Lecture Notes: Howard Marks' Memo "Nobody Knows Yet"

Introduction

• Date of significant event: September 15, 2008
  • Lehman Brothers filed for bankruptcy.
  • Followed by failures at Wachovia, Washington Mutual, and AIG.
• US financial sector perceived as near meltdown.
  • Causes:
    • Financial deregulation.
    • Housing boom and unwise mortgage lending.
    • Overrated securities and highly levered bank investments.
    • Counterparty risk due to banks' interconnectedness.

2008 Memo "Nobody Knows"

• Marks' perspective: Ignorance of the future was affirmed.
• Suggested investment:
  • Despite uncertainties, financial assets were bought at discounted prices.
  • Investing $10 billion in distressed debt opportunities.

Key Conclusions

• Predicting the end of the world is futile as most of the time it doesn't end.
• Action was taken based on logical reasoning rather than certainty.

Future Uncertainties and Predictions

• Future is unknowable, subject to complex, unquantifiable factors.
• Action during crises is filled with trepidation and lack of certainty.

Reflections on Current Economic Events

• Discussion on tariffs under Trump's administration.
  • Events reminiscent of the 2008 financial crisis.
  • Unpredictability of global trade and its consequences.

Importance of Decision-Making in Uncertainty

• Forecasts require evaluation of their probability.
• Decisions are necessary despite lack of certainty.
• Inaction is also a decision.

Tariffs and Their Implications

• Goals of tariffs: Support US manufacturing, discourage imports, etc.
• Tariffs lead to second and third order consequences.
  • Retaliation, inflation, recession, supply shortages.
  • Long-term effects on global order and economic relationships.
• Unpredictable politics and economics.

Global Trade and Comparative Advantage

• Post-WWII global trade benefits highlighted.
• Comparative advantage maximizes collective welfare.
• US has benefited from cheaper imports, despite some job losses.

Risks of Isolationism and Antagonizing Allies

• US historical generosity and its positive impacts on global relations.
• Risk of antagonizing trading partners, shifting global alliances.
• Potential financial implications of reduced foreign investment in US treasuries.

Conclusion

• Tariff developments compared to "own goal" in soccer, akin to Brexit.
• Potential for economic recession and inflation due to tariffs.
• Encouragement to connect globally and find investment opportunities amidst upheaval.
  • Reference to historical context and cyclical nature of economic events.

Personal Reflection

• Marks shared his respect for Canada amidst tariff concerns.
• Emphasis on global friendships and alliances.

Final Thoughts

• Importance of understanding complex economic and trade issues.
• Howard Marks urges informed yet speculative approaches to investing.
• Future economic landscapes remain uncertain and unpredictable.

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