Oak capital founder: we are facing such a big challenge, how can the price of securities be so high?

category:Finance
 Oak capital founder: we are facing such a big challenge, how can the price of securities be so high?


Howard marks said in his speech that the U.S. economic recession began in February, and the real GDP fell by 32.9% in the second quarter, the worst level in more than 80 years and the worst level since the quarterly GDP data were collected. As a result, the performance of the S & P 500 is expected to decline by 25% in 2020 compared with that in 2019. However, the S & P fell 34% from February 19 to March 23, the fastest time in history that the S & P 500 has retreated into a bear market. After the U.S. announced the rescue plan, the S & P 500 index rose 46% from its lowest point, which was also the fastest time in history that the S & P 500 index entered the bull market. It took only two and a half weeks to rise 20%.

Now, some investors are in a dilemma, especially value investors like me. Howard marks said the world is struggling with a serious panic and the subsequent effects of the worst economic contraction weve ever seen. However, the stock market rose to a record high and returned to its peak in February. At that time, the U.S. economy was prosperous, and the prospect was very good. The panic of the epidemic has not been implanted into the minds of investors. Whats the matter? We are facing such a big challenge, how can the price of securities be so high?

The Fed has created a capital market condition that has resulted in record levels of existing financing and securities issuance, as well as a large number of over subscription transactions, he said The market generally thinks that the Federal Reserve is invincible. If the Federal Reserve wants to make the market better, the market will get better; if the Federal Reserve wants interest rates to stay low, the interest rates will stay low.

The fear of missed opportunities is greater than the fear of losing money. Howard marks said the economic restart could lead to a second wave of outbreaks, work fatigue would make it more difficult for people to keep social distance, and vaccine development might not be as fast as people hoped. The epidemic has caused a long-term blow to national and local finance, with widespread default and bankruptcy in various states and cities; it may cause permanent changes to some business models or industries, such as the use of tourism, retail and office buildings, and the impact of densely populated urban centers on the flow of people; finally, in the long run, due to the injection of a large number of people by the Federal Reserve Mobility, inflation is likely to rise in the long run. The main question is, can the Fed stick to buying securities all the time, and can its purchases keep the price of securities firm forever? In short, most investors seem to think the Fed can.

Howard marks concludes: weve seen a strong rebound, and its based on peoples optimism, which includes many positive expectations but largely ignores negative factors. Importantly, this optimism is caused by the liquidity provided by the Federal Reserve and the backing money from the Treasury. It is also crucial that low interest rates lead to financial asset inflation. Now, investors have begun to make assumptions linking these to economic recovery, and they also believe that these will not lead to serious negative long-term consequences. At the end of March, it is reasonable to go from the extreme downturn to the rebound. But the rebound came unexpectedly early, and it was so long and fast that the S & P is now almost back to its all-time high in February and so far this year. Given so many terrible things happening all over the world, how could S & P get such a strong and rapid rebound? In my opinion, the potential for further increases, better than expected results or further increases in valuations, cannot fully compensate for the downside risk brought about by a weaker than expected situation or a lower valuation. In other words, the outlook for fundamentals may be positive and optimistic on the whole. I also believe that the economy will recover sooner or later. However, in my opinion, the selling price of listed securities is not reasonable, which is unfavorable to investors. Therefore, we need to be cautious.

Oak capital began to invest in China in the late 1990s. through our years of npinvesting, we have seen improvements in Chinas legal system and financial market efficiency, which we welcome, said Howard marks. The further opening of Chinas financial market and the improvement of government regulation, transparency and independence of credit market have enhanced oak capitals confidence in investing in China. The government has also provided important assistance in capital flows, tax incentives and policies to make our implementation process smooth.

The following is a summary of Howard marks speech:

Now, I use the challenge that doctors face in the face of patients with serious diseases to compare the situation we are in during an epidemic. In some cases, in order to better carry out more complex treatment procedures, doctors will choose to put patients into coma, which can protect their lives while treating patients. When the patient is in a coma, the doctor will provide life support measures, and the patient will recover consciousness after being cured. For now, covid-19 is the disease.

We have been fighting this virus for more than half a year. At present, there are more than 17 million confirmed cases and 700000 deaths worldwide. Novel coronavirus pneumonia cases in the United States exceed 4 million, and more than 150 thousand deaths. This is the most serious epidemic we have encountered in more than 100 years. In order to treat patients (economy), governments around the world, including China and the United States, have chosen to put the economy (patients) into a state of stagnation, that is, to put them into a coma state. In this way, the contact between people will be reduced, the spread of the virus will be controlled, and shops, restaurants, teaching halls, entertainment places, gymnasiums and other places are forced to close down. So far, 54 million Americans are applying for unemployment benefits, which is a large number for a country with 330 million residents. The unemployment rate in the United States has risen from 3.5% in the beginning of this year to 20% now, and the official highest figure is 14.7%. Of course, as we all know, the recession in the United States began in February. The U.S. government just announced last week that real GDP fell at an annualized rate of 32.9% in the second quarter, the worst level in more than 80 years and the worst since quarterly GDP data were collected. As a result, the performance of the S & P 500 in 2020 is expected to decline by 25% compared with that in 2019.

