We already posted Howard Marks’ most recent letter in its entirety previously, but it bears reposting a section from Art Cashin’s daily letter which focuses on one segment of Marks’ thoughts, which is especially relevant in light of today’s most recent comment from one Warren Buffett – a person who very directly benefited from the government/Fed’s bailout of the banking sector in 2008 – who said that “Bank Risk No Longer Threatens U.S. Economy.” The same banks, incidentally, who are TBerTFer than ever. An objective assessment or merely yet another example of the “handcuff volunteerism” (not to mention crony hubris) Marks touches on? Readers can decide on their own.
From Art Cashin:
Wisdom From A Sage — Howard Marks of Oaktree has another in his long and consistent series of wonderful client letters. This one has to do with things like risk, risk control and herd mentality.
Here is a key piece of his essay:
Arguably the eight pages of this memo leading up to this point are there for the sole purpose of establishing that when investors are sanguine risk is high, and when investors are afraid risk is low. Today there’s no question about it: investors are highly aware of the uncertainties attaching to the sluggish recovery, fiscal imbalance and political dysfunction in the U.S.; the same or worse in Europe; lack of growth in Japan; slowdown in China; resulting problems in the emerging markets; and geopolitical tensions. If the global crisis was largely the product of obliviousness to risk — as I’m sure it was — it’s reassuring that there is little risk obliviousness today.
Sober attitudes on the part of investors should be a source of comfort, since in normal times we would expect them to bring down asset prices to the point where they’re attractive. The problem, however, is that while few people are thinking bullish today, many are acting bullish. Their pro-risk behavior is having its normal dangerous impact on the markets, even in the absence of pro-risk thinking. I’ve become increasingly conscious of this inconsistency in recent months, and I think it is the most important issue that today’s investors have to confront.
What’s the reason for this seeming inconsistency between thoughts and actions? The answer is simple. These people aren’t buying because they want to, but because the feel they have to. In the past I’ve referred to them as “handcuff volunteers.”
The normal response of investors to uncertain times is to say, “Because of the risks that are present, I’m going to shy away from risky investments and stick with a very safe portfolio.” Such views would tend to depress prices of risky assets. But, thanks to the actions of the world’s central banks to keep rates near zero, that very safe portfolio — especially in the credit markets — will produce little if any return today.
Many investors have sought the safety of money market and T-bill funds yielding zero, Treasury notes at +/- 1%, and high grade bonds at 3%. But some can’t or won’t. The retiree living on his savings may not be able to abide the 90% reduction in short Treasury note returns. I imagine him picking up the phone, calling the 800 number and telling his mutual fund company “get me out of that fund yielding zero and get me into one yielding 6%. I have to replace the income I used to get from intermediate Treasurys.” And thus he becomes a high yield bond investor…whether consciously or not.
A similar process can affect a pension fund or endowment that needs a return of 7-8% and doesn’t want to bet its future on the ultra-low yields on high grade bonds and Treasurys, or the 6% that the institutional consensus expects stocks to return (especially given how badly stocks performed in 2000-02 and 2008 and their overall lack of gains since 1999).
This is the new universe that the Fed and, in fact, central banks around the world have brought us to.
Anyway, try to read the whole piece. As usual, it is structured on logic and filled with wisdom. No wonder that Warrant [sic] Buffett once said he reads anything written by Howard Marks.