---
title: "This is a monumental change! Howard Marks: The era of easy money in stocks is over, capital needs to be reallocated."
type: "News"
locale: "zh-CN"
url: "https://longbridge.com/zh-CN/news/99989458.md"
description: "The era of ease - Loose monetary policy is coming to an end"
datetime: "2023-10-16T10:17:57.000Z"
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# This is a monumental change! Howard Marks: The era of easy money in stocks is over, capital needs to be reallocated.

The low interest rates that prevailed from 2009 to 2021 were a golden age for both asset owners and borrowers-lower discount rates made future cash flows more valuable. \*\*And the era of easy money-easy money-is basically over. Regardless of the inherent advantages of holding assets and leveraged investments, their returns will decrease in the coming years, and credit bonds or fixed income investments should improve accordingly. **2.** Due to changes over the past year and a half, investors can now earn equity-like returns from their credit bond investments. This situation has not been seen for many years and is now emerging again. \*\*\*\* The expected pre-tax return on non-investment grade bond investments is now close to or exceeds the historical return on equities. If this really is a sea change (meaning that the investment climate has fundamentally changed), then you should not assume that the investment strategy that has benefited you most since 2009 will remain the same in the coming years. \*\*\*\* Credit instruments should probably make up a significant portion of the portfolio... perhaps the vast majority. \* \* On the afternoon of October 16, Howard Marks, a prestigious Wall Street investor and co-founder of Oaktree Capital (Oaktree Capital), released the latest memo on Oaktree Capital Public. The memo was originally published in May this year's "Vicissitudes of life" and was a sequel to December 2022. Considering that the topics discussed in recent months have become more relevant, he decided to make it public.! In the 20 years from 2000 to 2020, Howard Marks made only five predictions about the market, but they all turned out to be correct. In his latest memo, he notes that \*\*the era of easy money-easy money-is largely over, and that ultra-low interest rates or rate cuts are unlikely to become the norm over the next 10 years, which is a sea change. The investment strategy will change accordingly, the return on holding assets and leveraged investments will be reduced, and it is best for investors to allocate most of their assets to the credit bond market. \* \* The representative of the investment exercise class focused on sorting out (WeChat ID:touzizuoyeben) the essence of Howard Marks's latest memo and sharing it with you: \* \* The following are the basic points in the memo "Changshang" released by Oaktree Capital: \* \*-At the end of 2008, the Federal Reserve lowered the federal funds rate to zero for the first time in its history in order to free the economy from the impact of the global financial crisis. -The move did not lead to an increase in inflation from below 2 per cent, so the Fed was largely comfortable maintaining easing-low interest rates and quantitative easing-for the next 13 years. -As a result, we have experienced the longest economic recovery in history-more than 10 years-and the "easy era" for companies seeking profits and financing ". Even loss-making businesses have little difficulty going public, getting loans and avoiding default and bankruptcy. -**The low interest rates that prevailed from 2009 to 2021 were a golden age for both asset owners and borrowers**\-lower discount rates make future cash flows more valuable. This in turn makes asset owners "complacent" and potential buyers "ready to move". Fear of missing out (FOMO) is a major concern for most people. Accordingly, this period is challenging for hunters and lenders who focus on buying investment targets at a discount. -The massive new crown relief initiative and the impact of supply chain disruptions have led to large amounts of money chasing limited commodities, a typical condition for upward inflation. -Higher inflation in 2021 and continuing through 2022, forcing the Fed to suspend its easing stance. The Fed has since raised interest rates sharply-the fastest tightening cycle in four decades-and ended quantitative easing. -For a number of reasons, \*\*ultra-low interest rates or rate cuts are unlikely to become the norm in the next decade. \*\*-As a result, we may experience a more difficult period in terms of corporate profitability, asset appreciation, borrowing and avoiding default. \* \* Conclusion: If this is really a sea change (meaning that the investment environment has fundamentally changed), then you should not think that the investment strategy that has benefited you most since 2009 will continue to be the same in the next few years. \* \* \* \* Memo Highlights Excerpts: \* \* ## \* \* Easy times-easy money is basically over, investment strategies have changed \* \* Everyone who has entered the industry since 1980-that is, the vast majority of current investors-with a few exceptions, has only experienced the era of falling interest rates or ultra-low interest rates (or both). I think the fact that there are so few older seniority investors from the 70 s makes it easy to think that the