A Stock Market Crash and Recession is Virtually Unavoidable [Howard Marks]
One of these days the economy will slow down and I believe we will have a recession. I don't believe the Fed is going to hold it off forever. We & # 39, ll, have a slowdown and it's natural and when we do, the markets will go down, defaults will go up, bankruptcies will go up, people will panic, the some things are inevitable, but you really shouldn & # 39.
T. Think you know when hey what is up guys, we have been through the biggest expansion in the financial market history more than ten years ago, since we have seen major market correction in this video, I'll, explain their market cycles and why recession is Inevitable short-run economic forecasting is a black art.
Nobody does it very well for what it's worth people who are tracking our feeling moderately depressed right. Now they're. They're, seeing slow growth right now and the markets. The bond market is acting as if there's, a pretty good chance of a recession sometime in the next year or so.
But who knows there are all kinds of things that could be going wrong. China is clearly struggling. Europe may very well actually already be in recession. We probably are suffering the deflation of a tech bubble.
Corporate death has gotten it. I've, been saying there's. No one thing this is: if we're going to have a recession, it's, going to be a smorgasbord recessions. We know one thing, but just a bunch of different things.
Why all the doom and gloom, mainly it's, because the bond market recently flash warning signs that a recession could be on the horizon. Other economic indicators, like US manufacturing activity we're, also lower than analysts expected.
So when could a recession hit and how will we know it's been now quite some time since the 2008 recession, so the US economy now has been growing for ten eleven years is a very long expansion. We've seen recently.
If you just look at the popular press a bubble, I would say in discussion about recessions, everyone wants to talk about. It ends there, one just around the corner. The fact that the expansion has lasted so long has no predictive power whatsoever for whether a recession will start tomorrow.
If I had to pick a date for the next recession, it would be sometime. In 2020, we're in a self-reinforcing virtuous cycle. Lots of jobs, low unemployment, wage growth is accelerating that's, supporting more consumer spending, which is causing businesses to hire, which is pushing on employment debt.
So you were in a very virtuous cycle that's, pretty hard to break, but it can get broken and in my view, that probably would occur in 2020. So the policies, the economic policies that the administration pursuing is doing damage to the economy and that's, going to become increasingly more obvious as we move through 2019 and 2020 and that's.
Why? I think 2020 is the day of reckoning if there is a day of reckoning that's, when the economic expansion will end in the recession hope so before we jump into the next recession. Let's. Talk about market cycles, first and foremost, everything goes in cycles.
Trees do not grow to sky, and not everything goes to zero. This is true in our economy. This is true in financial market, and this is true in human nature. There is such a thing as life cycle people receive birth, they live their lives and they die and process continues when dealing with humans.
Let's. Remember. We are not dealing with the creature of logic and rationality. We are dealing with creatures of emotions. As long as humans will make financial decisions in the market, then we will always have cycles, maybe sometimes in the future, the entire decision-making it will be animated by AI.
Then cycles might be disrupted, but I highly doubt this will ever happen because people tend to believe they are smarter than everyone else and they also like to gamble. Let's go 20 years ago and see how cycles are cured in financial market.
In 2000, we had a dot-com bubble, which was fueled by internet IPOs in masters were literally throwing money at any company that has something to do with Internet. It went from hope to optimism to believe to euphoria at 1995 S & amp, P 500 was trading at around five hundred dollars a share.
Five years later, it was trading at one thousand five hundred dollars a share. That is a 1,000 points increase within five years. If he converted into percentage that is 200 % increase or it's, 25 percent annual compound rate of returns, which is pretty huge for a stock market euphoria, does not last forever.
After euphoria, we go to anxiety and then denial and finally panic - and this is exactly what happened: market crashed from $ 1500 dropped by 50 % within two years. When the market wasn & # 39, t panic fat was able to save the day by cutting interest rates.
It dropped from 6 % to 1 % and stimulate another economic cycle from 2002 until 2007 S & amp, P, 500 doubled again within the same time frame. This was another market cycle, but increased for a different reason.
This time it was not fueled by internet IPOs, but rather housing bubble that caused global financial crisis. Banks were lending subprime mortgages to people who could not afford the house. I did not even had a decent job after that they packaged all the subprime shed into a bond with triple-a ratings from credit rating agencies and so that garbage throughout the world.
