Mark Spitznagel says the ‘greatest credit bubble in human history’ is set to pop

https://finance.yahoo.com/news/hedge-fund-titan-watching-black-103000336.html

by mbustamanter • 3 years ago

57 57 3 years ago

finance.yahoo.com

gchokov• 3 years ago

All of the doomsayers are once in a while right..

PartiallyTyped• 3 years ago

Bears predicted 21 of the last 3 recessions; and if you tail a car for 500 miles you will give it a ticket.

thih9• 3 years ago

But does it happen in a statistically significant way?

H8crilA3• 3 years ago

2s-10s is remarkably accurate for predicting recessions. For returns over 10 years or so CAPE is quite good, stocks/(stocks+bonds+cash) is very good.

But you cannot make statistical claims about such numbers, the calculations are done over the entire very small population (if you want to abuse the maths a bit and call a time series a population), not over a sample.

ProjectArcturis• 3 years ago

There is very little difference between being early and being wrong.

H8crilA3• 3 years ago

Doom prophecies aside, I do think that some deflation protection in the form of US 10 year bonds (or longer, if you have the stomach for it) may be a wise idea. The 10 year yield hasn't been this high since before 2008, offering a decent upside should we get back to the low rate regime. Although of course if this is a 1960s or even 1970s replay then these bonds will cheapen to single digit cents on the dollar.

Chart for reference - always good to keep in mind the big picture: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...

rightbyte• 3 years ago

these bonds will cheapen to single digit cents on the dollar.

Only of you don't wait for them to be paid back.

H8crilA3• 3 years ago

Umm yes, but then I'd rather be paid 10-20% annual interest in the 10 years before maturity, as opposed to 4%.

andrewstuart4• 3 years ago

Does Mark Spitbznagel run a hedge fund, perchance?

It’s never a surprise to hear bad news from people who make money from bad news.

yieldcrv• 3 years ago

or a gold bug, who gives bad news but never makes money from any macroeconomic environment

SideburnsOfDoom3• 3 years ago

Does Mark Spitbznagel run a hedge fund

Well yes, it's in the actual title of the article.

andrewstuart4• 3 years ago

I wrote the comment before I clicked on the link.

NovaDudely• 3 years ago

I have heard this every month for the last decade.

madballster• 3 years ago

Spitznagel runs a fund that specializes on so-called "tail-risk events", i.e. he profits from extremely unlikely economic scenarios such as hyperinflation or violent economic crashes. He profits more the more assets he has under management, because he charges his clients a performance fee of probably around 20% of profits. So part of his job is to constantly find new investors by telling them that the worst economic crisis is just around the corner. And how he he just happens ot have the right solution.

atoav• 3 years ago

Coincidentally his name is German for "pointy nail" so I am not surprised he likes to pop bubbles. /s

mseepgood• 3 years ago

His name means "Dirk Müller" in German.

go_prodev• 3 years ago

If his fee is based on profits, he needs to be correct some of the time. The types of events you mentioned aren't all hype and he can't will them into existence, so maybe he's on to something?

virgildotcodes• 3 years ago

I believe most hedge funds also charge a fee on total assets under management regardless of profitability, so he’d be profiting just by luring in new customers, profits not necessary.

NoboruWataya• 3 years ago

No idea about his specific fund's pricing but the "traditional" pricing model for hedge funds is 2 and 20, ie, 2% of assets under management plus 20% of profits.

But also, a performance fee is kind of like an option in that it has an asymmetrical payoff - if you make 100 in profit, you get 20, but if you lose 100, you don't have to pay 20. All other things being equal, the expected value of a performance fee will increase with portfolio size as long as there is a chance you are right (and there is always a chance you are right).

Yes, the predicted events will have to come to pass eventually to collect on the performance fee. Nobody (not even this guy) knows when that will happen, but everyone knows that it will happen eventually, and in the meantime, you can position yourself so as to maximise the payoff when they do.

criley2• 3 years ago

If his fee is based on profits, he needs to be correct some of the time. The types of events you mentioned aren't all hype and he can't will them into existence, so maybe he's on to somethin

So all he's doing is timing the market. That's it. And here's the thing: it's impossible. Statistically, he and everyone else are on average bad at it. For example, over the past year he and many folk have predicted recessions, depression, stagflation and even collapse. And here in the US they've been entirely wrong. And if you invested according to them then you lost a lot of money.

The reason why this is a bad investment is because the opportunity cost of what you could be doing with your money during all the time that he's wrong up until he's right. And then you have to hope that when he's right, it makes up for all the time he was wrong. Statistically, it's unlikely.

Your best bet is to make the best investment you can that pays today, not a bet on a payday that could happen tomorrow... Time in the market beats timing the market.

malikNF• 3 years ago

To the folk who dismiss this as “just another hedge fund manager who stand to win if everyone fails”

Why do you think this event or any other kind of big economic downturn is unlikely to happen?

karatinversion• 3 years ago

Base rates.

andrewstuart4• 3 years ago

I used to believe it but after 30 years it just sounds boy who cried wolf.

Also, inflation kills debt.

csallen• 3 years ago

I mean you're essentially asking why people think a rare event is rare.

