Howard Marks: “This is a Time for Caution”

The latest from Howard Marks is jammed full of good insights and commentary, but I think this one is worth noting.  I am seeing this from an increasing number of credit specialists – there is near universal agreement that the credit market space is getting frothy (via Zero Hedge):

“The good news is that today’s investors are painfully aware of the many uncertainties. The bad news is that, regardless, they’re being forced by the low interest rates to bear substantial risk at returns tha thave been bid down.

Their scramble for return has brought elements of pre-crisis behavior very much back to life.Please note that my comments are directed more at fixed income securities than equities.  Fixed income is the subject of investors’ ardor today, since it’s there that investors are looking for the income they need. Equities are still being disrespected, and equity allocations reduced. Thus they are not being lifted by comparable income-driven buying.

In 2004, as cited above, I stated the following conclusion: “There are times for aggressiveness.I think this is a time for caution.” Here as 2013 begins, I have only one word to add: ditto.

The greatest of all investment adages states that “what the wise man does in the beginning, the fool does in the end.” The wise man invested aggressively in late 2008 and early 2009. I believe only the fool is doing so now. Today, in place of aggressiveness, the challenging search for return should incorporate goodly doses of risk control, caution, discipline and selectivity.”


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Boston Larry

    If high-yield bonds suddenly have more defaults and have a sell-off, then equities would also be impacted, especially financial stocks. Hence, it makes sense to lighten up on both junk bonds and financial stocks, agreed?

  • The Dork of Cork.

    The Irish news today is interesting.

    The government is beginning to sell its bank investments which are only worth money when a new flow is established.
    This is the signal that the government is about to print domestic currency (but not greenbacks)

    This printing (redenomination & devaluation) will favour bank assets as Riche Boucher (chief exec of BoI) recently said – they are only concerned with farming the cash flow or fiat, not the assets themselves which can remain a fiction as they are not a pawnbroking business.

    The new flow can then be subsequently privatized.

    Also a NTMA guy expressing frustration with the Bond markets on state television is nicely choreographed……
    Its difficult not to be too cynical when dealing with these guys.

    They are some piece of work.

    The really sad thing about it all is that they will get away with it.

    Anyway the gut feeling of this Dork …..the Irish zoo is coming out of the euro cage and going into another cage.

    In my humble non financial brain its a signal to stay away from Irish sov debt.
    The Bank of Ireland boys are about to eat all the Irish property pies.

  • Mr. Market

    This is another sign the rally in corporate bonds is about to end (with a bang/crash ???).

  • Geoff

    The agreement can’t be too universal considering that most bond funds are overweight credit. Watch what they do, not what they say :)

  • perpetual neophyte

    I would much prefer a more operationally-oriented explanation for the caution. For example, what mechanisms or catalysts will cause a significant decline in the value of credit holdings?

    What type of credit will be affected by those mechanisms or catalysts?

    How is “a significant decline” defined?

    I tend to think of high yield bonds as lower-beta equities. If stocks are shooting up, HY tends to rally but not as much. Likewise in the reverse direction. As Boston Larry alludes to, if you are seeing a significant rise in corporate defaults across the board, I don’t see how equities won’t also be affected.

    If interest rates are rising, that’s either because the Fed has recognized improving economic growth – which should be good for the HY corporate space – or because it’s trying to battle higher inflation.

    That doesn’t even touch on low-yield, high grade corporates, munis (again, high vs low yield?) or duration – short vs long.

    I can see arguments that some credit is less attractive because of duration risk or because spreads are tight, but I am not seeing a lot of detailed analysis on the probable risks that result in more loss than you would also be seeing in equities.