Mark Spitznagel recently stated that the current market is the biggest powder keg time bomb in financial history. He has been warning for some time about a debt bubble bursting.
• Spitznagel: The credit bubble will burst and lead to “catastrophic market failure”.
• Recession is inevitable
• Investors have always struggled with the risk dilemma
Mark Spitznagel: Fed policy ends in catastrophe
Universa Investments founder and chief investment officer Mark Spitznagel recently stated his suspicion that the Fed’s policy will end in disaster. He expects the stock market will likely rise and eventually change dramatically when the Federal Reserve begins cutting interest rates. “Then it gets really bad,” he explains in the interview with Bloomberg. Earlier this year, he declared it was the “biggest powder-keg time bomb in financial history,” even worse than in the late 1920s, before the Great Depression. “Here’s my crazy theory: I think our interest rates will also go back to zero. I mean, a lot of people would think I’m crazy. But think about the deflationary event when a credit bubble bursts. It’s like picking up a huge pile of money and set it on fire”, he explains during the interview.
Spitznagel is particularly concerned about the market, which depends on support from the Fed. He has been predicting for some time that the market is therefore on a drastic path to collapse. He attributes recent declines in stock markets primarily to the US Federal Reserve’s low interest rate policy over the past decade. This policy led to an excessive injection of liquidity into the markets and encouraged excessive debt. According to Spitznagel, this has created a “credit bubble” that he predicts will burst. He predicts this will ultimately lead to “catastrophic market failure.”
Fed needs to step up support
Spitznagel expressed the view in the interview that the Federal Reserve may face challenges due to its quantitative tightening and may even have to resort to easing measures again. Despite the current positive market development, Spitznagel believes a recession is inevitable. However, he expects the market to continue rising before a slowdown occurs as the Fed has taken a temporary pause. However, he emphasizes that the climate is very negative despite the current market developments. Spitznagel also explains that the delayed effects of high interest rates are not yet fully felt throughout the economy. However, future reductions would reflect borrowers’ inability to bear higher financing costs after becoming burdened with debt. “We’re probably in a short Goldilocks zone right now, and no one expects that – more pressure and slowdown in risk assets, which is what I’ve been writing and talking about for a year. too late to react,” said Spitznagel.
In an interview with Yahoo! Finance, Spitznagel explains that while he doesn’t consider government bonds to be a safe haven, they are a haven of hope. “They have their place. I think they’re very cheap at the moment, so I don’t want to demonize them too much. But as a strategic risk mitigation strategy, they don’t do justice to the non-linear nature of risk,” he explains.
However, reducing risk does not mean protecting yourself from the markets, but above all protecting yourself. “Markets make us do really stupid things. We just need to configure our portfolio to protect ourselves from them.” In general, Spitznagel considers risk to be a dilemma that has always existed for investors. “If you take too much risk, there will be costs over time. If you take too little risk, there will be costs over time.” And Spitznagel doesn’t believe diversification is the solution either. “Diversification has been called ‘the Holy Grail of investing’ by great luminaries like Dalio. That is a lie. It is not the Holy Grail of investing. Peter Lynch aptly calls it ‘portfolio dediversification’. In fact, It’s the cure for what’s worse than the disease”, he explains. The reason for this is that although you may lose less in a collision, you will ultimately have to pay for it in the recovery phase.
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