One conclusion from Howard Marks is that we cannot know where we (or the market) are going, but we better have an idea of where we stand …
Since reading Howard Marks’ books, I wanted to initiate a series of posts, measuring the markets temperature. Doing this exercise a few times per year, i.e. on a quarterly basis, could yield very rewarding insights.
»We may never know where we’re going, but we’d better have a good idea where we are.« – Howards Marks
Howards Marks
For this exercise, he provides us a table (chapter XIII, in Mastering The Market Cycle) which I will use as a very good basis. I will use numbers from 1 to 5, with higher numbers indicating higher risk potential.
| Criteria | ‘TOP’ | ‘Bottom’ |
|---|---|---|
| Economy: | vibrant | sluggish |
| Outlook: | positive | negative |
| Lenders: | eager | reticent |
| Capital markets: | loose | tight |
| Capital: | plentiful | scarce |
| Terms: | easy | restrictive |
| Interest rates: | low | high |
| Yield spreads: | narrow | wide |
| Investors: | optimistic, sanguine, eager to buy | pessimistic, distressed, uniterested in buying |
| Asset owners: | happy to hold | rushing for the exit |
| Sellers: | few | many |
| Markets: | crowded | starved for attention |
| Funds: | hard to gain entry, new ones daily, GPs hold the cards on terms | LPs have bargaining power |
| Recent performance: | strong | weak |
| Asset prices: | high | low |
| Prospective returns: | low | high |
| Risk: | high | low |
| Popular qualities: | aggressiveness, broad reach | caution and sicipline, selectivity |
| >> the right qualities: | caution and discipline, selectivity (during top) | aggressiveness, broad reach (during bottom) |
| >> available mistakes: | buying too much, paying up, taking too much risk | buying too little, walking away, taking too little risk |
The economy is rather weak (2) but rebounds are pretty likely and expected as soons as the pandemic is (almost) gone, making for rather positive outlooks (4).
Capital markets seem very loose in general and capitla is plentiful, at least for ‘sexy’ tech companies (IPOs, SPACs, Bitcoin), and nowadays everything is (or sells as) tech. This slide offers some insights. Lenders are eager to lend, interest rates are low and IG credit spreads are back to pre-covid levels (narrow).
Investors are eager to buy into equities. At least this seems to be the case for novice (robinhood) ‘investors’ and for the most prominent companies in the media (Tesla, Amason, etc.). For other segments dynamics can be quite different. Recent performance was strong, and prices seems rather high, and thus prospective returns low with lower interest rates being most certainly a factor (with potentially more investors reaching for yield).
I believe this is a time for caution, discipline and selectivity. But, the latter is almost always true I believe …
Addendum: The Economist (Nov 14th) phrases its perfectly: A second uncertainty is how the industry in China will evolve. The bet is that it will become more like America, a market in which mutual funds have the muscle. But there is no guarantee of this. Indeed, in recent months America’s stockmarket has looked a lot like China’s: retail-led, noisy and informed by social-media fads and a gambling mentality.
Addendum 2: Data for options /robinhoodlers?
searching 4 value 
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