The Tim Ferriss Show - #431: Howard Marks on the US Dollar, Three Ways to Add Defense, and Good Questions

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Starting point is 00:05:56 Hello, boys and girls, ladies and germs. This is Tim Ferriss. And welcome to another episode of The Tim Ferriss Show, where it is my job to interview people who are world-class performers in their respective fields. And today, my guest is Howard Marks, at Howard Marks Book on Twitter. Howard is co-chairman and co-founder of Oak Tree Capital Management, a leading investment firm with more than $125 billion in assets under management. He is the author of the books Mastering the Market Cycle, subtitled Getting the Odds on Your Side, and the most important thing, subtitled Uncommon Sense for the Thoughtful Investor, both critically acclaimed bestsellers. Warren Buffett has written of Howard Marks, quote, when I see memos from Howard Marks in my mail, they're the first thing

Starting point is 00:06:39 I open and read. I always learn something. So he has some very bright minds who pay attention to his writing. And Howard has been on the podcast before. This is round two. And we dig into all sorts of subjects, including the US dollar as reserve currency, investing, how to add defense to investment strategy, three different ways to do that, and much, much more. So without further ado, please enjoy a wide ranging conversation with Howard Marks. Howard, welcome back to the show. Thank you very much, Tim. It's a pleasure to be here. It's nice to hear your voice again. And of all the people I could speak to on the show during these most exciting times and difficult times for many people, you were very much at the top of the list. And there are a lot of different topics and

Starting point is 00:07:32 a lot of different questions that I'd like to cover, but I thought we could start. I have a number of your memos in front of me, and there's one called You Bet. This is from January 13th, 2020. And I thought we could start with the story of arriving at First National City Bank in May of 68 and how that contrasted with what you then did in 1978. Would you mind telling that story for people listening? No, if you have some time. I do. I have all the time in the world. It'll take a while. Well, as you say, I arrived at Citibank for a summer job in the Investment Research Department in May of 1968,

Starting point is 00:08:19 between years of graduate school at the University of Chicago. And I was assigned to the investment research department. The bank and most of the money center banks at the time in their money management departments were adherents of what was called nifty-fifty investing. They invested in what they considered to be the 50 best and fastest growing companies in America. Extremely

Starting point is 00:08:52 high quality companies where nothing could go wrong. And you know, the idea of growth stock investing, investing in companies because their earnings grew rapidly, had been born in the early 1960s. And these companies epitomized that activity. activity, IBM, Xerox, Kodak, Polaroid, Merck, Lilly, Hewlett Packard, Perkin,

Starting point is 00:09:27 Homer, Texas Instruments, Avon, Coca-Cola, AIG, et cetera. And, you know, the basic idea was you hitch yourself to a company with a bright future and rapidly growing earnings. If you did so the day I got there in 1968, and if you held those stocks firmly for the next five years, you lost almost all your money in the best companies in America, because one thing had been overlooked in the process, which was price. And nobody talked about the fairness or attractiveness of the price. The belief was that these are companies which were so good that it didn't matter what you paid.

Starting point is 00:10:24 And if you paid a price that was a bit high, the earnings would grow so fast that kind of the stock would grow into the price. And so, of course, this was painful education. The stocks, generally speaking, fell from price-earnings ratios of perhaps 80, which even today would be practically unheard of, to 8 when the wheels came was the function of the flowering of rapid inflation, which was perplexing the country at that time. But for whatever reason, here you are.

Starting point is 00:11:16 You're investing in the best companies in America, and you lose 80% or 90% of your money. Now, fast forward, as you suggest, Tim, to 1978, in part because my meanderings with equities had worked out so badly as part of the machinery that ran this Nifty Fifty effort, I left the Investment Research Department. I always say I'm lucky I didn't get fired. My boss asked me to join the bond department, which was at that time a backwater of investing,

Starting point is 00:11:56 and start a fund that would invest in convertible bonds, which was something that very few people had ever heard of. I started to do that and I loved it. I went from being head of a department of 75 people with a $5 million budget and membership on all the bank's senior investment committees to working alone with no colleagues, no budget, no committees. I was ecstatic because rather than know two sentences on 400 companies, I could know everything about a few. So I loved money management, and I loved the fact that I was operating in an uncrowded area. And then in August of 1978, I got the call to change

Starting point is 00:12:42 my life. The head of the bond department called up and he said, there's a guy named Milken or something out in California and he deals with something called high-yield bonds. Do you think you could figure out what that is? Because a client had asked for a high-yield bond portfolio. So I researched high-yield bonds. I met with Mike Milken. I started Citibank's high-ield Bond Fund late in 1978. I believe that

