Marks, the Macro, and Cycles

Tren Griffin reviews the new Howard Marks book about market cycles here.

Tren reviews and summarizes lots of good ideas from smart people, and we use him in my Columbia class to overview on various topics for his annotated bibliography style of writing.

Check out this memo from Marks last year, not about the macro which I have been slavishly following for a little while, but about a topic where he knows very little: artificial intelligence.

He has very little advantage opining on thinking-person vs. thinking-machine. It’s one of his and Charlie Munger’s rules: know your circle of competence. But here he strays. So he can be wrong you see; without delving into what’s so wrong about his views on mechanical thinking.

Here’s what he is praised for though: knowing that he doesn’t know everything, and thinking in probabilities instead of certainties. He doesn’t call the day or the long/short but generally turns dials on “where are we in the cycle”. All very admirable.

There is however an immovable theory underlying this view with two parts.

Cycles. Marks and Munger and Buffett and Keynes and Samuelson and wacky ones like Kondratieff and many old school theorists (moneylenders and jubilee years) of business cycles believe there are cycles. It’s the weirdest thing that this would be true. Efficient Markets theory would not let there be cycles — there would be laws that operate uniformly, and while there may be non-linear shapes like ellipses (the planetary orbits) or parabolic curves (like the speed of falling objects under gravity), there would not be manias and crashes. Right?

Well, Marks has a natural law of markets that manias happen and end in crashes. So does Dalio (though he has medium curves for debt and small curves for production and huge curves for history-driven prosperity over time).

Psychology. It’s quite fascinating that all the economic and monetary rubrics are designed to measure mindsets not money or metrics. For Buffett and Graham, there was the irrational Mr. Market. A person who acts crazy, as symbol of the market’s unreliable behavior. For Marks, in his widely ready 2017 memo “There they go again…again“, the main thing to learn from the VIX index’s then-historic low was not about the market’s expected volatility. The main thing was to learn how people in the market were thinking. They were expecting nothing much to change, even in a Trump + turbulent world. The commodity index tells us about the psychology, and that’s the predictively powerful fact.

So it matters how people are feeling, and feelings move in a pattern from optimistic to cautious. Munger and Buffett tell us to be bold when others are cautious, and careful when folks are acting too optimistic. So the last month’s movements tell us where we are, and the prescription above tells us what to do next.

And don’t forget this earlier post about the Grave Dancing Music.