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By Jason Stipp | 07-18-2013 12:00 PM

Marks Takes the Market's Temperature

For several years, investors have been acting bullish (if not thinking bullish) in bonds, bidding up safe instruments, while the interest in equities is still modest, with the potential for more relative value, says Oaktree's Howard Marks.

Jason Stipp: I'm Jason Stipp for Morningstar. Howard Marks is the chairman of Oaktree Capital and the author of some of the most enlightening shareholder letters you're likely to read. He is also a keen observer of the market and its many personalities. He is calling in today to give us a sense of where the market is today and the mood of investors today. Thanks for calling in Howard.

Howard Marks: It's my pleasure.

Stipp: Howard, you have a process that you call taking the temperature of the market. This is where you look at things like the attitudes of investors and commentators, headlines, the interest in new issuance, the amount of leverage that's taken out. When we spoke about a year ago, you said that the mood of the market was moderate. It wasn't too pessimistic, it wasn't too optimistic, even though we were facing some European crisis issues. I am interested to check in with you today, given that the market is up about 25% over the trailing 12 months, what's the temperature of the market now that we've seen a continuance of this bull market?

Marks: When we last spoke, by the way, most people when they say "the market," they mean the stock market. I don't, because our business is credit. And when I say the market, I am kind of talking about all the markets together, which is challenging, because they are all different. But when we spoke a year ago, I thought that for equities, the market temperature was actually quite cold, interest in them was quite low and had been low for a decade, and they penalized people for a decade, the so-called lost decade. People had lost interest, and I thought they were quite interesting for that reason because they were overlooked, unloved, underowned, and underrepresented in portfolios. Of course, a good deal of that has changed, thanks to the movement over the last year plus, as you described. I think there is still only a modest interest in stocks. I think the stock representation is not back to what it was 12 years ago or 20 years ago or what have you, and I don't see enormously bullish commentators.

In the debt world, I think that the temperature became quite high, you might even say overheated, in the period 2012 and maybe into the first half of 2013; not so much because people were ravingly bullish in their attitudes or oblivious to risk, you mentioned the risk in Europe. There are lots of risks out there today, and everybody is pretty conscious of them. So why would the market become overheated if psychology was modest, and I think the reason is because, in the way I put it in one of my memos, even though people weren't thinking bullish, they were acting bullish. They were going out the risk curve, talking greater risks to try to get greater returns, especially in the fixed-income world because they were forced to.

Why? Because when the Federal Reserve Bank and the other central banks took interest rates down to zero, what they basically said is you can't get any kind of adequate return from Treasuries and high-grade bonds. If you want a good return, you're going to have to go further out the risk curve. Of course, one of the goals of central banks in a crash or crisis, such as we were experiencing, is to rekindle risk-taking. I think they did a darn good job of it this time around by eliminating the return on safe instruments. This caused people to have to go out the risk curve and it caused prices for assets to become quite elevated, perhaps in the absence of bullish attitudes. I hope that's clear, Jason. 

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