Howard Marx Interview: “There’s No Free Market Today”

By Zerohedge

Earlier this year, Oaktree Capital Management’s Howard Marks asked what is perhaps the most important question for capital markets: “What would happen if a large number of holders decided to sell a high yield bond ETF all at once?”

The answer, of course, is that fund managers would be left with a massive, non-diversifiable, unidirectional flow which would force them to either tap emergency liquidity lines with banks to meet redemptions or else risk selling the underlying bonds into an increasingly thin secondary market for corporate credit; the former option is a delay-and-pray scheme while the latter has the potential to trigger a sum-of-all-fears scenario wherein illiquidity quickly begets a fire sale.

“The ETF can’t be more liquid than the underlying, and we know the underlying can become highly illiquid,” Marks warned.

Recently, the “lonely contrarian” spoke to Goldman on topics ranging from manipulated markets to investor psychology. Here are some notable excerpts.

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From Goldman’s “Fortnightly Thoughts”

How can we understand investor psychology and use it to make investment decisions?

It’s the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. It’s important to control fear and greed.

Why do behaviour patterns and mistakes recur despite the plethora of information available now? Are we doomed to repeat our mistakes?

The bottom line is that even though knowing financial history is important, requiring people to study it won’t make a big difference, because they’ll ignore its lessons. There’s a very strong tendency for people to believe in things which, if true, would make them rich. Demosthenes said, “For that a man

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