Thread by @fdestin

1/ If you're trying to get a simple macro-view of the current downturn, few people are as articulate as Howard Marks of Oaktree -- I've summarised his key insights below:

2/ We have a total stoppage of the economy, an unprecedented deep freeze of unknown length which comes after 11 years of prosperity and declining interest rates.

People used excessive debt to buy low quality, highly priced and lever themselves into palatable returns.

3/ A lot of assets and investments entities are over-levered and may not survive. They are now having their liquidity withdrawn by lenders who need the money back.

So on top of an economic freeze, we have a withdrawal of liquidity, and the combination is very serious.

4/ 2008 came off a period where banks were over-levered 32X their equity and had invested in sub-prime mortgages.

This time around we are not coming off a bubble, the banks are much less leveraged and there is no analog as deficient as the sub-prime mortgages.

5/ Central banks have exhausted their capacity to act on interest rates (the main tool for stimulating the economy/ GDP). In the past interest rate action used to mean 500bps (5%). In the global financial crisis they went from 5 to 0.

Here we started the crisis at 1.5%.

6/ Governments' main tool for stimulating the economy is deficits. We started this crisis with a $1TRN deficit in the US - so the ability to do deficit spending should be limited in some way

60 years ago people used to debate whether it was OK for government to even owe money.

7/ We will run huge deficits (that will never be repaid) and add to the national debt -- how much is too much ?

Modern monetary theory states it doesn't matter which Howard finds hard to believe.

We don't know what that means for the economy.

8/ Deficits and money printing money seem inherently inflationary -- we've been in a deflationary environment or low inflation from 82 until now -- 40 years

The return of inflation in this environment would be the worst possible outcome. We don't know.

9/ Oaktree entered this crisis believing in the "meaningful probability of a depression".

Given governments' swift actions the centre of their probability distribution is now for a recession rather than a depression.

10/ We need a temporary freeze on evictions, debt collections, rents etc. to allow the economy to heal itself. A partial coma.

But many pundits underestimate how everything is linked - e.g. how do landlords maintain their buildings and central costs.

No easy solutions.

11/ Oaktree has been aggressive in this crisis given that prices are down and the marketplace is more disciplined. "When other people are terrified of risk, we should turn aggressive".

12/ "Catching the falling knife" is BS. An asset is cheap when it's selling at a discount to intrinsic value. When the knife stops falling, the opportunities are gone.

Personal judgement is all there is - that's what he gets paid for.
You have to get back to fundamentals.

13/ Hedge funds are exposed to redemption and may choose to stay away from the market -- this is optimal for the fund managers but not for their investors. This is why closed-end funds should outperform in crisis - they can catch falling knives, even if they are to fall further.

14/ "Wait for the bottom" is a cover for inaction in a crisis.

15/ Crisis creates emotional up-and-downs. The average investor gets enthusiastic when things are going well and vice versa -- which is exactly the opposite of what a good investor should do. To be an above average investor, you cannot follow average psychology.

16/ Be dispassionate and buy when people are panicky. We have to invest despite the absence of foreknowledge.//eot

Enjoy the full conversation and Howard Mark's clarity of thinking on @twentyminutevc with @HarryStebbings -- one his best interviews:

thetwentyminutevc.com/howardmarks2/