Mark Spitznagel has earned a reputation as a pessimist over the years. But it’s an accolade the co-founder and CIO of private hedge fund Universa Investments earned for good reason. When you warn, over and over again, that the Federal Reserve helped explode the “largest credit bubble in human history” and that all bubbles will eventually burst, investors – and the media – will tend to focus on the bearish side of the story. your prospects. Furthermore, Spitznagel’s patented strategy, called tail risk hedging, seeks to profit from sharp market downturns, and he employed Nassim Taleb, the statistician and academic who popularized the concept of the rare and unexpected event called “swan black”, as a “distinguished” scientific consultant”.
However, Spitznagel says he was somewhat misunderstood, and so was his strategy. Tail risk hedging is meant to protect investors when things go wrong – a sort of “insurance policy,” says Wall Street veteran Fortune-but the real value of this is that it allows Universa clients to invest more of their portfolios in stocks with price appreciation potential; take more risks, not less. As Spitznagel said, “the point is that they can be longer.”
However, most media headlines are about Spitznagel, including ours here Fortune, tend to focus on its bearish forecasts. And although there is a clear reason for this after all, Spitznagel said recently BusinessInsider who believes the “worst market crash since 1929” is upon us: The hedge funder has actually been bullish in recent years. He argued in his 2023 investor letter, seen by Fortune, that a stock market rally was coming and has said publicly on multiple occasions that until the Fed starts cutting rates, markets will likely continue to rise.
“I’ve talked to a couple of people and I’ve always understood that I’m a permabear. Which is right, because all my life I have been skeptical… of monetary interventionism and the destructiveness it has on investors, on the economy and on capital,” Spitznagel said. “But at the same time, clearly, I’m not a permabear. I have been as optimistic about this market as I could be over the last year and a half.”
Even now, after a nearly 10% year-to-date rise in the S&P 500, Spitznagel remains, shall we say, with caution bullish. With the Fed pausing its rate hikes in July 2023 and company announcements on artificial intelligence receiving all kinds of publicity, markets have found themselves in a sentiment-induced “Goldilocks zone,” according to the hedge funders. “And we still have some work to do on that,” he said Fortune.
The Goldilocks area
Despite his concerns about the long-term impact of our growing national and private debts, and the lagged impact of Fed rate hikes on the economy, Spitznagel argued that investors are ignoring these negatives and pushing markets higher at the moment. That’s because “sentiment was bad in ’22, we thought we were in the ’70s, and that sentiment was going to reverse both in the markets and also in the economy,” she said.
For Spitznagel, the current stock market rally is simply based on a relatively accommodative Fed and bullish investor sentiment, “both of which are basically just juice.”
But like every Goldilocks zone, this one won’t last forever. Positive investor sentiment alone cannot drive markets higher indefinitely; fundamentals such as earnings and economic growth will eventually become relevant. And Spitznagel still believes higher interest rates are weighing on the economy, meaning fundamentals won’t hold up forever.
“The Fed has done a lot. And now it’s like he’s speechless. But he can’t undo what he’s done,” she said. “Ultimately markets follow fundamentals, but you can have these little Goldilocks zones where you can remain somewhat unconstrained.”
We may be in a Goldilocks zone now, but when the Fed starts cutting interest rates, which many on Wall Street expect to happen this year, Spitznagel says it will be a sign that the economy is feeling the brunt of years of rising borrowing costs. in an era of growing public and private debt.
The consequences of “the fastest and biggest tightening ever seen, in some respects, in the biggest credit bubble in human history” cannot be avoided, he added, arguing that “that’s when things are going to get really bad – and at that point , it’s probably too late to go out.”
Ok, but how about being bullish? I thought Spitznagel said you were bullish? And yes, “once again, I look like a permabear right now,” the hedge funder admitted.
But with enthusiasm for AI growing and the Fed “kind of apologizing” for raising interest rates so aggressively since it suspended its hikes last July, Spitznagel said, there we’re in one of “these areas where everything looks really good, where there’s sort of this middle ground.” So he’s at least optimistic in the short term, although he still fears a crisis could strike at some point.
But remember: “The Cassandras are terrible investors”
In Greek mythology, Cassandra was a princess of Troy who was cursed with being able to see the future, but not be believed by anyone she warned. (This was especially fatal because she warned the Trojans that the famous horse the Greeks had given them was not a gift, but a trick.)
Investors reserve the term “Cassandra” for those who make prophetic predictions that are ignored by the masses. But the fact is, when it comes to managing money, those who purely preach doom and gloom, without understanding the power of markets and the long-term American economy, end up not doing very well, according to Spitznagel.
“I can’t say it loud enough: Cassandras are terrible investors,” the hedge funder said, repeating himself for emphasis and adding: “no exceptions.”
The comment, which could be seen by some as a criticism of fellow hedge fund financier Michael Burry, of Big Short fame, who passes for Cassandra BC on ”.
But at the same time, Spitznagel always sticks to one of Warren Buffett’s key bullish principles: don’t bet against America. The Wall Street veteran said that despite the looming debt crisis and the growing likelihood of a stock market crash, in the long term American businesses will continue to innovate and expand. “You can be positive in the long term, but still understand that there are future crises,” he explained.
Spitznagel believes that investors would be hurting themselves just by trying to time market entries and exits. And he warned that professional investors who tell the masses to abandon stocks often do so at the worst possible time. These prophets of doom have the luxury of waiting a long time for a reward, but most Americans have neither the time nor the capital.
Now, as investor euphoria around AI continues to grow, Spitznagel said that “what will end up happening is that all those Cassandras will finally buy into this market at the highest levels, which is probably not too far away.”
Too often, he said, investors end up buying at market highs, then selling when a crash occurs. Instead of that, Spitznagel advises the average investor to keep a little extra cash on hand, ensuring that when a market decline occurs, it won’t force him to sell at the worst time.
If all you do is buy and hold America’s largest companies, a market crash is simply an opportunity to load up for the long term, he argued. Even the well-known permabear who fears the coming debt crisis believes 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 collapses.
“If I was only allowed to do one operation for the next 20 years, and I had to do it today, and [could] If I didn’t touch a portfolio for 20 years, I would buy the S&P [500],” he said. “Because remember: Cassandras are terrible investors.”