"With valuations now pushing the levels we observed in 2007 (not to mention 2004-2006), it is clear simply from a valuation standpoint that investors are unlikely to be rewarded by "reaching for return" - even if the progress of the market remains positive or stable for a while longer. With respect to the gradual resolution of present credit conditions, Marks had this to say in a CNBC interview Friday:"
"We've gone through a period - I've been in this business for 42 years - that has primarily been a period of great prosperity. My essential underlying assumption is that the coming years will not be as prosperous as the last decades of the 20th century were. Incomes were stagnant during that period. GDP grew healthily. What bridged the gap between incomes and GDP was the extension of credit, and I don't believe that there will be a comparable increase in the use of credit in the next 10 years."
"To illustrate how the menu of investment options has varied over time from an expected return/risk perspective, the chart below presents the menu that we estimate was available at a number of points in time. For 30-year Treasuries and the S&P 500, the expected return estimates use a 10-year investment horizon. I've included the profiles for August 1982, March 2000, August 2007, March 2009, and today."
"Notice that 1982 was really a once-in-a-generation investment opportunity from the standpoint of long-term assets. On the basis of well-defined relationships between valuations and subsequent market returns, stocks were priced to achieve total returns approaching 20% annually for a decade. In fact, they followed with compound annual returns of nearly 20% over the next 18 years."
"The impact of the Fed's policy of quantitative easing has not been to increase "wealth" upon which a future consumption stream can be based. Instead, the effect of QE has been to increase valuations - producing high short-run returns by borrowing from long-term prospects. This has now produced a degenerate menu of long-term investment options (for passive investment strategies). Quantitative easing cannot produce wealth - it can only shift the profile of returns from the future to the present by forcing all assets to compete with zero-return cash. Now that it has done so, it is urgent for investors to weigh the prospective returns that remain, against the likely long-term risks."
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