interest rate trend from 2009 to 2021 is the norm. **If interest rates fall during the easy money period and/or ultra-low interest rates cease to exist in the next few years, there may be many consequences:**\-economic growth may slow;-profit margins may be eroded;-default rates may rise;-asset appreciation may be unreliable;-borrowing costs will not continue to fall (although interest rates raised to curb inflation may be allowed to fall once inflation slows down); -Investor psychology may no longer be generally optimistic;-Businesses may not have easy access to financing. \*\*In other words, the investment environment may gradually normalize after a longer period of exceptionally easy times. \*\*Note that I am not saying that interest rates have fallen by 2000 basis points over the past 40 years and are now back to the levels they were in the 1980 s. In fact, \*\*I see no reason to believe that short-term interest rates will be much higher in five years than they are now. But I still think that the era of easy money-easy money-is basically over \* \*. Perhaps, for example, five years ago, an investor went to a bank to take out a loan, and the bank said, "We'll lend you $0.8 billion at 5%. "Now the loan needs to be refinanced, and the bank says," We'll lend you $0.5 billion at 8%. "This means that the cost of capital for investors has risen, the net return on investment has fallen (or is negative), and there is a $0.3 billion funding gap. Obviously, if certain strategies perform best during periods with specific characteristics, then the best-performing strategies will be very different in very different environments. \*\*The 40-year low and rate-cutting environment has been of great benefit to asset owners. \*\*The decline in the discount rate and the corresponding weakening of the competitiveness of bond returns have led to significant asset appreciation. Therefore, the investor should hold ownership of the asset-whether it is a company, a part of the company (equity), or a property. Lower interest rates reduce the borrower's cost of capital. In this case, any borrowing will naturally become more successful than initially expected. And, for investors who buy assets with borrowed money, the combined result is "double happiness". Recall the first sea change I mentioned in that memo: the birth of high-yield bonds from 1977 to 1978, which spawned the trend and leveraged investment strategies of taking risk for profit. It is worth noting that the entire history of leveraged investment strategies has been written almost exclusively during periods of falling and/or ultra-low interest rates. For example, I can say with confidence that nearly 100 per cent of private equity capital invested was effective after interest rates began to fall in 1980. What is surprising about leveraged investment thriving in such a favourable environment? At the same time, falling interest rates lead to lower returns on lending-or buying debt instruments. During this period, not only were the expected returns on debt low, but eager investors, not content with the very low yields on more conservative securities such as U.S. Treasuries and investment-grade corporate bonds, competed to put their money into riskier markets, leading many investors to accept lower returns and weaker lender protection provisions. Finally, these "quiet" market conditions make it difficult for hunters looking to buy investment targets at a discount. Where do the best "bargains" come from? The answer is: from the despair that the holder has fallen into because of panic. When the wind is calm, asset owners are full of confidence, buyers are in high spirits, and no one is eager to exit the investment, so it is difficult to buy a real "bargain". **Will holding assets in the next few years be as profitable as it was between 2009 and 2021? If interest rates do not decline over time, or if the cost of borrowing is not significantly lower than the expected return on the asset purchased, will leverage also increase returns?** **Regardless of the inherent advantages of holding assets and leveraged investments**, \*\*returns will decrease in the next few years \* \*. Merely taking advantage of favorable trends by buying assets and using leverage will not be enough to achieve success. ## **In the new environment, credit debt investments get equity-like returns** In the new environment, to achieve superior returns, it is likely that the ability to buy the investment target at a discount will again be needed, as well as the ability to add value to the assets held in the strategy of gaining control. \*\*Credit bonds or fixed income investments should improve accordingly. \*\*As I mentioned in my December memo, these 13 years have been a difficult, dull and low-return period for credit bond investors, including Oaktree Capital. Most of the asset classes we manage have the lowest expected returns ever. \*\*But now, higher expected returns have emerged \* \*. \*\*In early 2022, for example, high-yield bonds are yielding around 4%-the returns aren't too high. Today, their yields exceed 8%, meaning these bonds could make a significant contribution to portfolio performance. This is also generally the case in the overall non-investment grade credit sector. **And at a meeting of a nonprofit investment committee last December, I made the following point:** Sell