Starting point is 00:13:08 was the first High Yield Bond Fund from a mainstream financial institution. That was the very beginning of the High Yield Bond world. One of the great lessons, of course, as Malcolm Gladwell makes clear in his book, Outliers, is that it's great to be first in line. And the timing accident of my being assigned to the bond department in 1978 put me at the beginning of the line in high-yield bonds. And high-yield bonds are the bonds of companies which are not rated investment grade. They're considered speculative grade by the rating agencies at the time they were

Starting point is 00:13:48 verboten by the vast majority of investors. And so I went from investing in what everybody loved to what everybody hated. From the best companies in America to the worst public companies in America, and now I'm making money safely and steadily in the worst companies in America because they were so cheap, because the interest rates they had to pay in order to secure financing as a disrespected group was excessive under the circumstances. So this was quite an epiphany, and it has really directed my whole career. And you've written in this particular memo,

Starting point is 00:14:44 success in gambling doesn't go to those who pick winners, but to those with the ability to identify superior propositions. The goal is to find situations where the odds are generous to one side or the other, whether favorite or underdog, in other words, a mispricing. And you explore this in the context of different types of games, some games of chance, some games that have different profiles, and you can categorize them. You have, let's just say, no hidden information, no luck, and skill, chess, no hidden information, luck and skill, backgammon, no hidden information, luck, no skill, roulette, hidden information, luck, skill, blackjack, and poker. And you have quite a history with many different types of games. And you, I think, are very good

Starting point is 00:15:32 at thinking about the future probabilistically, framing good questions. If you were to look at our current circumstances as a game, and perhaps compare it to 2008? What are the games that we're looking at? Well, it's a very interesting set of circumstances we find ourselves in because nobody knows anything about the future. There's, you know, in the fields that I'm involved in, economics and investing primarily,

Starting point is 00:16:06 there is no such thing as knowledge of the future. Because the future does not operate according to a fixed schedule or the laws of nature, like physics and so forth. All we have is extrapolation from past patterns, which help us in terms of our expectations for the future. The problem we have now is that there is no history for what we're engaged in. First of all, we have, I would say, the worst public health crisis to come to America in over 100 years, or certainly one of the worst.

Starting point is 00:16:49 The worst economy since the Great Depression, more than 80 years old. The worst collapse of oil in history. And the greatest rescue and stimulus program from the Fed and the Treasury in history. So we have four things going on which are unprecedented. And as a result, we really can't say what lies ahead in any of them. And it is further complicated by the fact that they all interact, and we can't know how they will interact and what that will produce.

Starting point is 00:17:36 So I would say that we are unusually ignorant with regard to the future today. And one of the things I said to one of my colleagues, Tim, is that we all have the same information about the present and we all have the same ignorance about the future. And today I think that ignorance is greater than at other times. So we have to use the outline you were posing, there's a lot of hidden information. We don't even know how many people really have it. We don't know how many people have died from it because there are unreported cases of infection

Starting point is 00:18:18 and there are deaths that took place that were not known to be the result of infection. So we have hidden information, and we have so much about the future that we don't know. You know, will the disease turn down? Will the effect of warm weather be a positive? When will an immunological test be developed and a vaccine? If we reopen business, will the cases strike up again and so forth? And to what extent? So we're really dealing with a lot of ignorance and a lot of uncertainty, and yet we have to take action in positioning our capital for the future when the future is unusually unpredictable.

Starting point is 00:19:19 And how were you currently thinking in bets, to use the title of the Annie Duke book that I know you are a fan of? Perhaps that's not the best way to address the question, really, but given the uncertainties, given the situation, how are you trying to navigate that, or what questions are you finding most helpful? Sure. Well, I think a lot of it goes back, Tim, to what you said about the memo you bet, is that it has to do with the quality of the proposition. I wrote a book, we talked about it a year and a half ago called Mastering the Market Cycle. I thought the subtitle of that book was unusually helpful. The subtitle is Getting the Odds on Your Side.

Starting point is 00:20:16 When you're dealing with the future, given the ignorance, you can never have certainty. There's nothing that's sure to work or sure to fail. You only have probabilities. But sometimes the probabilities are very favorable to the investor, and sometimes they are very unfavorable to the investor. And the whole thing about studying cycles is trying to figure out which is which. So let's talk about propositions, So let's talk about propositions. And let's talk about picking winners.

Starting point is 00:20:50 So you go to a horse race, and there's one horse that stands out among all the others. Great lineage, looks terrific, great recent record, and this horse is by far the favorite. And everybody concludes that this horse will win the race. Does that mean that you should bet on this horse? That's really the key question in investing.

