Market Musings 160423:
Adapting to a Sea Change in Markets

Decision time for stocks as US earnings season approaches

Summary:

40 years of declining inflation and interest rates are over

The new environment higher interest rates will endure

This provides opportunities to active investors hunting for value

Chartstorm of interesting charts I fund this week

Where I am personally focused at the moment

Podcast this week: Our investment strategy for April 2023

1) Is the banking crisis over?

2) Do you forecast a recession both in the US and Europe this year?

3) Which asset class could benefit from the banking stress?

A Sea Change

Howard Marks, the founder of Oaktree Capital, is famous not only for being an excellent investor over a 50+ year career, but also for writing periodic memos.

I recommend this last memo – “A Sea Change”. If you prefer to listen to an audio version, he has also recorded a podcast version.

The essence of the memo is that we are undergoing presently a sea change in economics and markets – an event that happens rarely.

What is this sea change that Mr. Marks is referring to? Best to refer to the table below, from his memo, to get a better idea of what has changed structurally today versus the pre-COVID period…

A Sea Change in economic and market conditions

…

	2009 to 2021	Today
Fed behavior	Highly stimulative	Tightening
Inflation	Dormant	40-year high
Economic outlook	Positive	Recession likely
Likelihood of distress	Minimal	Rising
Mood	Optimistic	Guarded
Buyers	Eager	Hesitant
Holders	Complacent	Uncertain
Key worry	FOMO	Investment losses
Risk aversion	Absent	Rising
Credit window	Wide open	Constricted
Financing	Plentiful	Scarce
Interest rates	Lowest ever	More normal

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Albm7

16th Apr '23

Thanks Edmund, I appreciate your weekly insights. Have a good week too.

Alkmund

Thank you Edmund. What I also really took from the Sea Change Memo is that in our careers there are a few (say 2-3) really important transition points, meaning the world thereafter will be quite different. I think that this can be applied beyond finance, and then potentially back again in terms of how we make sense of our world and invest as a result. I work in the bioeconomy, and my three`career events are climate change, DNA sequencing and the EU referendum (the latter because it affects land use including through farming subsidy and international trade for agricultural commodities). "Interestingly" I suspect that many of us are noticing a new Sea Change in our different areas of expertise at the same time around now.

WarrantStar

Edmund, I greatly admire your ability to present relevant data and summarise it.

With regards to the Oaktree Capital table: 1) I see 13 negative factors followed by Prospective Returns now being stated as "More than ample". I crudely take this to be along the lines of "Buy when there is blood on the streets" . Would you agree?

Also please can you tell us over what time frame the returns from today are expected to be more than ample? Some of us are traders with short term horizons, and some of us are long term investors. Please be specific eg "6 months" and don't say something vague like "medium term".

Edmund Shing

17th Apr '23

Yes I think that is fair. When valuations are more "normal" i.e. lower, then long-term returns can be higher. As for time horizon, the Oaktree memo is definitely taking a long-term view, i.e. over the next few years, not months.

Best

Edmund

I would agree with this, technology is progressing quickly in a number of different areas such as medical technology/diagnosis, Artificial Intelligence applications in real-world settings, the energy transition, as well as a new era in the global economy.

Incidentally, this is why I am not so sure that inflation will stay high in future, just that it will be higher on average than it has been over the last 10+ years. AI could have a profoundly deflationary impact on white collar jobs, for instance.

Market Musings 160423: Adapting to a Sea Change in Markets

Market Musings 160423:
Adapting to a Sea Change in Markets

Summary:

Podcast this week: Our investment strategy for April 2023

A Sea Change

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Edmund Shing

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