Listen to the Billionaires!

I followed our own team’s advice, and invested an hour this weekend reading Howard Marks’ most recent investor letter. I recommend you do as well. The legendary investor and co-founder of Oaktree Capital is more pessimistic than optimistic despite the positive developments around coronavirus in the past week.

"When I read the more positive views regarding the current episode, I can’t help but think back to my favorite newspaper headline, which included the phrase “Bankers Optimistic.” It’s worth noting that the story in question was published on October 20, 1929, reporting on the prior day’s market crash. On that day of optimism, the Great Depression still had eleven years to run.

I admit to my biases: I’m more of a worrier than a dreamer. Maybe that’s what made me a better credit analyst than equity analyst. On average, I may have been more defensive than was necessary, thus is shouldn’t come as a surprise that my list of cons is longer than my pros."

For those who are starting the week without an hour to spare, here is the tl;dr (which I think is spot on)...

Pros:

• Early impacted countries like China and South Korea are showing progress, and Italy, Spain, NY seem to be flattening (albeit slowly)
• Most forecasters believe this will be under control by the end of Q2, with a rebound in Q3. The impact will be sharp, but brief
• The government is putting the patient (economy) in a medically induced coma, but acting as the ICU with its unprecedented stimulus efforts
• The banks are less vulnerable than the Great Recession, PPE / treatment R&D and manufacturing is accelerating, and there is plenty of dry powder to backstop the market bottom

Cons:

• Marks worries hospitals will be overwhelmed, and we’ll have to resort to triage decisions (very bad for our collective psyche)
• He doesn’t think a V-shaped recovery is feasible
• Politically speaking, the U.S. may have one of the toughest times balancing between disease containment and economic recovery
• Some sectors have medium-term (not just short-term) revenue shocks, others have permanent shocks. That unwinding hasn’t happened yet
• Part of that unwinding has to be a wave of debt defaults that might not hit until Q3-Q4. There’s a long-tail to this recession, and that could be exacerbated by a vicious cycle of downgrades, margin calls, liquidations, and forced selling
• The concurrent oil crisis jeopardizes the American energy industry, which employs 5% of the workforce and accounts for a meaningful percentage of capital investment
• The sharp negative wealth effect will reset consumption and investing habits for a long time

Marks' conclusions are similar to my own. Namely, he thinks the stimulus will likely continue to swell, and that Modern Monetary Theory is here to stay. Would a reduction in the dollar’s reserve currency status plus a global supply chain shock make it harder for us to restructure our debts, and ultimately lead to inflation?

I think the investment narrative by 2021 (after investors have grappled with the first and second order effects of the coronavirus) will be all about global currencies and sovereign debt. Marks sounds like a bitcoiner even if he doesn't know it yet.

Also worth listening to Chamath (Pomp crushed this podcast interview last week), and Bill Gates (always). We’ll talk about all this and more in today’s livestream.

See you in an hour, and have a great start to the week!

-TBI