Starting point is 00:21:30 And the answer is it depends on the odds. Because when one horse is an overwhelming favorite, you may have to bet $5 to win a dollar. He's so sure to win that nobody wants to bet against him. And if you want to join the hordes who want to bet on that horse, as I say, you may have to put up five bucks to get back six. There may be a long shot in that race that somebody can figure out, well, maybe that horse is going to have his day, and that horse may be a 10-to-1 shot or a 50-to-1 shot because we're so sure the favorite will win that this long shot is absolutely unpredicted to win. Nobody wants to bet on this horse, so if you will bet on this horse and you put up a dollar, you can get 50 if you're right.

Starting point is 00:22:16 So even though the horse is unlikely to win, it may be the better bet. Even though the favorite is overwhelmingly likely to win, it may be a bad bet. So it's not only what you think will happen, but it's also the payoffs. So let's take that through what we were just discussing. 1968, the Nifty Fifty companies were believed to be great companies with a bright future, and let's assume that their future success was assured, you still have to look at the proposition. And the answer is that it cost so much to bet on those companies that betting on what were believed to be good companies turned out to be bad bets.

Starting point is 00:23:02 1978, high-yield bonds. Now we're betting on what are believed to be bad companies, but because they're believed to be bad companies, the payoff is extremely generous. Not expected to be favorites, but highly remunerative if they pay off. So high-yield bond investing was very successful. Now you come into the present, and life gets tough.

Starting point is 00:23:32 But, you know, we have to make some judgments about the future, and you have to say how bad will it get now, how quickly will we go back to say, how bad will it get now? How quickly will we go back to work? What will be the experience when we go back to work? Will there be a rebound in cases? How quickly will the economy come back to life? What will GNT do in the second quarter of this year, which is roundly believed to be the worst recession quarter in history?

Starting point is 00:24:07 And how fast will we get back to the 2019 levels of economic activity and surpass them? When will we have a vaccine? There are dozens of questions and no answers. I've been quoting Mark Lipsitch, who's an epidemiologist at Harvard, who says that in studying the virus, there are facts, there are inferences based on analogies to other viruses, and there are opinions. And when we started off in this round, there were no facts. The highly skilled epidemiologists could make inferences, and the rest of us were left to just guess. But, you know, there's some consensus developing,

Starting point is 00:25:03 which is that the country will go back to work in the next few months. Clearly, no agreement on the pace. That there will likely be a rebound in new cases, but not as bad as the first. And that gradually the economy will recover, and it'll show much better 2021 than 2020. 2021 may or may not be back to the 2019 levels, but by 2022 we'll be back to or surpass the 2019 levels. And with vaccines and treatments, the coronavirus will be demoted to just another seasonal disease.

Starting point is 00:25:57 That's the consensus. And, of course, the consensus opinion is reflected in the bidding for stocks and in the prices of stocks and other securities. And that's where we are now. And so I would describe that as a fairly positive forward-looking case. And it's incorporated in the prices of stocks and the prices of stocks are surprisingly high some of them or if you look at the the averages which are dominated by you know the great companies like amazon and microsoft those averages like the s&p 500 are surprisingly high relative to where they were on februaryth, which was the all-time high.

Starting point is 00:26:45 And we're probably down low double digits of percent, 12%, 13%, 14%, depending on the date you air this. And so the way I've described it, I would say, not a bad outcome, not a bad future. Stocks have recovered very substantially from their lows. They're up 27%, I think, from their lows because the consensus has settled on this good news. Now let's talk for a minute, if I can go on, about proposition. The challenge today is that if the favorable unfolds and 2021 or 2022 are healthy economically versus 2019,

Starting point is 00:27:44 nobody thinks the stock market has that far to go on the upside. And if the negative case unfolds and everything I've said so promisingly fails to materialize or materializes less and later than hoped, there are pessimists who think that the market has far to fall. And it's hard to choose between the optimistic and the pessimistic case. So the odds for buying here, the S&P 500, for example, do not seem to me to be tilted heavily in the investor's favor.

