This week’s must-read is the latest memo from Oaktree’s Howard Marks, in which the investing legend ruminates on the current state of risky behavior in the markets. There is a great deal of nuance in his analysis, rather than the more typical “THIS IS 2007” or “NO, THIS IS NOT 2007” you’ll find everywhere else.
The executive summary is that he’s seeing a lot of the same activities/products that made him cautious in 2006-2007 – notably a large rise in debt to fund buybacks/dividends and the return of covenant-lite lending (the debt market equivalent of “Don’t worry, I’m sure you’re good for it.”).
With that said, it could still be early enough in the cycle to remain constructive on the big picture. There are plenty of ways in which market participants are acting more chastely than seven years ago – notably the absence of banks building out new derivatives and the overall subdued totals in leverage built up in the system…so far.
Marks doesn’t claim an ability to pinpoint the beginnings and ends of these credit cycles – but the exact timing is less important to him than just having an overall awareness of their inevitability.