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Howard Marks: This is the “Fifth Inning” of a Credit Bubble

This quote is from this weekend’s Barrons interview with Howard Marks of Oaktree Capital fame:

“These days, Marks sees disquieting signs of another credit bubble, though it is just in “the fifth inning.” Central banks are pumping money into economies with abandon. And rates have descended to levels that hardly compensate investors for the risks incurred.

The leveraged buyout market, too, is heating up again, with private-equity firms willing to pay price-to-cash-flow ratios at the elevated levels of 2006, if not the absurd ratios of 2007.

Debt issuance, particularly of high-yield bonds and leveraged loans, is soaring. Individuals and pension funds, though hardly complacent about risk after the trauma of the credit crisis, are, Marks says: “acting bullish, if not thinking bullish,” by piling into high-yield and other riskier debt sectors in a desperate attempt to fund retirements or satisfy minimum return needs.

Does it all spell a disaster in the making? Probably not, he avers. The much-feared eventual rise in interest rates, which doomsday forecasters say could crush bonds, would likely result from an improvement in the economy, he reasons. That alone would mitigate against a smash-up in, say, the junk-bond market, as defaults would remain at minimal levels.”

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