"Too Much Money Chasing Too Few Deals"

The seven worst words in the world (for an investor) is "Too Much Money Chasing Too Few Deals" according to Howard Marks of Oaktree Capital.

When investors bid up assets to premiums unjustified by traditional risk mitigation practices, the return opportunities inherently diminish and may not justify the potential risk for a loss of principal. 

Marks is justifiably neutral on the economic outlook with a risk averse inclination. He recognizes the underlying strength in the economy. But he wants investors to respect valuation and shift their risk profile into a more stringent phase. He admits he is still making investments, but he is still prepping for the next downturn. Oaktree has been raising distressed funds for 3 years and running, so they are admittedly early, but eventually they will be right. Some would argue that Marks is attempting to sell more of his new book "Mastering the Market Cycle" with Peter Schiff-esque scare tactics, and they might be right. After all, it's easy to claim a recession is coming without ever having to nail down the timing!  

What we are seeing now is the "Fed put" reversing course into a "tightening" phase. Federal Reserve Chair Powell said "we're a long way from neutral on interest rates" indicating that more hikes are coming. 

With a plethora of new money, new funds, new first time funds and new non-bank lenders, there is an unofficial requirement for investors to "put money to work" while at the same time the opportunities for good investments shrink as the Fed tightens. The Federal Open Market Committee (FOMC) is likely to take the funds rate to 3.4% before pausing. This is all a recipe for disaster. 

Dan Shainberg

#DanShainberg

#RecessionResister
@DanShainberg