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

Please enjoy this transcript of my interview with Howard Marks (@HowardMarksBook), co-chairman and co-founder of Oaktree 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: Getting the Odds on Your Side and The Most Important Thing: Uncommon Sense for the Thoughtful Investor, both critically acclaimed bestsellers.

Warren Buffett has written of Howard Marks: “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.” Marks holds a BSEc degree from the Wharton School of the University of Pennsylvania with a major in finance and an MBA in accounting and marketing from the University of Chicago.

Transcripts may contain a few typos—with some episodes lasting 2+ hours, it can be difficult to catch minor errors.

Listen to the episode on Apple Podcasts, Spotify, Overcast, Stitcher, Castbox, Google Podcasts, or on your favorite podcast platform.

#431: Howard Marks on the US Dollar, Three Ways to Add Defense, and Good Questions
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Tim Ferriss: Howard, welcome back to the show.

Howard Marks: Thank you very much, Tim. It’s a pleasure to be here.

Tim Ferriss: 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. There are a lot of different topics and 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 Citibank in May of ’68 and how that contrasted with what you then did in 1978. Would you mind telling that story for people listening?

Howard Marks: No, if you have some time.

Tim Ferriss: I do, I have all the time in the world.

Howard Marks: 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, between years of graduate school at The University of Chicago. 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 50 investing. They invested in what they considered to be the 50 best and fastest growing companies in America, extremely high quality companies where nothing could go wrong. 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: IBM, Xerox, Kodak, Polaroid, Merck, Lilly, Hewlett Packard, PerkinElmer, Texas Instruments, Avon, Coca-Cola, AIG, et cetera. 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, 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. So of course this was a painful education. These stocks, generally speaking, fell from price earnings ratios of perhaps 80, which even today would be practically unheard of, to eight when the wheels came off the market in the early 1970s.

Now some of it was the collapse of the market. Some of it was the collapse of this particular field of investing, and some was the function of the flowering of rapid inflation, which was perplexing the country at that time. But for whatever reason, here you are, you’re investing in the best companies in America and you lose 80 or 90 percent 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 50 effort, I left the investment research department. I always say I’m lucky I didn’t get fired. And my boss asked me to join the bond department, which was at that time a backwater of investing, 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.

So 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. And I was ecstatic because rather than know two sentences on 400 companies, I could know everything about a field. So I loved money management and I loved the fact that I was operating in an uncrowded area. Then in August of 1978 I got the call that changed my life. The head of the bond department called up and he said, “You know, 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 yield bond fund late in 1978. I believe that 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. 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 verboten by the vast majority of investors. 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.

Tim Ferriss: You’ve written in this particular memo, “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 where 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 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?

Howard Marks: Well, it’s a very interesting set of circumstances we find ourselves in because we deal with the future. Let’s check that. Nobody knows anything about the future. In the fields that I’m involved in, economics and investing primarily, 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 a hundred years, or certainly one of the worst, the worst economy since The Great Depression, more than 80 years old, the worst collapse of oil in history, and the greatest rescue on 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.

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. So I would say that we are unusually ignorant with regard to the future today. 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, 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 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. 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 are 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.

Tim Ferriss: How are you currently Thinking in Bets, to use the title of the Annie Duke book that I know you are a fan of, perhaps it’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?

Howard Marks: 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, and I thought that the subtitle of that book was unusually helpful. The subtitle is Getting the Odds on Your Side. 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 and let’s talk about picking winners.

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. The answer is it depends on the odds, because when one horse isn’t the overwhelming favorite, you may have to bet $5 to win a dollar. He’s so sure to win, but 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-one shot or a 50-to-one 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. 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. Let’s take that through what we were just discussing. 1968, the Nifty 50 companies were believed to be great companies with a bright future.

Let’s assume that their future success was assured. You still have to look at the proposition, and the answer is that it costs so much to bet on those companies that betting on what were believed to be good companies turned out to be bad bets. 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, but we have to make some judgments about the future and the judgment, you have 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 GNP do in the second quarter of this year, which is roundly believed to be the worst recession quarter in history, and how fast will we get back to the 2019 levels of economic activity and surpass them? When will we have the vaccine?”