Starting point is 00:28:26 Now, you have been thinking about uncertainty for a very, very long time. You, for instance, first read a book in 1963 titled Decisions Under Uncertainty, subtitled Drilling Decisions by Oil and Gas Operators by C. Jackson Grayson Jr. And you've proven an ability to act on a sort of spectrum of uncertainty over the subsequent decades. And I think the way that you phrase questions is part of that questions to yourself, questions among your team. And I just wanted to give an example of that. From your most recent memo, this is knowledge of the future. And it's a paragraph that's discussing the word limitless, which was used, I think, in quoting the Fed chairman or someone of that type. And here's the wording. Is the program really limitless, and is that okay? The stimulus, loans, bailouts, benefits, and bond buying that have been announced thus far

Starting point is 00:29:36 add up to several trillion dollars. What are the implications of the result in addition to the federal deficit in the Fed's balance sheet? Here's the part that I want to highlight highlight just because I think it's a useful framework for looking at a lot of these elements. Okay, so here we go. To be facetious, the government could send every American a check for $1 million at a cost of $330 trillion. Would there be any negative consequences from doing this, such as burgeoning inflation, a downgrade of US creditworthiness, or the dollar losing its status as the world's reserve currency? If the answer is yes, is there a point below 330 trillion at which those ramifications might kick in? And if so, where? Could we be there already?

Starting point is 00:30:17 I'd be very curious to hear how you've attempted to answer or think about any of those things that were mentioned in that paragraph. We could pick one, certainly, if it's helpful, such as the U.S. dollar, the status of the dollar as a reserve currency in these wildly unusual times. But how have you continued to think about those questions or attempt to tackle some of those unknowns? Well, this is the $64 question these days, Tim. I want to make it clear before I try to do so that I'm not saying the Fed is wrong to do what it's doing. The Fed is throwing everything in the kitchen sink at the problem, and the problem has to be solved. You know, back, if I go back to March, let's say, 18 or 19, I think it was,

Starting point is 00:31:13 you know, I was actively considering the possibility with my partner, Bruce Karsh, of a global depression comparable to the 1930s. And you recall that we had a decade with unemployment in excess of 14% in the U.S. and a total absence of growth and widespread suffering. And, you know, we were talking about the possibility of that as this economy contracted, imploded. So the Fed and the Treasury came along. They threw everything at it. They used all the lessons learned in the global financial crisis of 08-09. Things that were developed over the course of months at that time were implemented in weeks this time. And certainly, you know, I think it was the New York Times describing a Jay Powell statement

Starting point is 00:32:13 as saying that the resources thrown at the problem would be limitless. And I think that's the right thing because the alternative, you know, back in the 30s, they were judicious in trying to fight the Depression, almost austere. And as a result, a decade of suffering, a generation truly scarred. And, you know, arguably, we only got out of the Depression because of the arrival of World War II. We don't want to wait for that as a curative. So I say strongly that the Fed and Treasury were right in doing what they did. But the fact that there may be negative unintended consequence doesn't mean that they weren't right.

Starting point is 00:33:06 But, you know, again, we're battling problems we've never seen before with weapons we've never seen before. And we certainly can't say that they don't have negative potential unintended consequences. We don't know what they are. We would probably bear them nevertheless. But, for example, if the government floods, prints money, the normal reflex reaction is to say that if they print a lot of money, that causes the currency to be devalued. And that is a lockstep relationship that has always been considered. Now, in the last, you know, we've been running big deficits for a long time and extremely big deficits in recent years.

Starting point is 00:34:07 And yet, we don't have serious inflation, which is the normal sign of a currency being debased. If a currency is being debased and people think less of it, then if you want to buy a goat, you have to pay more dollars to get the goat or a car or a bar of gold or whatever or a bunch of bananas. And in recent years, we haven't had inflation, even though we've been running huge deficits, vastly increasing the national debt, and so forth.

Starting point is 00:34:46 So, you know, economics is not a mechanical process, which works according to a schematic in a dependable fashion. And all the printing of money that has taken place in recent years has not brought on inflation. Inflation is supposed to work in response to the unemployment rate. The less unemployment there is in the country, the higher the inflation is supposed to be because there's less slack in the economy and the workers, for example, can demand higher wages.

Starting point is 00:35:18 It hasn't happened. This is something called the Phillips curve and it's been touted for 60 years, and it just doesn't work. So we don't know. But, you know, that's why I use that extreme, and I said in the memo, facetious example. If the government sent everybody a check for a million dollars and it cost $330 trillion, would there be an effect on the value of the dollar, on inflation, et cetera? And you have to believe there would,

Starting point is 00:35:52 or I have to believe there would, but where does the negative effect cut in short of that, since we're not going to do that? But, you know, the government is probably spending on buying securities and pumping into the economy, you know, close to $10 trillion this year. Is that enough to cause an impact? And the answer is we don't know. But I would just say, you know, it's clear that we all have our biases