We also provide life support when the economy is in a coma. The Federal Reserve and the Treasury have provided trillions of dollars in aid to support the paralyzed economy, including assistance to individuals and families, general commercial loan subsidies to troubled industries and businesses, loans to small businesses to increase employment, assistance to States, hospitals, and veterans nursing homes, and money market funds and commercial paper Guarantees, all of which are designed to maintain the liquidity of financial markets and enable businesses to earn the income they would have been able to earn if the economy were operating normally, as well as to enable individuals to earn what they were supposed to earn under normal economic conditions. After that, the treatment began. Of course, there is no feasible treatment for the new coronavirus at present, but we can maintain social distance, wear masks, test and update the source. Now many drugs are very advanced, which can reduce the patients condition and reduce the risk of death. An unprecedented global collaboration is underway to develop a vaccine. But it is obvious that our medical level is still limited.

Nevertheless, the economy has begun to recover. To stimulate the economy, the United States has cut its benchmark interest rate to 0%, and the Federal Reserve has purchased nearly $3 trillion of bonds. Economic activity has been restarted in April and may. Retail sales increased by 17.7% in May after a 22% decline in March and April. The unemployment rate dropped to a low of 11.1% at the end of June, about half of the highest level. The markets response to all these developments is extremely rapid and very interesting. As early as February 19, most Americans didnt realize that the new coronavirus had been imported into China. The S & P 500 index reached a record 3386 points, but fell by 34% in the next four and a half weeks, and fell to 2237 on March 23, the fastest time in history that the S & P 500 index has escaped into a bear market. That is to say, this is the fastest time the S & P 500 has fallen 20% or more. But then, in mid March, the Federal Reserve and the Ministry of Finance announced their rescue plan. On March 23, the Federal Reserve announced to expand the scope of its rescue. The market immediately started a strong rebound, and then raised the S & P 500 index to its current level, that is, 46% from its lowest point. It has basically returned to the original level, that is, the high level on February 19, which is also the history of the S & P 500 It took only two and a half weeks for the index to enter the bull market, which was up 20%.

Now, some investors are in a dilemma, especially value investors like me. The world is struggling with a serious panic and the subsequent effects of the worst economic contraction weve ever seen. However, the stock market rose to a record high and returned to its peak in February. At that time, the U.S. economy was prosperous, and the prospect was very good. The panic of the epidemic has not been implanted into the minds of investors. Whats the matter? We are facing such a big challenge, how can the price of securities be so high?

There are reasons for this, of course. Investors have great confidence in the Fed and treasury that they can revive the economy. According to the statistical results of the epidemic, the situation has basically improved, but it is still uncertain that we have brought the epidemic under control. People are increasingly optimistic about vaccines, testing and treatment, which also gives investors confidence. News such as the 33% decline in GDP in the second quarter will be compared in the next few quarters, which is believed to bring positive results. People have begun to think about the so-called V-shaped recovery. In general, investors are happy to see that after the trough, their profits will exceed the level of 2019, or even exceed the expected profits in 2020.

In terms of fiscal and monetary theory, this is simple. Everyone will say that the Fed is invincible. If the Fed wants to make the market better, the market will get better; if the Fed wants interest rates to stay low, interest rates will stay low. The Fed and Treasury have shown their determination to do their best to save the market. Federal Reserve Chairman Colin Powell said, we will not run out of ammunition.. The Fed has said it will continue to buy bonds as long as it needs to, and it has the ability to do so at all times. Now, when the Fed spends money on bonds, the bonds bring benefits to the Fed. The money goes to the seller, and the seller needs to control the money. The money can be used to continue to buy bonds, thus making them appreciate. In short, the Federal Reserve has created a capital market condition, which has brought the existing financing and securities issuance to record levels, and also resulted in a large number of over subscription transactions.

Interest rates have had a very positive effect on all of this, and everyone believes that interest rates will be lower for a long time to come. To be sure, interest rates will not rise until the recession is over. It may take a year or a half at the earliest from now on. Low interest rates increase the discounted value of future cash flows, making realizable assets more valuable. Low risk floating rate will reduce the yield required by the yield curve and capital market line as a whole. This means that all forms of investment dont have to provide a normal high return to allow prices to rise.

Finally, low yields on bonds mean less competitive advantage over stocks. All asset classes performed well.

Peoples behavioral factors are also important. Bargain hunting mentality and confidence in growth momentum are back. A large proportion of transactions come from index funds, ETFs and other passive investment vehicles, which do not make conscious decisions about the fairness of prices. So once trends start to take shape, they may be easier to continue.

The fear of missed opportunities is greater than the fear of losing money. Its a very important shift when prices go up, and of course because of the support of retail investors. Some of them make more money from unemployment benefits than they do when they work.