There are dozens of questions and no answers. I’ve been quoting Marc Lipsitch, who’s a 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 there’s some consensus developing, which is that the country will go back to work in the next few months — clearly, no agreement on the pace, that there’s likely to be a rebound in new cases but not as bad as the first, and that gradually, the economy will recover and it’ll show a 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. 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 averages, which are dominated by the great companies like Amazon and Microsoft. Those averages, like the S&P 500, are surprisingly high relative to where they were on February 19th, which was the all-time high. And we’re probably down low double digits of percent, 12, 13, 14 percent, 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. And so stocks have recovered very substantially from their lows. They’re up 27 percent, 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 ’22 are healthy economically versus ’19, nobody thinks the stock market has that far to go on the upside. And if the negative case unfolds and everything I have 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 investors’ favor.

Tim Ferriss: 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 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 add up to several trillion dollars. What are the implications of the result and additions to the federal deficit and the Fed’s balance sheet?”

Here’s the part that I want to 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 credit worthiness, 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?”

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 US 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?

Howard Marks: 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 and the kitchen sink at the problem, and the problem has to be solved. If I go back to March, let’s say, 18 or 19 I think it was, I was actively considering the possibility, with my partner Bruce Karsh, of a global depression comparable to the 1930s. And you’ll recall that we had a decade with unemployment in excess of 14 percent in the US and a total absence of growth and widespread suffering. And 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, I think it was The New York Times describing Jay Powell’s statement as saying that the resources thrown at the problem would be limitless.

And I think that’s the right thing because the alternative — 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 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 consequences doesn’t mean that they weren’t right. But again, we are 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.

We’ve been running big deficits for a long time and extremely big deficits in recent years. 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.

So 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. Hasn’t happened. This is something called the Phillips curve, and it’s been touted for 60 years and just doesn’t work. So we don’t know.

But that’s why I used 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, 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 the government is probably spending, on buying securities and pumping into the economy, close to 10 trillion this year. Is that enough to cause an impact? And the answer is, “We don’t know.” And it’s clear that we all have our biases, and we deal with our uncertainty with regards 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 I worry that there will be some negative effects that I can’t predict or describe or quantify. And so that would, among other things, tend to cause me to implement some caution.

Tim Ferriss: And you were 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 junk bonds, distressed debt, et cetera, how does that affect your playbook and how you think about crowded versus uncrowded opportunities?

Howard Marks: Sure. So many things in that question require an answer. But 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 make money and trying to avoid losing money at the same time. And the way I built 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 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, 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 Oaktree, my firm, in recent years, has been concerned about the market and about the fact that we thought that it was exposed to significant uncertainties and risks, although we didn’t enumerate a pandemic, that asset prices were high, that prospect of 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. 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? And 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 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. So cash is tough.

The next thing you can do is you can go into more defensive asset classes. And we know what they are, more bonds rather than stocks. Larger companies rather than small. Value rather than growth. Stable rather than cyclical. US 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 shifted everything you want to do in investing can be done in a more aggressive or more defensive way.

So you might say, well, I have 40 percent 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. Our asset allocation is assigned. Our clients give us money and they say, here, 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 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. And so we came into this virus episode 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 shifted the balance in our portfolios. Moved more onto offense to take advantage.

Tim Ferriss: 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 if —

Howard Marks: Sure. That was part of your original question, which I forgot. But, well as it should be clear we’re specialists in non-gilt edge debt. Gilt edge is an old fashioned term, non-investment grade debt, speculative grade debt. That means high yield bonds, leverage 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. My partner, Bruce Karsh, joined me in ’87, he’s been running these portfolios since then. 

In the 32 years, there were five periods when they were very high default 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. And in the crisis, 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 it’s 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’ve. We don’t get the bargains we otherwise would’ve.

Tim Ferriss: When you look — 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 thinking probabilistically how do you look at the possible outcomes and probabilities that this type of spending continues for a long period of time?

Howard Marks: I think that the Fed and the treasury want to soften the impact on America and its economy. 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, they’ll put the patients into a coma so that they can treat the disease. And while the patient’s in the coma, they keep him 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 to stay home. So Star Wars, movies, and hotels, airlines, and concerts, and sports all stopped cold. That’s putting the economy into a coma.

