No. of Recommendations: 7
Howard Marks on interest rates.
https://www.oaktreecapital.com/insights/memo/easy-... I think few of us would disagree about the potential for different interest rate environments to influence "investor" behavior (I'd call those who are wildly enthusiastic in a loose monetary environment and depressed when rates rise speculators, even if unwitting ones, but that's a semantic argument for another time). I sort of resist the implication that investors ought to think a lot about the interest rate environment. At least for a long-only, equity-only investor, rates are more like the weather in the Midwest: it would be nice to know what it's going to do in the near future -- but good luck. Further out, it will be hot sometimes for long periods and cold sometimes for long periods. I'd rather put time into finding businesses that seem likely do pretty well under a range of interest rate regimes (which, not coincidentally, are businesses that are less likely to engage in some of the risky behavior Marks describes when money is cheap).
The behavior brought on by low rates takes place in plain sight. Some people take note of it, and a subset of them talk about it rather than let it pass unremarked. Fewer still understand its real implications. And almost no one alters their investment approach to take them into account.
The low-rate period that immediately preceded the Global Financial Crisis of 2008-09 was marked by the kind of spirited competition to make investments and provide financing described above. It was in this climate that Chuck Prince, then CEO of Citi, made the statement for which he is remembered:
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. (July 14, 2007)
When money is easy, few people opt to sit out the dance, even though the adverse results described above can reasonably be anticipated. When faced with the choice between (a) maintaining high standards and missing deals and (b) making risky investments, most people will choose the latter. Professional investment managers especially may fear the consequences of idiosyncratic behavior that’s bound to look wrong for a while. Abstaining demands uncommon strength when doing so means departing from herd behavior. 