Starting point is 00:36:21 and we deal with our uncertainty with regard to the future implementing our biases it's very hard to get away from that and i worry i'm not a dreamer i'm not a pollyanna i'm not the person who says oh they'll find a solution i worry and so uh you know i worry that there will be some negative uh effects I can't predict or describe or quantify. And so that would, among other things, tend to cause me to implement some caution. And you're right, the Fed Chairman Jay Powell, his quote was, when it comes to lending, we're not going to run out of ammunition, which was in the Wall Street Journal. That's on March 30th. What form might that caution take? Or perhaps more specifically, if we look at the Fed buying all sorts of things that historically would not necessarily be associated with purchasing

Starting point is 00:37:26 junk bonds, distressed debt, etc. How does that affect your playbook and how you think about crowded versus uncrowded opportunities? Sure. So many things in that question require an answer. First, let me say that I think every investor has to make a choice. They have to balance offense and defense, just like a soccer team that a coach fields to play against another team. You have to have players on the field who in totality can both defend their goal and attack the other side's goal. So your portfolio for the investor has to strike a balance between trying to avoid losing money at the same time. And the way I dope it out, Tim, is to say that every investor faces two risks every day. The risk of losing money, which is obvious, and the risk of missing opportunity, which

Starting point is 00:38:41 is a little more subtle. Now, you can eliminate either risk if you are willing to totally surrender to the other risk. So if you want to eliminate the risk of losing money, you can put all your money into T-bills and then you will miss all the opportunities. Or if you want to make sure you don't miss any opportunities, you can make sure that all your investments are aggressive and there are no T-bills or cash,

Starting point is 00:39:10 in which case you're exposed heavily to the possibility of losing money. So most people compromise. Most people say, well, I don't want to lose a lot of money, but on the other hand, I don't want to miss all the opportunities, so I'm going to strike a balance between offense and defense. That's what we all have to do if we're not crazy. And so the question is, how do you strike that balance today? And Oak Tree, my firm, in recent years has been concerned about the market and about the fact that we thought

Starting point is 00:39:49 that it was exposed to significant uncertainties and risks, although we didn't enumerate the pandemic, that asset prices were high, that prospective returns were low because interest rates in the environment have been so low for so long and because a lot of investors were engaging in risky behavior in order to make a good return in a low return world. So you put all that together and we thought that made the world a risky low return place in which one should emphasize defense over offense. And we did.

Starting point is 00:40:26 We adopted a mantra, move forward but with caution, and that has guided us. Now, we are cautious investors, so when I say with caution, I mean more than usual. And that's what we've done. Next question, how do you implement defense? There are basically three ways that an investor can add to defense in his portfolio or her portfolio. The first, the obvious one, is you sell some assets and you go to cash in part or in whole. Now, this is very hard to do because this is black or white, wrong or right. And rarely is it right

Starting point is 00:41:12 to be overwhelmingly in cash. And on the rare occasions when it's right, most people can't find those occasions. So going to cash is problematic. And by the way, if you go to cash and you're wrong and you miss good performance in the market for a couple of years, the individual investor will rue the day and the professional investor might be out of work.

Starting point is 00:41:35 So cash is tough. The next thing you can do is you can go into more defensive asset classes. We know what they are. More bonds rather than stocks, larger companies rather than small, value rather than growth, stable rather than cyclical, U.S. rather than foreign, developed world rather than emerging. And there are many, many ways to increase the defensiveness of your asset allocation. And then the third form of going defensive doesn't even require you to disturb your asset allocation. It's just that everything you want to do in investing can be done in a more aggressive or more defensive way.

Starting point is 00:42:23 So you might say, well, I have 40% of my portfolio in stocks and I want to keep it that way. But you can buy more defensive stocks or you can put your money with a more defensive manager or you can put your money in a mutual fund, which has a record of not making so much money in the up years, but protecting money in the down years. So there are three ways to be defensive. Go to cash, take a more defensive asset allocation, or use more defensive tactics. And we've been doing the latter.

Starting point is 00:42:59 Our asset allocation is assigned. Our clients give us money and they say, put this in this or put this in that. For the most part, we don't choose our asset allocation. But what we've been doing is in recent years, we have been fully invested. And so we participated as the market rose, but with a portfolio that we think was more defensive than most. So we came into this virus episode

Starting point is 00:43:27 with a higher quality, more defensive portfolio. And that stood us quite well in the first quarter. But frankly, with the risks on the table and a lot of securities now cheaper than they used to be and a lot of risky behavior now discouraged, I don't think one has to be as defensive as we were. So we have

Starting point is 00:43:55 shifted the balance in our portfolios, moved more onto offense to take advantage. And if you're looking towards offense, capitalizing on some of your historic strengths, how does the Fed purchasing all sorts of asset classes that it might not normally purchase affect how you look at those opportunities? Sure. That was part of your original question, which I forgot. But, well, you know, as it should be clear, you know, we're specialists in non-guilt-edge debt. Guilt-edge is an old-fashioned term. Non-investment-grade debt.