large-cap, small-cap, value, growth, U.S. and foreign stocks. Sell equity, real estate, hedge funds and venture capital in the private and public markets. Sell it all and put the proceeds into high-yield bonds with a yield of 9%. \*\*\*\* The institution's endowment needs to earn an annualized return of about 6%, and I believe that if it holds a qualified portfolio of 9% high-yield bonds, it will most likely exceed its 6% target \* \*. But I'm not making a formal recommendation, it's more through that statement that I'm sparking a discussion about the fact that, thanks to the changes in the past year and a half, investors can now get an equity-like return on their credit bond investments. For nearly a century, the annualized return on the S & P 500 index has been just over 10%, and investors are very satisfied with it (a 10% annual return over 100 years can turn $1 into nearly $14,000). Today, the ICE BofA U.S. High Yield Constrained Index (ICE BofA U.S. High Yield Index) yields more than 8.5 per cent, the CS Leveraged Loan Index yields about 10.0 per cent, and the yields offered by private equity loans are clearly higher. In other words, the expected pre-tax return on a \*\*non-investment grade bond investment is now close to or exceeds the historical return on equities. \*\*\*\* The expected return on credit bonds has not been evenly split with the expected return on equities for many years. This is happening again \* \*. Should the non-profit organization of which I sit on the board of directors put all of its money into credit instruments. But Charlie Munger (Charlie Munger) exhorts us to "do the opposite," or think in reverse. In my opinion, this means that asset allocators should ask themselves, **" Why don't we put most of our capital into credit debt now? "** What I want to mention here is that for many years, I have seen institutional investors "sit back and talk" about market developments while they make small adjustments in asset allocation accordingly. In the 1980 s, when early index funds outperformed actively managed funds, they said, "We're ready for this: we 've converted 2% of stocks to index funds. "When emerging markets look attractive, their response is usually to shift another 2 per cent. From time to time, clients tell me that they have invested 2% of their funds in gold. However, if the developments I have described constitute, as I believe, a sea change-fundamental, significant and potentially lasting-\*\*then credit instruments should probably be a significant part of the portfolio... perhaps the vast majority. **##** Risks and rewards of credit investments \*\*\*\* What are the downside risks? Under what circumstances can things go wrong? \*\*First, individual borrowers may default and fail to pay. If you're worried that your credit portfolio will be hit by a wave of defaults, think about how this environment will affect stocks or other holdings. Second, credit instruments, by their very nature, have little potential for appreciation. As a result, it is entirely possible that equity and leveraged investment strategies will unexpectedly rise and outperform credit bond strategies in the coming years. This is undeniable, but we should keep in mind that "downside risk" here refers to the opportunity cost of giving up returns, rather than failing to achieve the desired returns. Third, bonds and loans face price volatility, meaning that selling during periods of weakness can result in real losses. But credit instruments are far from the only ones that could encounter this. Fourth, the returns I'm talking about are nominal returns. If inflation cannot be controlled, these nominal returns could depreciate sharply when translated into real returns, which is what some investors are most concerned about. Finally, the duration of this sea change may not be as long as I expected, that is, the Fed will bring the federal funds rate back to zero or 1%, and credit bond yields will fall accordingly. Fortunately, by purchasing a multi-year credit instrument, an investor can earn the promised return over a considerable period of time (assuming the investment provides some degree of redemption protection). You will have to reinvest at maturity or redemption, but once you implement the credit bond investment I recommend, you will at least receive the promised return (perhaps minus default losses) for the term of the credit bond instrument. \*\*My main discussion is the reallocation of capital from holding assets and using leverage to lending. \*\*I haven't called this often in my career. \*\*This is the first time I 've talked about a sea change, and it's one of the few ideas I 've made to significantly increase my credit investments. But the point I keep repeating is that today's credit bond investors can earn returns with the following characteristics: **\-extremely competitive compared to the** historical returns of equities, **\-exceeds the returns or actuarial assumptions required by many investors, and-is much more certain than the** certainty of equity returns. \*\*Unless my logic is seriously flawed and self-consistent, I believe it is necessary to reallocate a large amount of capital to the credit debt sector. \* \* Please pay attention to the views of more bosses \* \*! Author: Wang Li Source: Investment Workbook

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