Legendary investor Howard Marks says we are entering a “sea change” in capital markets. He correctly points out that stocks have seemingly gone up forever because interest rates could go down forever.
What Marks calls a “sea change,” Ray Dalio would call the end of a long-term debt cycle.
Howard Marks has forgotten more about capital markets this morning than I could ever know, but it is refreshing to hear these guys talk about something that the millennial/boomer investing-advice bros completely miss.
The millennial/boomer investing bros have only ever invested and created content in a 40-year secular downtrend in interest rates.
Of course stocks and real estate can keep going up “over the long-term” when there is always more room for rates to get slashed.
But what do assets do when interest rates can’t be cut anymore? Well, we are about to find out.
It is shocking to me how unfamiliar and seemingly uninterested these people are with history.
They assume that the next 40 years will look like the previous 40 years — completely unaware of any monetary/global history that existed prior to peak-Keynesian hysteria or peak-globalization.
For example, most mainstream financial advice is contingent on interest rates being lower in the future than they are today. Again, what happens to asset prices when that escape valve is taken away? A sea change happens.
What that looks like, we don’t know. But one thing is for certain, it won’t look like anything that happened between 1980 and 2021.
This is the pitfall of over-indexing on events that have happened during your lifetime, and under-indexing on events that have not happened in your lifetime but are common throughout history.
This is one of Dalio’s main themes in his must-read book Principles for Dealing With The Changing World Order: Why Nations Succeed and Fail.*
Take a global pandemic for example. In 2018, a global pandemic was something that happened in history; a relic that peasants and serfs dealt with.
Then 2020 happened.
A similar thing may be happening with global superpowers right now. In 2021, a world war was something that happened in history.
Then 2022-2030 happened.
Ironically, world wars are the norm throughout history. In the grand scope of history, it is atypical for the most powerful nations to not be in existential conflict.
But understanding that requires studying events that happened before your time on earth — something few choose to do — and understanding why we are so prone to repeat such things.
History does not repeat but it often rhymes. This is because human behavior remains relatively unchanged through time.
We have the same operating system that humans had when they were roaming around the safari foraging for berries. The same operating system that created the Roman Empire… and that caused it to collapse.
It’s the same ones that started the Revolutionary War. And the ones that created the Great Depression.
While the stimuli may vary, our ultimate us-vs them, fear-based reaction to the stimuli does not.
That reaction is what repeats.
I go on this slight tangent to reiterate the value in studying history on a longer time horizon than the time period in which you have been on earth.
For example, mainstream financial advice is based on a history where year zero was the immaculate conception of Keynesian. A belief where any calamity can be cured by a PhD creating a new acronym (TARP, ZIRP, QE, QT, YCC, BTFD, expect more!).
There is an ignorance to thinking that nothing can be learned from studying how humans reacted to stimuli before 1950.
It’s almost like because we have iPhones and watch Succession, world wars and sovereign debt crises can’t happen anymore.
The arrogance to think this time is different is the most alarming part to me.
I do not claim to offer solutions — only observations and an attempt to connect some dots every once in awhile.
*That’s an affiliate link to the Ray Dalio book. If you purchase the book through that link, you will be supporting this publication (and the author’s cigarette habit).