Nobody Knows (Yet Again)

This is the memo by Howard Marks. Nobody knows yet again. On Friday, 09/15/2008, shortly after the close of the New York Stock Exchange, Lehman Brothers surprised the world by filing for bankruptcy. This came on the heels of rescues slash bankruptcies of Bear Stearns and Merrill Lynch and was followed quite soon by more of the same at Wachovia, Washington Mutual, and AIG.

Market participants quickly concluded that The US financial sector was on the verge of melting down. It had become patently obvious, unlike a few days earlier, that

financial institutions might fall like dominoes due to the combination of, a, financial deregulation, b, a manic housing boom, c, unwise mortgage lending, d, the structuring of mortgages into thousands of tranche securities that were rated too high, e, investment in these securities on the part of highly levered banks, and f, counterparty risk resulting from the bank's interconnectedness.

Reflecting this fear, the markets embarked on what felt like a downward spiral without end. I

thought I should comment on these developments and the outlook, and the result was a memo called nobody knows, published four days later. I affirmed my ignorance of the future, as usual, but to an even greater degree given that all prior expectations had been upended. Nobody knew, especially me, whether the spiral could be arrested. Nevertheless, I concluded that we had to assume it would and, thus, that we should plow money into financial assets at their highly discounted prices. There was nothing anyone could say they knew, and that included me. I was limited to gaming out my conclusions, wh

How could we not follow through when one arrived, especially given the bargains and the extraordinary yields available on some of the highest quality debt we'd ever been able to buy in distress?

And yet, we admittedly had no idea what the future would bring. I can't claim to have analyzed the future. In fact, I consider the phrase analyze the future one of the great oxymorons. The future has not yet been created, and it's subject to millions of complex, unquantifiable, and unknowable factors that will always be in flux. You can ponder the future and speculate about it, but there's nothing to analyze, and certainly there wasn't in the early days of the global financial crisis. In March 2020, I reused the title of the 02/2008 memo for Nobody Knows Two, my first memo during the COVID nin

The things on which everyone will agree are obvious, such as the likelihood of higher prices.

The less obvious truths will be harder to discern. One of the things I insist on is that even for someone who deals with the future via forecasts, a forecast isn't enough. In addition to a forecast, you also need a good sense for the probability your forecast is correct since not all forecasts are created equal. In this case, under these circumstances, it must be accepted that forecasts are even less likely to prove correct than usual. Why? Primarily because of the vast number of unprecedented unknowns involved in the current matter, which has the potential to turn into the biggest economic de