Starting point is 00:44:40 Speculative-grade debt. And, you know, that means high-yield bonds, leveraged loans, convertible bonds, which I mentioned before, emerging market debt, lots of, let's say, less-than-stellar-quality debt. And usually, in a crisis like this, that stuff would be hurt more than most, which meant that we could pick it up cheaper than most. Perhaps one of our flagship strategies is investing in distressed debt, the debt of companies that are either bankrupt in default or highly likely to be in the opinion of the market. And we've been investing in distressed debt since 1988.

Starting point is 00:45:32 My partner, Bruce Karsh, joined me in 87. He's been running these portfolios since then. And in the 32 years, there were five periods when there were very high defaults among high-yield bonds, a lot of distress, and when we got to take advantage of very good opportunities. And those were 1990-91, 2001-02, and 08. Those were crisis years.

Starting point is 00:45:56 And in the crises, the low-quality, risky debt tended to melt down, and we tended to get great buying opportunities. So your question is, well, what does it mean that the Fed is involving itself in these areas? And the answer is we wish they'd go away because historically in negative times, and this is something we haven't discussed much, but maybe we should, most people get discouraged. Most people shrink to the sidelines. And when these things would cascade down in price, we would be able to buy them very cheaply. If the Fed comes in and buys in those markets, then it makes our lives more difficult because things don't fall the way they otherwise would have. We don't get the bargains we otherwise would have.

Starting point is 00:46:47 When you look, well, I mean, I want to ask if you think the Fed is truly with infinite ammo. I mean, I don't know if they have the sort of bandwidth to participate super widely indefinitely in high volume but possibly they do this is way outside of my area of expertise so it's a bit above my pay grade but where would you thinking probabilistically where would you how do you look at the possible outcomes and probabilities that this type of spending continues for a long period of time? I think that the Fed and the Treasury want to soften the impact on America and its economy. And I think they're going to continue to spend until the economy can take over for itself. I think one way to think of this, Tim, is that many times if a patient has a serious disease,

Starting point is 00:47:51 they'll put the patient into a coma so that they can treat the disease. And while the patient's in the coma, they keep them on life support. And then when the disease has been healed, the patient can be brought back, and the life support can be removed. So the disease is the virus. In order to fight the virus, we had to close businesses, freeze economic activity, and tell people stay home. So stores, movies, and hotels, and airlines, and concerts, and sports all stopped cold. And that's putting the economy into a coma.

Starting point is 00:48:38 And we have 26 million people who have filed for unemployment insurance in the last five weeks. And we are expecting a decline of GDP in the second quarter here of, well, most people say 20 to 30 percent, which would make it the worst quarter in history by an order of magnitude. So they have to keep it on life support until they can bring the economy back. And the life support is all this injection from the Fed and the Treasury. And they're going to continue it until they're highly confident

Starting point is 00:49:18 that they're out of the woods. They're not going to take a chance and say, well, let's suspend it now and see if the economy can pick up. They're going to wait until the economy is operating with some strength and growing from this depressed pace before they withdraw it. I'm confident of that. What are the, as someone who's, I've never taken an economics class, which is not something I brag about. It's quite something, a source of embarrassment for me.

Starting point is 00:49:47 But what are the markers or metrics that they would look to to assess whether the patient can be taken off of life support? Well, unemployment is usually the best short-term indicator. Remember that unemployment reached 10% in the global financial crisis, and it was down to 5%. Five to five and a half has generally been considered something like a structural level of unemployment. In other words, there are some people who can't get a job because they're unqualified. There are people who can't get a job because they can't pass a drug test. There are people who just quit a job.

Starting point is 00:50:30 There are people in the process of looking for a job. So transactional, frictionally, most people assume that 5-ish percent is structural. And the Obama administration, over eight years, did get the unemployment rate, I believe, down to 5% by 2016. And then the Trump administration came in and continued very aggressive stimulus, pro-business environment reduction of regulation, and the unemployment got down to 3.5%. So it's a barometer of how the economy is doing. And I would think that they'll want, well, you see, it's not going to be all or nothing. They're not going to spend, spend, spend, and then stop.

Starting point is 00:51:18 They'll slack off. The term we use in the discipline you never studied economics is taper. And they'll taper. But, you know, I think that they'll support the economy certainly aggressively until the unemployment rate gets into single digits and perhaps until it gets into mid-single digits. And then, of course, they'll look at GDP. You know, GDP has been growing at around 2%, mid-single digits. Then, of course, they'll look at GDP.