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 percent to 30 percent, which would make it the worst quarter in history by 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 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 base before they withdraw it, I’m confident of that.

Tim Ferriss: What are the, as someone who I’ve never taken an economics class, which is not something I brag about, it’s quite something, a source of embarrassment for me. But what are the markers or metrics that they would look to assess whether the patient can be taken off of life support?

Howard Marks: Well, unemployment is usually the best short term indicator. Remember that unemployment reached 10 percent in the global financial crisis and it was down to five percent. five percent to 5.5 percent 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. There are people in the process of looking for a job. So transactional frictionally, most people assume that five-ish percent is structural. And the Obama administration over eight years did get the unemployment rate, I believe, down to five percent by 2016.

And then the Trump administration came in and continued a very aggressive stimulus, pro-business environment, reduction of regulation, and unemployment got down to three and a half. 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, they’ll slack off. The term we use in the discipline you never studied economics is taper, and they’ll taper. But 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.

Then of course they’ll look at GDP. The GDP has been growing at around two percent and Donald Trump has been trying to say he’ll get it to three or four. And 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.

Tim Ferriss: You’ve listed some questions that debt traders on the Oaktree 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 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?

So these are behavioral questions and you seem to be a connoisseur of questions. 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?

Howard Marks: Well, 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 there’s a lot of debate about how sharp the recovery will be.

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 for in that memo, Tim, was mine for a New Yorker, when are you going to get back on the subway?

Tim Ferriss: Right. That’s a great question.

Howard Marks: And be in close contact with all those other people. Taking an airplane flight is a big deal because 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. Of course they’ll fill the seats and they’ll have people wear masks.

But 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 yet have 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 the 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 is probably not more profitable than it was when it was closed.

Tim Ferriss: Yeah, that’s definitely true here in Austin. A lot of restaurants are opting not to open with 25 percent capacity.

Howard Marks: Right. So 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 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, 660 million doses. And these are massive issues and they don’t happen overnight.

And then of course we have large numbers of people who — only half of Americans, I think, get flu shots. Flu 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 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? So I just think that 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.

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 differences of opinion. That’s why we have markets in which people can meet and express their opinions through price.

Tim Ferriss: Just a few more questions, Howard. I appreciate all the time today. The question of informational filtering is one I’d like to chat about for a second. And 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?

Howard Marks: Well, 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 always review our thinking, 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 we’ve talked about some of those. 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 what was in the newspaper was true. But newspapers have slants too.

And then, importantly, we have to be very aware of our own slants. We tend to — 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. And this is a great challenge. We should try to read broadly. We should try to read from the newspaper whose editorial slant we agree with and the one we disagree with. We should try to appreciate all the input. But I think this is a great challenge, and if you read 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 it’s a terribly challenging thing and I think a lot about bias. Let’s go back to what I said earlier, quoting Professor Lipsitch of Harvard, “Facts, analogies, guesses.” When I read layman investment people talking about the likely medical course of developments, I say, “Well, where’s your expertise?” But 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.” It’s very, very difficult to decide these things in a uniquely uncertain environment like today’s.

Tim Ferriss: 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?

Howard Marks: Well, just in the narrow field of investing, most people want to hear somebody like me say buy or sell, but it’s a much more nuanced question than that. 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. The person has to decide for themselves how they feel about these things. 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.

I mentioned that Oaktree 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 what’s becoming increasing aggressiveness for us may not be right for everybody. 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 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. 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. 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 down.

Tim Ferriss: Well, thank you very much, Howard. People can find you on Twitter @howardmarksbook. 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 that people take a look at?

Howard Marks: No, sounds good to link to all the memos. There’s 30 years’ worth in the archive at oaktreecapital.com. It’s free, so you can — 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. They’re even difficult to frame the question. 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.

Tim Ferriss: Oh, my pleasure, Howard. And to everybody listening, as always, everything will be in the show notes, tim.blog/podcast. And until next time, thanks for tuning in.

The Tim Ferriss Show is one of the most popular podcasts in the world with more than 500 million downloads. It has been selected for "Best of Apple Podcasts" three times, it is often the #1 interview podcast across all of Apple Podcasts, and it's been ranked #1 out of 400,000+ podcasts on many occasions. To listen to any of the past episodes for free, check out this page.

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