Sea ChangeCopy Anchor Link

Sea ChangeCopy Anchor Link

Sea change is howard-marks's term — borrowed from the idiom — for a structural, lasting transformation of the investment environment, as distinct from an ordinary cyclical swing. He uses it sparingly: in his telling, a 53-year career has produced only two real sea changes, and his December 2022 memo Sea Change argues the world was entering a third.

What counts as a sea changeCopy Anchor Link

Marks's two prior examples are both regime shifts in how investing is done. The first was the birth of the risk/return mindset in the late 1970s, when high-yield bonds made it possible to invest prudently in non-investment-grade credit — a change in which "risk wasn't necessarily avoided, but rather considered relative to return and hopefully borne intelligently." The second was the four-decade decline in interest rates that followed Volcker's defeat of inflation, a tailwind he refuses to understate: "I consider it nearly impossible to overstate the influence of declining rates over the last four decades."

The moving walkwayCopy Anchor Link

His image for the rate tailwind is an airport moving walkway: investors earned returns both from their own skill and from a conveyor belt they did not fully appreciate. "they were on a moving walkway, carried along by declining interest rates", so that "a significant portion of all the money investors made over this period resulted from the tailwind generated by the massive drop in interest rates." The implication for performance attribution is uncomfortable: much of four decades of returns may have been environment, not alpha. See cycles.

The third sea changeCopy Anchor Link

The 2022 memo argues that the post-GFC low-rate world — zero rates, quantitative easing, dormant inflation, lowest ever prospective returns — had reversed. Inflation returned, the Fed began its fastest tightening cycle on record, and the conditions of 2009–21 flipped. The summary is the memo's thesis: "We've gone from the low-return world of 2009-21 to a full-return world" Credit, in particular, began to offer equity-like returns from contractual cash flows. "That's the sea change I'm talking about."

Why the distinction mattersCopy Anchor Link

Marks is careful that a sea change is not the same as a market call. His stance throughout is "we never know where we're going, but we ought to know where we are." A sea change is a claim about where we are — about the character of the environment — not a forecast. In the follow-up memo he sharpens the point against the usual skepticism: "the changes I described in Sea Change aren't just usual cyclical fluctuations; rather, taken together, they represent a sweeping alteration of the investment environment, calling for significant capital reallocation."

He concedes the historical caution — Templeton's warning that this time it's different is usually a rationalization of high prices — but allows that "On rare occasions, something fundamental does change, with significant implications for investing." A sea change is precisely that rare case, and the practical consequence is that the strategies that worked in the old regime may not be the ones that outperform in the next. The framework connects to cycles (the pendulum of psychology) and to risk-vs-uncertainty (the limits of prediction), and it is the macro-level counterpart to the company-level idea of a durable moat: both ask what is genuinely lasting versus merely cyclical. Marks returned to the theme in later memos: Easy Money catalogues how "low rates alter investor behavior, distorting it in ways that have serious consequences", and 2020 in Review had already flagged the tailwind in real time — "This has been a huge tailwind for investors." He also defended the memo against the charge of forecasting: "I stand by Sea Change ... as an acceptable deviation from my standard practice", a rare opinion for an investor who normally refuses macro calls.

SourcesCopy Anchor Link

• howard-marks/Memos-Markdown/Sea Change.md
• howard-marks/Memos-Markdown/Further Thoughts on Sea Change.md
• howard-marks/Memos-Markdown/Easy Money.md
• howard-marks/Memos-Markdown/2020 in Review.md
• howard-marks/Memos-Markdown/Taking the Temperature.md