Starting point is 00:51:51 GDP's been growing at around 2% and Donald Trump has been trying to say he'll get it to 3 or 4. But GDP will be deceptive because it's going to be so horrible in the second quarter of 20 that it's going to be easy to show growth in the second quarter of 21. But we have to take that growth with a grain of salt. And I think what they'll look for is for the GDP to be getting close back to the track that it was on if this virus hadn't developed. You've listed some questions that debt traders on the Oak Tree team, Justin Quaglia, if I'm saying that correctly, Sam Rotondo, that are related to behavioral change more than anything else. So assuming that quarantine is lifted, when will you take your first flight? How will you react when the person next to you starts coughing? What has to happen to make you feel it's safe to send your child back to school? One of my favorites is the when you go to a dinner with your wife, husband, friend, family, do you want to be served by a waiter or waitress wearing mask and gloves?

Starting point is 00:52:54 So these are behavioral questions. And you seem to be a connoisseur of questions. And I want to bring up a quote that also was featured in the You Can't Predict, You Can Prepare memo, which was, what the wise man does in the beginning, the fool does in the end. And these might not be totally apples to apples, but what types of questions are the wise asking these days? Are any particular types of thinking or questions present in those people you admire as good thinkers right now? Well, the future, the outlook for the economy has been mostly described as a V, sharp down in the first and second quarter of 2020, maybe some lingering effects in the third, and then sharp up. And, you know, there's a lot of debate about how sharp the recovery will be.

Starting point is 00:54:02 You know, I personally think we're going to come back gradually. I think that people who have a choice are not going to rush back to work. One of the questions that you didn't ask from that memo, Tim, was mine, for a New Yorker, when are you going to get back on the subway? Right, that's a great question. And be in close contact with all those other people. And, you know, taking an airplane flight is a big deal because, you know, they want you to be six feet away from the next person. And the way I calculated it, at best, you could have one person for every nine seats. And they're not going to do that.

Starting point is 00:54:41 Of course, they'll fill the seats and they'll have people wearing masks. But, you know, I think that people who have a choice are going to wait a while before they get on a full airplane. Another question, of course, is assuming that there is a reopening and assuming that the virus hasn't been killed off and we don't have yet a vaccine, will people engage in their previous activities? I think that people who have a choice will not rush back. And then I read about one state that passed a rule that restaurants can reopen, but only one out of every four tables can be occupied. But also an article yesterday which said that a business which is operating at a low level of its capacity

Starting point is 00:55:34 is probably not more profitable than it was when it was closed. Yeah, that's definitely true here in Austin. A lot of restaurants are opting not to open with 25% capacity. Right, right. So, you know, the expectation that we're going to come back is probably right, but nobody knows the pace. And these are important questions to ask. But, you know, one of these days, I assume we'll have a vaccine. It's not easy to produce 330 million doses and get them into distribution. Or if we need to, like you do for shingles, for example, there's 660 million doses.

Starting point is 00:56:29 And, you know, these are massive issues, and they don't happen overnight. And then, of course, you know, we have large numbers of people who don't, you know, only half of Americans, I think, get flu shots. Flu kills a lot, you know, kills a lot of Americans. I think flu probably averages 40,000 to 50,000 deaths a year, and yet only half the people get the shots. Will people get the shots? And, you know, there's an anti-vaccine cohort in America, and will they get them and so forth? And if they don't, what does it imply for everybody else?

Starting point is 00:57:08 So I just think that it's, you know, what I say about these unprecedented events, Tim, is that if you haven't seen something happen in the past, you can't say you know how it's going to turn out. And we have to allow windage. Now, a warrior like me allows for the possibility of bad outcomes. An optimist wants to make sure he contemplates the possibility of good outcomes, surprisingly good outcomes. And so that's why we have indifferences of opinion. That's why we have markets in which people can meet and express their opinions through price. Informational filtering is one I'd like to chat about for a second. What I mean by that is, how do you choose amongst a deluge of possible books, articles, sources of information, what you read these days, for instance? Or a better question is probably, what are some of the higher signal sources of information, books, people, anything that you're paying attention to these days? Well, you know, there are no, I don't think there are useful topical books on the subject of this episode yet. It's too new. We have to, you know, always review our thinking,

Starting point is 00:58:39 how we think about propositions and odds and bets and probabilities and how we think about making decisions under uncertainty and these kinds of things. And you've talked about some of those. You know, I think that we all have to take in a lot of input, primarily through the newspapers. And, of course, we have to be aware of the biases of the newspapers. When I was a boy, I used to believe that if it was in the newspaper, it was true.

