Mark Spitznagel warns we are in ‘black swan’ territory
The stock market crashed last month on recession fears but has since soared new record high as the Federal Reserve begins cutting interest rates and China announces stimulus measures.
For Mark Spitznagel, co-founder and chief investment officer of hedge fund Universa Investments, events are unfolding as he predicted.
Former hedge fund veteran said the market will recover when the Fed loosens policy in the Goldilocks phase, but also warns of an impending recession and interest rate cuts are also the opening signals for major reversals in the future.
In the current environment, that means in The biggest market bubble in history will soon bursteventually causing the Fed to “do something heroicbut he did say the economy would fall into stagflation.
In an interview with Bloomberg Television on ThursdaySpitznagel said the market will continue to see “pure euphoria” in the short term, but will exit the Goldilocks zone by the end of the year.
To be sure, he has regularly sounded the alarm about extreme market events. His hedge fund specializes in tail risk preventiona strategy aimed at preventing losses from unpredictable and unlikely economic disasters, also known as “black swans.”
With recent yield curve inversion After years of reversals, the clock has begun to tick, Spitznagel warns.
“That’s when you enter black swan territory,” he said. “Black Swans are always lurking, but now we are in their territory.”
Rather than point to a specific catalyst, he said the risks in the market stem from the overall environment that is experiencing the lagging impact of the Fed’s aggressive rate-hike cycle starting in 2022, when banks The central bank seeks to contain high inflation.
Despite the current risk landscape, Spitznagel warns conventional approaches to diversifying investments could actually worsen a portfolio.
“Diversify,’distortion‘, modern portfolio theory—it keeps people distracted on average variations, on risk-adjusted returns, and these are the things that keep people poorer over the years, like a solution looking for a problem,” he explains. “Diversification is not the holy grail that many have touted. That’s a really big lie.”
Investors should think about how their portfolios will perform in good markets and bad markets — and feel comfortable with both outcomes, he added.
However, he admitted it is difficult to try to hedge this market, saying gold will follow stocks lower and cryptocurrencies will go down along with risk assets. But it’s important to stop fixating on what the market will do.
“We need to protect ourselves not from the market but from ourselves. We need to forecast not the market but ourselves,” Spitznagel said. “We need to think about what we would do in these two situations: a boom market and a bust. The market zigs and zags. It’s like poker, they try to force us out of our positions to make us sell low and buy high. Let’s make sure we don’t do that.”
