Mark Spitznagel has developed a reputation as a pessimist over the years. But the co-founder and chief information officer of private hedge fund Universa Investments got it for good reason. When you repeatedly warn that the Fed helped burst the “largest credit bubble in human history” and that all bubbles eventually burst, investors and the media tend to focus on the bearish aspects of your outlook. Additionally, Spitznagel's patented strategy, called tail risk hedging, seeks to profit from sharp market declines and popularizes the concept of rare and unexpected events known as “black swans.” Nassim Taleb, a statistician and academic, has been selected as a “notable researcher.'' Scientific advisor. ”
Nevertheless, Spitznagel says he is a bit misunderstood and so is his strategy.Tail risk hedging is meant to protect investors when things go wrong and is a type of “insurance,” says Wall Street veteran. luck— but its real value is that it allows Universa customers to invest more of their portfolios in stocks with the potential for price appreciation. It's about taking more risks, not less. As Spitznagel says, “The important thing is that you can do it longer.”
Still, most media headlines, including the one here, are about Spitznagel. luck, tends to focus on his bearish predictions. There are clear reasons for that, but as it turns out, Spitznagel recently said: business insider He has certainly been bullish in recent years, saying he believes “the worst market crash since 1929” is coming. He made this claim in his 2023 letter to investors. luck, He says a stock market rally is on the way, and has said publicly multiple times that the market is likely to continue rising until the Fed starts cutting interest rates.
“I talked to some people and it always came out that I was a perpetual bear. That makes sense, because I've always been a big believer in financial interventionism, and whether it's investors, economics, “They were skeptical about the destructiveness of capital,” Spitznagel said. “But at the same time, obviously I'm not a permanent bear. I've never been more positive about this market in the last year and a half.”
Let's say Mr. Spitznagel is still around, even though the S&P 500 is up nearly 10% since the beginning of the year. carefully Bullish. With the Fed pausing rate hikes in July 2023 and company announcements on AI receiving all the hype, the market is in a sentiment-driven “Goldilocks zone,” hedge funders said. “And there's a little more work to be done on this,” he said. luck.
goldilocks zone
Spitznagel said that despite concerns about the long-term effects of rising sovereign and private debt and the delayed impact on the economy from Fed interest rate hikes, investors are ignoring these negative factors and, for now, claimed to be driving the market higher. The reason is that “sentiment was so bad in 2022 that we thought we were in the 70s. That sentiment needed to reverse in both the market and the economy,” he said. Ta.
Spitznagel said the current stock market rally is simply based on a relatively dovish Fed and bullish investor sentiment, “both of which are basically just juice.”
But like all Goldilocks zones, this one doesn't last forever. Positive investor sentiment alone cannot drive the market up forever. Fundamentals such as earnings and economic growth will ultimately matter. And Spitznagel still believes rising interest rates are weighing on the economy and mean fundamentals cannot be maintained forever.
“The Fed has done a lot. And now, in a sense, it's coming out of it. But you can't take back what's been done,” he said. “Markets follow fundamentals at the end of the day, but there can be a little Goldilocks zone where the market is untethered.”
We may be in the Goldilocks zone right now, but if the Fed starts cutting interest rates, which many on Wall Street expect will happen this year, the economy will feel the weight of years of rising borrowing costs. Spitznagel argued that this would be a sign that there is. This is an era when public and private debt is rapidly increasing.
He added that going from “in some ways the fastest and biggest tightening in history to the biggest credit bubble in human history” was inevitable, adding: “That's when things get really bad – and at that point.” he claimed. , it's probably too late to get out. ”
Okay, but how about being bullish? Do you think Spitznagel said he was bullish? And yes, “again, I'm speaking like a perpetual bear right now,” the hedge funder admitted.
But as AI hype grows and the Fed “sort of apologizes” for its very aggressive rate hikes since pausing last July, Spitznagel says we is in “one of those zones where everything feels really good,” he said. This midpoint. ” So even if he remains concerned about the possibility of a crisis someday, he remains bullish, at least in the short term.
But remember: “Cassandra makes a terrible investor.”
In Greek mythology, Cassandra was a Trojan princess who had the curse of being able to see the future, but no one believed what she warned about. (This was especially fateful in her warning to the Trojans that the famous horse the Greeks gave them was not a gift, but a contraption.)
Investors use the term “cassandra” to refer to people who make predictions that are ignored by the masses. But the problem is, Spitznagel says, when it comes to managing money, people who just preach doom and gloom without understanding market forces and the long-term American economy aren't going to be very successful in the end.
“I can't say it too strongly, but Cassandra is a terrible investor,” the hedge funder reiterated for emphasis, adding, “There are no exceptions.”
Some may see this comment as a criticism of fellow hedge funder Michael Burry of Big Short fame. Cassandra BC It is certainly a little strange that the statement about X is Spitznagel's. Just last year, Spitznagel again warned of the “largest credit bubble in human history” and “the worst market crash since 1929.”
But at the same time, Spitznagel always adheres to one of Warren Buffett's key bullish principles: “Don't bet on America.” Wall Street veterans say that in the long run, U.S. companies will continue to innovate and expand, even as the debt crisis erupts and the possibility of a stock market crash increases. “Although we may be positive in the very long term, please understand that there are still crises ahead,” he explained.
Mr. Spitznagel believes that investors only hurt themselves by trying to time their entry and exit from the market. And he warned that professional investors who tell the public to flee stocks often do so at the worst possible time. These doomsayers have the luxury of being able to wait a long time for a payoff, but most Americans don't have that time or capital.
As investors become more excited about AI, Spitznagel said, “What will ultimately happen is that the Cassandras will end up buying this market at the highest price, which is probably not the case.'' It's probably not far away.”
Too often, he says, investors buy at the top of the market and then sell when the market crashes. Instead, Mr. Spitznagel recommends that the average investor keep more cash on hand to avoid being forced to sell at the worst possible time when the market crashes.
He argued that market crashes are nothing more than long-term cumulative opportunities if all you do is buy and hold America's biggest companies. Even the reputed permabears, who fear a debt crisis is coming, believe that the best option for the average investor is to simply buy and hold the S&P 500 for the long term, increasing their position when the market declines. ing.
“If I was only allowed to make one trade over the next 20 years and I had to make it today, I would [could] If I didn't touch my portfolio for 20 years, I'd buy S&P. [500],” he said. “Because remember, Cassandra would be a terrible investor.”
