- Mark Spitznagel warned of a painful market meltdown fueled by the Fed’s interventions.
- The head of Universa Investments wondered if gold, bonds or cryptocurrencies could serve as safe havens.
- Spitznagel advised investors to reconsider how to mitigate risks and diversify their portfolios.
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Mark Spitznagel predicted a historic market crash and warned that the Federal Reserve’s stimulus efforts would exacerbate deflation, in an interview with Yahoo Finance this week.
The investor, whose hedge fund Universa Investments returned to 4,144% in the first quarter of 2020, also questioned the value of gold, bonds and cryptocurrencies as a safe haven. Moreover, he urged investors to rethink how to mitigate risk, and to stop reckless diversification of their portfolios – a central theme in his new book “Safe Haven: Investing for Financial Storms”.
Universa specializes in high-risk investment strategies that pay off during periods of market stress. Spitznagel is a close partner of Nassim Nicholas Taleb, author of The Black Swan: The Very Unlikely Impact. The couple founded the now-defunct Emperica Capital, and Universa is a student advisor.
Here are Spitznagel’s 12 best quotes from the interview, slightly edited and condensed for clarity:
1. “The way Universa invests is probably the most bearish expression one can have as an investor.”
2. “The goal of risk mitigation, like the goal of an investment, should be to raise our doubling rate over time. People make the mistake of thinking of it as a trade-off, when there really is another way.”
3. “Any gambler can come up with a deal that works well in a crash. The key is how you do in a crash for the rest of the time.”
4. “The Federal Reserve is manipulating the most important information parameter in the economy, which is interest rates.” – Describing financial markets as a “homogeneous system” responding to corrective feedback, Spitznagel said the Fed was messing with the system by keeping interest rates artificially low, incentivizing people to borrow rather than save.
5. “When you drive on the ice, you have delayed reactions so that when you do something, nothing happens until it happens all of a sudden. That’s what central bank interventions do to this symmetric system, they delay and focus on it over time.” – Delaying the corrective process would exacerbate the inevitable crash, Spitznagel said.
6. “I have an expectation of havoc in the financial markets. This does not necessarily mean that someone should hide away, as that may not be the best strategy either.” – Not knowing if there was an accident coming up, Spitznagel added, he built up his portfolio to win either way.
7. “Gold is very good. You just have to understand that there is a lot of hype around it.” – Emphasizing the value of gold as a safe haven, noting that it works best when inflation expectations are high, and has historically been inconsistent in mitigating portfolio risk.
8. “Cryptocurrency is basically a great idea, and I agree with the thinking behind it – the destruction of our money through the actions of central banks, and the risks of the banking system as a result.”
9. “It has turned into a casino, which is a very bad idea. It kills the golden goose in many ways. It is very noisy and not a safe haven at all.” – Discussing the value of cryptocurrency as a safe haven.
10. “It would be very difficult for bonds to offer cost-effectiveness. Bonds are really the base case for the average variance approach to lowering volatility in the portfolio, but they are poorer because of that.”
11. “No book will ever tell you what to do as an investor.”
12. “There is a lot of storytelling, narration and even snake oil being sold in the name of this doctrine of diversification. It just makes people poorer and doesn’t provide much risk mitigation.”