Basically, transferring toxic gas in the box from United States to different part of the world's, but since people aren't creatures of logic but creatures of emotion, they continue to buy those houses and fueling bigger in a bigger bubble.
Because no one wants to miss out those cheap money. Euphoria did not last that long market heft again dropped from $ 1,500 people lost their houses and major banks went underwater, but wait it didn't go down.
They got bailed out by government. The Fed once again dropped interest rates from 5 % to 0 % and started another economic expansion. Now we are currently at the longest economic cycle that lasted for more than 10 years since the housing bubble, when SP 500 was under 800 dollars a share.
Now we're at almost a new all-time high at 3000 dollars. A share that is 2200 points, increase within 11 years or two hundred seventy percent. It seems like we could be in euphoric state because the economy is doing so well, but there is a problem.
Current interest rate is at one point: eighty-five percent. If something happens to economy, it could be a game over, I believe, fed, will not decrease interest rates anymore. I believe they will raise interest rates up to four percent, at least because they have it so in Europe, interest rates are negative.
Basically, what it means that banks will pay you interest to lend your money, what a beautiful deal and people will do stupid things when you learn the midship money, let's. Take a look! What one of my favourite investors covered Marx? He has to say about market cycles and our current economy, and if we get to the point where a recession is something that has to be avoided at all costs yeah.
Well, it's, a it's. A big mistake in one of my memos post-mortem for the global financial crisis. I talked about forest fires, yep and good forest management. You permit there to be fires once in a while and if you, if you, if there are fires of moderate-sized, occasionally it burns out the fuel and then you don't, get the one big one same thing.
In my opinion and the the fluctuations of the economy are natural in my opinion and should be permitted to occur yeah and if you try to forestall them, then when they happen, I don't, think you can forestall them forever and when they happen, They're bigger.
So when you look across the lens and excuse me and the attempt to forestall them creates moral hazard yeah that's, that's the key. But when you look across the landscape at this, this kind of construct that we've, built ourselves within the Federal Reserve or the central bank controlled world.
They can't control. This forever short right. There must come a point where things get out of hand. Do you sense coming back to that original question with 2005-2006? Do you see any similarities in what you're, seeing what's, starting to make your spidey sense, tingle, not similarities in the sense of specific things repeating yep, but I have felt that because people were traumatized by the Great Recession, the Recovery has been the slowest one since World War two, and that has kept things moderate, which meant that we would certainly have a recession one of these days, but it would be moderate.
It wouldn't when you don't have a boom. You don't have to have a bust in my belief, but now between the tax bill, which was a shot of adrenaline into in my opinion and already healthy patient, and then the possibility that we're.
Going to see a Powell. Put in action, I think that we may get two highs that lead to lows. You know. I think that when when I was writing, I'm, a believer in cycles believe they always have occurred. I think I understand why and I think they always will a car and - and I tried to study them and then, when I kind of got to the end of writing the book I said well, why do we have cycles if the market goes up 10 %? A year on average, why doesn't just go 10 % over year? Why? And in fact it almost never goes up between 8 and 12, so the average is not the norm.
Why not - and the answer I think, is excesses and Corrections. So you have a trend line and most trend lines are upward, sloping yep, but then you deviate from the trend line on the upside because of some combination of optimism and greed and wishful thinking, and then you have to have a correction to the downside.
So now I'm thinking. We may have more of an excess which leads to more of a correction. You know I've thought a lot about this too. I'm. A great believer in cycles and everything I've read in history demonstrates beyond any argument that they do is everywhere.
You know I when I think that, through I put that down to a human life, you know we are. We have there's, a cycle of life and and markets are nothing but the collective representation of our greed and our insecurities and our cycles, and, as you know, that that's, a major theme at the bottom yeah exactly then, but It but it's, not it's, a hard thing to argue that that when Pete and I've had a lot of people.
Tell me. I'm wrong cycles. Don't exist and, and you shouldn & # 39, t, really build any kind of investment thesis around which are unremarkable. The cycles come primarily from the behavior of people, and I don't, see how you can argue that people are not prone to excesses and repeating them, and - and you know the the big theme of the book is Mark Twain.
