Taps Coogan – September 22nd, 2022

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Mark Spitznagel, Universa Investments Founder and hedging pioneer, recently spoke with Bloomberg to reiterate his philosophy that investors must be hedged against downside risks so that they have the ‘optionality of not knowing’ how things will turn out. He also reiterates his view that the Fed will never be able to normalize interest rates again.

 

Some excerpts from Mark Spitznagel:

“These grandiose forecasts are really not the way to do this. You need to be agnostic… You need to retain the option of not having an opinion…”

“The Fed is really trying to crash the market. Let’s recognize within the context of modern US history, this is a very unusual thing… We can think of the more normal type of crash, or selloffs, or recessions where the Fed starts tightening and it builds up in the system and the markets roll over and then the Fed is desperately trying to stop that… That’s sort of ‘Regime One’ and now we have what I would call ‘Regime Two,’ a very unusual type of crash where we actually have the Fed leading it down… The litmus test for which regime we are in is ‘Can the Fed stop this selloff… at any time?’ and clearly today they can. Powell could utter a couple of words and the market would completely reverse. We could argue about what that would mean for inflation. That wasn’t the case for other crises…”

“There is this sort of psych-ops. The Fed wants us to believe they are going to do this but… I’ve been a broken record on this. I don’t believe the Fed can ever normalize interest rates again… We’ve been kicking the can down the road and now we’re down the road and here is the can. You can’t turn this around. There is an arrow of time to this. The Fed has been fighting wildfires for a quarter of a century… forest ecology has changed fundamentally. Now the Fed wants us to believe that they are going to do a controlled burn, which is what they are doing this year…”

“I think the Fed is ultimately going to have to choose (between inflation and markets). They don’t want us to think that, of course…”

“People like to compare this to the 1970s but I think there is a fundamental flaw in that. In the 1970s the debt was nothing like today and that structure is the elephant in the room. The total debt-to-GDP today is 3x what is was in the 1970s. There is no comparison…”

“Remember, the Fed is tightening into… (a recession) or moving into a recession… I don’t think it is going to be able to do it… The controlled burn can turn into a wildfire cascade…”

“I think we should worry more about deflation is really what I am saying… If the Fed pops this bubble, we will be in a deflationary spiral and there are delayed effects here. We won’t know when the Fed has popped this bubble…”

Sounds about right. The 1970s were also the post-war high in working age population growth. Today is the post-war low.

There is much more to the interview, so enjoy it above.