The stock market collapsed last month on recession fears but has since risen to new highs as the Federal Reserve began cutting interest rates and China unveiled stimulus measures.
For Mark Spitznagel, co-founder and chief investment officer of hedge fund Universa Investments, events are unfolding as he expected.
The hedge fund veteran previously said markets will rise as the Fed eases into a moderation phase, but he also warned that a recession is coming and that interest rate cuts are also an opening signal of major setbacks to come.
In the current environment, he said, that means the largest market bubble in history will burst soon, which will eventually prompt the Fed to “do something heroic” but doom the economy to stagflation.
In an interview with Bloomberg TV on ThursdaySpitznagel said the market will continue to see “pure euphoria” in the short term, but will emerge from the Goldilocks zone towards the end of the year.
To be sure, he has often sounded the alarm about extreme events in the market. His hedge fund specializes in risk hedging, a strategy that seeks to prevent losses from unexpected and unlikely economic disasters, also known as “black swans.”
Spitznagel warned that with the yield curve not inverting recently after years of inversion, the clock is starting to tick.
“This is when you enter black swan territory,” he said. “Black swans are always lurking, but now we are in their territory.”
Rather than pointing to a specific catalyst, he said the risks in the market stem from the overall environment feeling the late effects of the Fed’s aggressive rate-hiking cycle that began in 2022, when central bankers sought to rein in high inflation.
Despite the current risky landscape, Spitznagel warned against traditional methods of diversifying investments that can actually worsen an investment portfolio.
“Diversification”deterioration“Modern portfolio theory – people have been distracted to average variables, to risk-adjusted returns, and these are the things that have made people poorer over the years, which is kind of a solution looking for a problem.” “Diversification is not the Holy Grail that many people make it out to be. That is actually a big lie.”
He added that investors should think about how their portfolios perform in good markets and bad markets, and be comfortable with both outcomes.
However, he acknowledged that it is difficult to try to hedge this market, saying that gold will follow the decline of stocks and that cryptocurrencies will fall along with risk assets. But the key is to stop focusing on what the market will do.
“We need to protect ourselves not from the market but from ourselves. We need to predict not the market, but ourselves,” Spitznagel said. “We need to think about what we would do in these two scenarios: boom and bust markets. Markets zigzag for the sake of zigzagging. It’s like poker, they try to get us out of our positions to make us sell low and buy high. Let’s make sure we don’t do that.”