Where are we in this up-leg part of this cycle? Two recent books address how investors - and other interested parties - can look at the world and approximately place where we are in a cycle and have a view on what has gone before which impacts what happens now in the future. It chimes with an earlier post on Hyman Minsky, who constructed a model of a cycle that uses human psychology (see link end).
Ray Dalio recently wrote Principles (see links end) and is now giving away a book on his understanding of the debt cycle. Dalio is convincing on why debt cycles will always occur (and like Howard Marks and Minsky) explains the human psychology behind why this might be the case.
Howard Marks, who writes a widely read investment letter for his money management firm, has recently published his work focusing on the economic and market cycle (but touches on the debt and other cycles too - he makes the point that they are inter-related).
Both are very valuable for investors giving practical thoughts on how to assess cycles, but for those simply interested in what are powerful trends and forces that have shown patterns through out human history, it will also give insights into why we have booms and busts - and why we will continue to have them.
Both books are recommended.
As to the state of the world now? Both Dalio and Marks sound notes of caution in recent months. I will note Marks recent Memoo
“I’m absolutely not saying people shouldn’t invest today, or shouldn’t invest in debt. Oaktree’s mantra recently has been, and continues to be, “move forward, but with caution.” The outlook is not so bad, and asset prices are not so high, that one should be in cash or near-cash. The penalty in terms of likely opportunity cost is just too great to justify being out of the markets.
But for me, the import of all the above is that investors should favor strategies, managers and approaches that emphasize limiting losses in declines above ensuring full participation in gains. You simply can’t have it both ways.
Just about everything in the investment world can be done either aggressively or defensively. In my view, market conditions make this a time for caution.”
“In memos and presentations over the last 14 months, I’ve made reference to some specific aspects of the investment environment. These have included:
the FAANG companies (Facebook, Amazon, Apple, Netflix and Google/Alphabet), whose stock prices incorporated lofty expectations for future growth;
corporate credit, where the amounts outstanding were increasing, debt ratios were rising, covenants were disappearing, and yield spreads were shrinking;
emerging market debt, where yields were below those on U.S. high yield bonds for only the third time in history;
SoftBank, which was organizing a $100 billion fund for technology investment;
private equity, which was able to raise more capital than at any other time in history; and
cryptocurrencies led by Bitcoin, which appreciated by 1,400% in 2017.
I didn’t cite these things to criticize them or to blow the whistle on something amiss. Rather I did so because phenomena like these tell me the market is being driven by:
trust in the future,
faith in investments and investment managers,
a low level of skepticism, and
risk tolerance, not risk aversion.
In short, attributes like these don’t make for a positive climate for returns and safety. Assuming you have the requisite capital and nerve, the big and relatively easy money in investing is made when prices are low, pessimism is widespread and investors are fleeing from risk. The above factors tell me this is not such a time.”
And here’s Dalio on Debt:
“To summarize some of the key points found in the book:
All big debt cycles go through six stages, which I describe and explain how to navigate:.
The Early Part of the Cycle
The Beautiful Deleveraging
Pushing on a String/Normalization
2. Getting the balance right between having too much debt (that causes debt crises) and too little debt (which causes suboptimal development) is never done perfectly. Cycles always swing from having too little debt relative to the opportunities to having too much and back to having too little and back to having too much. These swings are exacerbated because people tend to remember what happened to them more recently rather than what happened a long time ago. As a result, it is pretty much inevitable that the system will face a big debt crisis every 15 years or so.
3. There are two major types of debt crises—deflationary and inflationary—with the inflationary ones typically occurring in countries that have significant debt dominated in foreign currency. The template explains how both types transpire.
4. Most debt crises can be well-managed if 1) the debts denominated in one’s own currency and 2) the policy makers both know how to handle the crisis and have the authority to do so. As I write in the book: “Managing debt crises is all about spreading out the pain of the bad debts, and this can almost always be done well if one’s debts are in one’s own currency. The biggest risks are typically not from the debts themselves, but from the failure of policy makers to do the right things due to a lack of knowledge and/or lack of authority.”
Both Marks and Dalio are billionaires, who have been investing over decades. Their thoughts are worth reading.