This weekend’s Barron’s cover story is about Howard Marks, the so-called guru to the investment stars. He believes that the bond bubble is only in the “fifth inning” and that the bursting of the bubble doesn’t necessarily have to end badly. Even so, stocks are still a better investment. I have highlighted some excerpts from the Barron’s article below:
One of his [Marks’] biggest fans is Warren Buffett, who encouraged him to gather his memos into a book, The Most Important Thing. Buffett’s blurb says it all: “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.”
Other admirers include Christopher Davis of Davis Funds, Seth Klarman of Baupost Group, and Joel Greenblatt of Gotham Capital — all of whom offer commentary throughout a new, annotated version of the book, The Most Important Thing Illuminated, published in January. Though they quibble with him at times, this trio of giants mostly marvel at Marks’ observations. “I love this thought,” Greenblatt exclaims in the middle of a chapter about contrarianism. “This is extremely simple and extremely insightful,” adds Davis. It’s almost as if Marks is their guru.
These days, Marks sees disquieting signs of another credit bubble, though it is just in “the fifth inning.” Central banks are pumping money into economies with abandon. And rates have descended to levels that hardly compensate investors for the risks incurred.The leveraged buyout market, too, is heating up again, with private-equity firms willing to pay price-to-cash-flow ratios at the elevated levels of 2006, if not the absurd ratios of 2007.
Debt issuance, particularly of high-yield bonds and leveraged loans, is soaring. Individuals and pension funds, though hardly complacent about risk after the trauma of the credit crisis, are, Marks says: “acting bullish, if not thinking bullish,” by piling into high-yield and other riskier debt sectors in a desperate attempt to fund retirements or satisfy minimum return needs.
Does it all spell a disaster in the making? Probably not, he avers. The much-feared eventual rise in interest rates, which doomsday forecasters say could crush bonds, would likely result from an improvement in the economy, he reasons. That alone would mitigate against a smash-up in, say, the junk-bond market, as defaults would remain at minimal levels.
Prospects are better for the stock market, even after its recent rally, than for bonds because the former “remains less loved,” says Marks. And Oaktree, despite its heavy concentration in debt markets, does have a clear interest in stocks: The company frequently ends up with large equity positions as a result of company restructurings.
“I can tell you from talking to institutions that, after 13 years of having their hearts broken by the stock market, they still are still leery of stocks even with the recent rally,” Marks says. “You can see that in their low stock allocations, compared with the period of 2000 and before. But imagine a couple of more years of good performance for stocks, which well could happen, and the love affair will really be rekindled.”