market folly

Oaktree Capital's Howard Marks is out with his latest Chairman's Letter and as always, it's a must read. When we last checked in with the prominent manager, we saw that Howard Marks was cautious. And he's certainly not alone in his concern as legendary investor Seth Klarman is worried about the markets as well. Needless to say, Marks is still concerned about many issues. His July missive, entitled 'It's Greek to Me' obviously outlines the recent problems in Greece.

Given that the country has been responsible for so many headlines in the Eurozone (and appropriately so), Marks outlines the ingredients that have contributed to the contagion across the ocean, notably:

- Slow-growing, unproductive & uncompetitive economies
- Low birthrates & aging populations
- Generous benefits & social services
- Extensive vacations & limits on work weeks
- Early retirement
- Artificially high debt ratings & resultant low interest rates

However, the Oaktree Capital Chairman also argues that debt is not the problem (or even the cause of the problem), but rather the facilitator. He writes, "without credit - I think back to my pre-credit card college days of 45 years ago, for example - you couldn't spend money you didn't have. Thus you couldn't buy things you couldn't afford. Then the miracle of credit came along and it became easy to get in over your head." He relates that analogy to government spending and wonders what would come to be if governments couldn't finance deficits by issuing debt.

Marks then compares the United States' situation to that of Greece. While he does not think the US will face the crisis Greece has, he acknowledges the basic problem is the same: both countries have a bigger government than they're paying for. To avoid such folly, he argues "the bottom line appears to be that the U.S. must anticipate austerity, higher taxes, and the sluggish growth that combination is likely to produce. Failing that, we may face devaluation, default and other unthinkable developments. We are not exempt from the problems besetting Greece."

Turning to Marks' thoughts on the current markets, he actually began his letter by touching on the tenets of successful investing. He writes, "risk control and consistency hold the keys to long-term investment success." He comes full circle and ends his commentary by lamenting that, "bottom line: anyone who invests today in a pro-risk fashion out of belief in the recovery must be confident he'll be agile enough to take profits before the long-term realities set in."

Embedded below is the latest market commentary from Oaktree Capital's Howard Marks:



You can download a .pdf copy here.

For more market commentary from Oaktree, head to our piece on Marks' cautionary stance. And for the rest of our 'market-strategist-Monday' pieces, you can head to the latest investment outlook from PIMCO's Bill Gross, as well as Jeremy Grantham's latest commentary from GMO.