Starting point is 00:59:10 But newspapers have slants, too. Then, importantly, we have to be very aware of our own slants. We have what's called confirmation bias, and we all tend to read the things we agree with more than the things we disagree with and believe the things that support our biased position more than the things that throw it into question. This is a great challenge. So we should try to read it broadly. We should try to read from the newspaper whose editorial slant we agree with and the one we disagree with. And we should try to appreciate all the input. But I think this is a great challenge. And, you know, if you read

Starting point is 01:00:10 broadly and everybody on the internet, every brokerage and securities house is putting out its own COVID report nowadays, and you see such disparate information. By the way, there are probably, I don't know, you've been talking to me about questions today, Tim. There are probably 100 or 200, 300 questions that bear on the future. And nobody can take them all into account. So which ones do you think about? Well, number one, your selection of the questions to ponder will be shaped by your bias because you can't do them all. So, you know, it's a terribly challenging thing. And I think a lot about bias.

Starting point is 01:01:04 And let's go back to what I said earlier, quoting Professor Lipsitch of Harvard. Facts, analogies, guesses. layman investment people talking about the likely medical course of development. You know, I say, well, where's their expertise? But, you know, everybody has an opinion. And you can't argue you're right. But on the other hand, you can't say, well, I'm not an expert, so I'm not going to have an opinion. And, you know, it's very, very difficult to decide these things in a uniquely uncertain environment like today's.

Starting point is 01:01:58 Well, Howard, I really appreciate you carving out time for the conversation. I think that we could cover a thousand additional topics, but I'll just ask one more or maybe two more. And that is, what would you hope people would think more about or what aren't people paying enough attention to in your mind? Does anything occur to you? Well, just in the narrow field of investing, you know, most people want to hear somebody like me say buy or sell. But it's a much more nuanced question than that. You know, the person who wants advice has to think for themselves. Do I want to put a lot of emphasis on making sure I don't lose money, or do I want to put a lot of emphasis on making sure that I take advantage of the opportunities? And those two things work in opposite directions, as I explained before. So the person has to decide for themselves how they feel about these things.

Starting point is 01:03:09 Now, they can ask for advice, but everybody has to decide this on a personal basis. And the other thing is, whether you should buy or sell has a lot to do with, number one, your current position so i i mentioned that that oak tree became more aggressive because we had been very defensive if you have been aggressive until now that doesn't mean you should necessarily become even more aggressive so you know what's what's becoming increasing aggressiveness for us may not be right for everybody.

Starting point is 01:03:50 And then the other thing is the investor has to ask themselves and be tough on themselves to spec out what their time frame is. Because, you know, if you say to me, how are we going to look in five years? I think in five years, we're going to be okay. And so, you know, if you said to me, I'm going to put on a position today and I'm not going to look at it for five years, I'd say, okay, well, then you should have a pretty normal non-defensive investment posture. If you're going to look every day and if you're going to get upset if the market goes down, then you might want to have a little more defensiveness than normal.

Starting point is 01:04:34 So again, the same answer is not right for everybody because it depends on their ability to take a long-term view rather than short, and their ability to live with the agita of short-term ups and downs. Well, thank you very much, Howard. People can find you on Twitter at Howard Marks Book. Certainly, I'll link to your writing, to your book, and everything else in the show notes, including any of the memos and references that we've made in this conversation. Is there anything else you would like to add or anything else you would like to suggest

Starting point is 01:05:12 that people take a look at? No. You know, Tim's good to link to all the memos. There's a 30 years worth in the archive at oaktrecapital.com. It's free, so the price is right, and you can look at what I was thinking at various points in time in the last 30 years. I want to thank you, Tim, for inquiring about these things and asking such good questions. These are difficult topics.

Starting point is 01:05:42 They're even difficult to frame the questions and I want to apologize for the length of my answers but there are never easy answers and that's especially true today so thank you for having me with you my pleasure Howard and to everybody listening as always everything will be in the show notes

Starting point is 01:06:00 Tim.blog forward slash podcast and until next time thanks for tuning in. Hey guys, this is Tim again. Just a few more things before you take off. Number one, this is five bullet Friday. Do you want to get a short email from me? And would you enjoy getting a short email from me every Friday that provides a little morsel of fun for the weekend? And five bullet Friday is a very short email where I share the coolest things I've found or that I've been pondering over the week.

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The Tim Ferriss Show - #431: Howard Marks on the US Dollar, Three Ways to Add Defense, and Good Questions

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The Tim Ferriss Show - #431: Howard Marks on the US Dollar, Three Ways to Add Defense, and Good Questions

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.