hieke's word malinvestment because of

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Speaker 2: the validity of the idea behind it. In low return times,

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Speaker 2: investments are made that shouldn't be made, Buildings are built

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Speaker 2: that shouldn't be built. Can we talk about buildings that

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Speaker 2: were built that shouldn't have been built? Is that an

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Speaker 2: error of focus for you at the moment as you

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Speaker 2: think about prospective weakness down the road.

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Speaker 4: Well, I think that commercial real estate office buildings in

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Speaker 4: big cities in particular are a focus area.

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Speaker 3: For investment people.

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Speaker 4: The post pandemic behavior of people not going to the

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Speaker 4: office so regularly calls the sector into question, as does

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Speaker 4: AI and the question.

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Speaker 3: Of how many employees.

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Speaker 4: You know you're going to have a Am I going

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Speaker 4: to be talking in five years to a machine over there?

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Speaker 3: I don't know. Maybe you are right now, there you go.

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Speaker 2: Maybe this is aim right now at Lisa top.

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Speaker 4: Of me as always, So, I mean, there are questions

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Speaker 4: about real estate. But on the other hand, most people

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Speaker 4: won't touch real estate with the ten football, and they

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Speaker 4: may be underestimating the intrinsic value. So that you know,

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Speaker 4: Jonathan It's important that everybody you understand. The question is

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Speaker 4: not is everything going great in a sector or is

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Speaker 4: it going terribly in a sector? The question is do

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Speaker 4: prices in that sector reflect the reality overestimated or underestimated.

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Speaker 4: I've made a living buying things that nobody else thought

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Speaker 4: was a good idea. But if you buy them cheap enough,

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Speaker 4: they become a good idea. And you know, if you

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Speaker 4: have the right real estate in the right place. If

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Speaker 4: if you're differentiating and other people haven't, yep, then that's

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Speaker 4: the time for bargain hunting.

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Speaker 2: See for the story and the price of the story.

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Speaker 2: Can I ask if you like the price of the story?

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Speaker 4: You know there's not a lot of price discovery going

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Speaker 4: on in the real estate industry. There are very few transactions.

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Speaker 4: So when you say do I like the price of

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Speaker 4: the story, I don't see a lot of prices in order?

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Speaker 4: You know, I see all the people say, oh, worth anything?

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Speaker 3: But where will they trade it? Will?

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Speaker 4: If you know, if if the quoted price for a

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Speaker 4: New York office building is down fifty percent, let's say,

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Speaker 4: will any sense sell there?

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Speaker 3: Will all the buyers buy there?

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Speaker 4: If a lot of people are willing to buy and

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Speaker 4: nobody's willing to sell. That says to me, the real

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Speaker 4: price isn't down fifty, So we have to have price discovery, which.

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Speaker 1: It brings us to kind of the fact that the

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Speaker 1: tide hasn't gone out yet exactly, and that when the

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Speaker 1: tide goes out, then we're going to start to get

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Speaker 1: some real price discovery, because then there will be some

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Speaker 1: people left naked. You don't like to make rate projections.

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Speaker 1: You do have a model roughly in your head where

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Speaker 1: you say in the memo that you don't think that

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Speaker 1: rates are high, they're kind.

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Speaker 3: Of going high relative to my experience.

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Speaker 1: So if that's the case, you kind of game out

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Speaker 1: three to three and a half percent FED funds rate

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Speaker 1: over the next five to ten years. What then does

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Speaker 1: that mean for returns to smart generally? Does that mean

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Speaker 1: that they're better in credit and better in your world?

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Speaker 1: Or are they kind of worse because the overhang that

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Speaker 1: we've had of that easy money policies is going to

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Speaker 1: take a lot.

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Speaker 3: To work through. It's a complex question, but.

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Speaker 4: Those you know, we're at five or to five and

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Speaker 4: a half on the FED funds right now, that's uh

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Speaker 4: a measure determined to crimp the economy to uh uh

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Speaker 4: kill off the excess inflation. The target is two. We're

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Speaker 4: above two, cool off the economy until it moves toward

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Speaker 4: to By the way, in in f in t Pal's

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Speaker 4: remarks on Monday, he said we won't cut rates until

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Speaker 4: we see we're making progress towards two percent. I thought

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Speaker 4: that the we're toward was very important. He didn't say

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Speaker 4: until we're at two percent, So uh, I think that uh,

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Speaker 4: you know, if if in if inflation starts going you know,

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Speaker 4: uh three two in three quarters, two and a half,

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Speaker 4: maybe he'll start cutting. I don't know, but the the

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Speaker 4: the word two toward was important. The The only thing

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Speaker 4: I'm sure of is that if if interest rates are higher,

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Speaker 4: the people who invest in credit instruments, which is what

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Speaker 4: we do, UH, are buying in at higher yields, and

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Speaker 4: invariably we'll have higher returns than they have in the

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Speaker 4: recent past. So today's rates are not high historically, but

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Speaker 4: they're certainly higher than we had from nine through twenty one,

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Speaker 4: which means the returns on credit investing, fixed income investing,

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Speaker 4: bond investing, loan investing will be higher than those in

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Speaker 4: that period, which were you know, really poultry.

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Speaker 2: Always sypathol filam, think pretty. Howard marks