Of course, there are also negative aspects. I would like to list them briefly. I have listed the negative effects in detail: economic restart may lead to the second wave of outbreak, and we have seen the signs of the second wave; fatigue at work will make it more difficult for people to keep social distance, as we have seen; vaccine development may not be as fast as people hope; in fact, the statistical report shows that the second wave of the epidemic is likely to happen The decline of GDP in the second quarter will be shocking; if the recovery progress is slow and small enterprises can not restart, it will have an impact on the economic recovery. The slowdown of the recovery speed is related to the possible outbreak of the second wave of epidemic; the epidemic has caused a long-term blow to the national and local finance, and there is a possibility of widespread default and bankruptcy in various states and cities Some business models or industries will cause permanent changes, such as the use of tourism, retail and office buildings, and the impact of the flow of people in densely populated urban centers. Finally, in the long run, inflation is likely to rise in the long run because of the large amount of liquidity injected by the Federal Reserve. The main question is, can the Fed stick to buying securities all the time, and can its purchases keep the price of securities firm forever? In short, most investors seem to think the Fed can.

In my 2016 memo on the couch, I said that in the real world, things tend to swing between good and bad. But in the stock market, they tend to fluctuate between excellent, very poor and excellent. Of course, the challenge of what happened in the past six months is to find out which part is reasonable and which is abnormal, and there is no formula to tell us the answer to this question, but we can ask some supplementary questions to help us understand the truth: whether investors weigh the pros and cons equally and calmly; positive factors have been proved to be effective or negative factors What is the probability of rising importance; are these positive factors related to corporate performance and profitability or to the technical rebound brought about by the Feds continuous purchase and liquidity injection into the market? Obviously, the latter is more important now; the technical aspect plays an important role, but whether the influence is temporary or permanent; whether the market is boosted by the spread of optimism is optimistic Have investors ignored the valid rebuttals, and how valuations of earnings, sales and assets compare to historical levels. We can ask these questions and think about the answers.

My conclusion is as follows: we have seen a strong rebound, which is based on peoples optimism, which includes many positive expectations but largely ignores negative factors. Importantly, this optimism is caused by the liquidity provided by the Federal Reserve and the backing money from the Treasury. It is also crucial that low interest rates lead to financial asset inflation. Now, investors have begun to make assumptions linking these to economic recovery, and they also believe that these will not lead to serious negative long-term consequences.

Lets look at the back. At the end of March, it is reasonable to go from the extreme downturn to the rebound. But the rebound came unexpectedly early, and it was so long and fast that the S & P is now almost back to its all-time high in February and so far this year. Given so many terrible things happening all over the world, how could S & P get such a strong and rapid rebound? In my opinion, the potential for further increases, better than expected results or further increases in valuations, cannot fully compensate for the downside risk brought about by a weaker than expected situation or a lower valuation. In other words, the outlook for fundamentals may be positive and optimistic on the whole. I also believe that the economy will recover sooner or later. However, in my opinion, the selling price of listed securities is not reasonable, which is unfavorable to investors. Therefore, we need to be cautious.

I hope I can answer your questions on the spot, but if you have any questions, please let me know. I am happy to answer them.

Now, Id like to take a few minutes to talk about oak capital and its activities in China. Oak capital began to invest in China in the late 1990s. Today, we have set up offices in Beijing and Shanghai. Our investments cover listed stocks, credit, real estate, especially non-performing loans. We are the largest foreign non-performing loan investor in China, and we are also a strong supporter of Chinas deleveraging. Since 2007, oak capital has been serving clients in China, including sovereign wealth funds, insurance companies, family offices, wealth management companies, private banks and non-profit organizations. In 2013, oak became one of the first six managers to obtain the qualification of qualified domestic limited partner. We have set up a wholly foreign-owned enterprise in Shanghai and raised RMB 1 billion to invest in oak capital managements offshore fund, namely, oak capitals distress debt strategy. Since 2014, Chinese investors have been exposed to some of oak capitals credit strategies through products issued by local asset management companies in China and through the QDII project. As credit investors, we attach great importance to and act in accordance with the objective legal system and local market regulation.

Through our years of npinvesting, we have seen improvements in Chinas legal system and financial market efficiency, which we welcome. The further opening of Chinas financial market and the improvement of government regulation, transparency and independence of credit market have enhanced oak capitals confidence in investing in China. The government has also provided important assistance in capital flows, tax incentives and policies to make our implementation process smooth. In short, I have visited China frequently in the past 15 years and witnessed the changes in China. Oak capital and I are committed to contribute to Chinas economic opening up. Thank you very much for your long-term investment in China. Source: editor in charge of economic report in the 21st century: Zhong Qiming_ NF5619

Through our years of npinvesting, we have seen improvements in Chinas legal system and financial market efficiency, which we welcome. The further opening of Chinas financial market and the improvement of government regulation, transparency and independence of credit market have enhanced oak capitals confidence in investing in China. The government has also provided important assistance in capital flows, tax incentives and policies to make our implementation process smooth. In short, I have visited China frequently in the past 15 years and witnessed the changes in China. Oak capital and I are committed to contribute to Chinas economic opening up. Thank you very much for your long-term investment in China.