The stock market crashed last month on recession fears, but has since risen to record highs as the Federal Reserve began cutting interest rates and China announced stimulus plans.
For Mark Spitznagel, co-founder and chief investment officer of hedge fund Universal Investments, things are unfolding exactly as he predicted.
The hedge fund veteran has previously said that markets will rebound if the Fed eases in a Goldilocks phase, but also warns that a recession is on the horizon and a rate cut could signal the beginning of a major reversal in the future. I was doing it.
In the current environment, that means the biggest bubble in market history will soon burst, and while the Fed will eventually “take heroic action,” the economy is doomed to stagflation, he said. said.
In an interview with thursday bloomberg tvSpitznagel said the market will continue in “pure euphoria” in the short term, but will move out of the Goldilocks zone toward the end of the year.
Indeed, he frequently sounds the alarm about extreme events in the market. His hedge fund specializes in tail risk hedging. This is a strategy to prevent losses from unpredictable and unlikely economic catastrophes, also known as “black swans.”
Spitznagel warned that after years of an inverted yield curve, the inversion has recently been lifted and the clock is starting to tick.
“That’s when we enter black swan territory,” he said. “The black swans are always lurking, and now we are in their territory.”
Rather than point to specific triggers, he said the risks to the market are overall being felt by the delay in the Fed’s aggressive rate-hiking cycle that began in 2022 as central bankers sought to rein in high inflation. He said it comes from the environment.
Despite the current high-risk situation, Spitznagel warned against traditional approaches to diversification that can actually hurt your portfolio.
“Diversification”deformity“Modern portfolio theory distracts people from mean fluctuations and risk-adjusted returns, which have been making people poorer for years, and leaves people looking for solutions in search of problems.” Something like that,” he explained. “Diversification is not the holy grail that many people tout it as. In fact, that’s a big lie.”
Investors should think about how their portfolio performs in good and bad markets, and should be satisfied with both outcomes, he added.
Still, he acknowledged that trying to hedge this market would be difficult, saying that gold would follow falling stock prices and cryptocurrencies would fall along with risk assets. But the important thing is to stop fixating on market trends.
“We need to protect ourselves, not the market. We need to predict ourselves, not the market,” Spitznagel said. “We have to think about what we would do in two scenarios: a boom and a bust in the market. They will try to make you sell something and buy something expensive. Don’t let that happen.”