History does not repeat, but it does rhyme and the world is just too unstable a place to believe that stability is the norm, and you know, if you think about it in the economy a great year is up for and a bad year is down too.
So the economy has an upward trend. Then it kind of goes like this. Then companies have leverage financial leverage and operating leverage, so their profits go like this and then the market goes like this and why? Because of people yeah, you know the risk in the market.
Does not come from stock certificates, companies, exchanges, it comes from people yeah, but people are prone to excess and, and I don't see how it can be argued otherwise, and by the way when people say I don't think we're gonna have cycles in the future, because the astute Fed has it under control or whatever it is.
What they're saying is the the what I consider the four worst words in the world: it's different. This time you know: okay, until now we've had cycles, but we're, not gonna have anymore. So let's. Talk about the economic reality of this, because the political reality is.
You are never gonna get to the bottom, a listen in the time we have, but the economic reality. How do you take what you've observed on the political scene? You take what you've, looked in terms of asset prices and valuations, and you take what you've, seen from the Fed and the interest rate cycle.
How do you apply that to your investment philosophy? Right now, has it changed? Anything? Has it made you adjust anything, I think that grant the most important decision for an investor at a point in time.
With regard to the intermediate term, I wish I mean not tomorrow and not thirty years, but the next two to five years. The most important decision to make today is whether to invest aggressively or defensively, and it's, not all one or all the other.
But how do you mix the two? You know an investor like me faces two risks every day. The obvious risk that everybody knows about is the risk of losing money. The other risk, which is a little more subtle, is the risk of missing opportunity, and so what most people say is 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 do something that compromises on the two and each person's. Positioning Visa Visa.
The two risks should be different based on their circumstances, but still then this that's, the first question and then the second question is you figure out your normal risk position? You look at today and you say well today, should I be worrying more than usual about losing money or more than usual, about missing opportunity, and you know.
I just think that the world is an uncertain place and the things we're talking about contribute to the uncertainty, and so today I would emphasize avoiding the loss of money a little higher than than usual visa fee, avoiding the risk of missing opportunity Everywhere you look across the financial landscape, there are there's, a series of successful and importantly pragmatic investors who are coming out and and issuing what the headline writers called stark warnings or dire warnings, Seth Klarman being the most recent, perhaps during the devasting.
Recently that I'm, always interested that that cacophony of voices that gets louder and louder and and more respected by the day, doesn't seem to change behavior at all. We seem to be in this period. Where do you & # 39? Ll find that fear of missing out is being re-weight, adjusted by the smart investors, the guys who are always early, and yet the retail investors are wiping their brows and saying what December's over Kramer said the markets gonna go up.
We should we should investigate the dip on Christmas Day. Everything's. Good again, do you know deep deep when you look at the Y average retail investors think about this? Do you fully want to find a way to reach out to them, say: listen! You need to think about it like this.
You're, not thinking about this correctly. It's, a tough one, yeah grant, because you know I always imagine you know the the movies that are made for the teenagers and over here sitting on the shoulder.
You have the angel saying don't. Do it it's, not prudent, you, you know, you & # 39, ll regret it in the morning and over here you have the devil saying: do it, it & # 39, ll, be fun and the devil wins every time, and that's why we have the movies right, but in in the in the investment business you know you have prudence and history and knowledge of cycles and and consciousness of the of the risks and over here the devil says: do it you'll, get Rich and you know wishful thinking - there's, the desire to get rich there's really dominant and and and the fear of missing out together, and so we saw in the fourth quarter an incredible swing of psychology from positive to negative.
But then back and most of the damage has been made up - and you know most people don't, invest in the long term. They're just trying to bet on what the markets gonna do, the the retail that you describe, but also many professionals.
Yes, because they're. They're afraid to be cautious and miss a good month, yeah because they could lose business and it kind of goes back. Maybe to your first question, which is that most people are afraid to be wrong, and since the market goes up, most of the time being wrong consists of being out, which means most people are afraid to be out, and so they they're.
Their nature, doesn't, permit them to get out until it's too late. Until until the crisis is upon us,