1vuio0pswjnm7• 3 years ago

Fact or fiction: Someone once told me that the only black swans are found in New Zealand and before people from around the world started travelling there, for the rest of the world, there was no such thing as a black swan. If this is true, then it would seem the term "black swan" has been given a new meaning, namely a "rare" event, as opposed to some thing that people had not yet witnessed. Surely, this is fiction and Taleb is an expert on swans.

ehnto• 3 years ago

Maybe I am missing the joke, but there are Black Swans outside of NZ.

anothernewdude• 3 years ago

Black swans are Australian. New Zealand has blue ducks, but not for long.

hathchip• 3 years ago

Taleb explains this in his eponymous book.

regularfry• 3 years ago

Australia, but yes, this is fact. They weren't known outside Australia before 1697.

And you're right about the term: a true "black swan" event is one that is so unpredictable from the prior history that it's just not included in models of the future. It's not just "rare".

neilwilson3• 3 years ago

“Spitznagel believes the rising interest expense on federal government debts will ultimately constrain fiscal spending, slow economic growth”

Yet if I give you $100 and you spend it that will create extra transactions and extra tax. Therefore increased interest payments are just the same as mailing a stimulus cheque to those who already have money.

More transactions = more growth not less.

We can of course change the distribution. Pass legislation requiring base rates to be set to zero permanently. [0]

Government debt rates will then automatically fall to Japanese levels. As Japan demonstrates.

[0] https://theconversation.com/interest-rates-the-case-for-cutt...

surprisetalk• 3 years ago

Thank you. I found your article very thought-provoking.

Suppose I own a forest that regenerates at 2% per year and is worth £1 million in timber overall. I could log the forest sustainably, cutting down trees only in line with the speed of regeneration, which would earn me £20,000 a year.
But with interest rates at 5.25%, I would do better to cut down everything, invest my £1 million into bonds, and earn upwards of £52,500 in annual interest (I say upwards because the rate of interest on bonds is usually a little way above the central bank base rate).

Fredkin2• 3 years ago

I found the article very unsettling and seems to be advocating bigger government, financial repression, and authoritarian control of what people spend their money on:

"This [CBDCs] could enable central banks to encourage or discourage certain spending in more targeted ways, for example by restricting what can be spent by people in certain areas or income brackets."

There's also an argument that higher rates are better for the environment. They are a headwind to rampant consumption. They decrease investment in areas that might not generate a return, focusing resources on existing viable businesses instead of new unproven businesses that are likely to fail (wasted energy).

The forest example is very reductive and completely ignores other costs and factors: the expected price of timber and machinery in the future, and the inflation rate in general, the cost of re-planting the forest, wages, the convexity risk of the bonds (if rates appear to be accelerating higher, your bonds will drop in value), the confidence in the government, ... and so on. It also doesn't consider that higher rates curb construction loans, and thus decrease excessive demand for timber, which results in a pile up of timber inventories initially. Businesses then react by doing less logging in future.

Zero rates (or more accurately artificially low rates) encourage gambling and waste. If I can get a cheap loan, I can go buy loads of machinery and land and start logging, whereas I wouldn't have bothered if the financing wasn't available. Financial repression in China for instance allows for the cheap financing that builds enormous ghost cities. All that sand-dredging they do emits huge amounts of CO2.

somenameforme• 3 years ago

The way the US government raises money is by selling treasuries with interest. Give me $100 now and I'll give you $105 in a year type stuff. Those rates are determined by market mechanics. If you set the rates to $0, nobody would buy them, and the government would be unable to raise money. The Fed rate is something else, the rate banks pay to each other for [generally] brief lending.

As for Japan, I find their name pops up oddly frequently in economic discussions. I suspect many of us still have an image of them from a time when we were growing up and their economy was booming - predicted by some to imminently surpass even the US. Here [1] is a graph of its GDP including and since then. They been in a state somewhere between decay and stagnation for nearly 3 decades now.

[1] https://www.statista.com/statistics/263578/gross-domestic-pr...

neilwilson3• 3 years ago

The US government has no need to sell Treasuries at all. It already has the best bond in the world. The US dollar.

Lots of people want that. Particularly those with tax bills to pay in dollars.

Why repeat the myth?

unnouinceput• 3 years ago

The original story is here:

https://fortune.com/2023/08/05/black-swan-hedge-fund-mark-sp...

Yahoo simply took it over. I avoid yahoo like plague.

j16sdiz• 3 years ago

Yahoo paid for them, not "simply took it over"

__Joker• 3 years ago

Econmics noob here.

Leaving aside the Ad Hominem that Spitznagel is hedge fund manager who might benefit from the said event.

I can only gather two main points in the argument.

1. Level of debt is at unprecedented levels ( private, public, global)

2. Kind of follows from 1, Government(FED) has very high annual debt servicing.

How we go from 1&2 to popping the credit bubble ?

janejeon• 3 years ago

Right, I'm wondering that as well, because one could argue that 1 & 2 is a necessary condition but not an automatic trigger. Something needs to actually cause the crash, and it's not always obvious that just because there is a bubble, there will be a trigger, hence the saying: "Markets can stay irrational longer than you can stay solvent."

bradleyjg• 3 years ago

The real issue is the potential for positive feedback cycles.

E.g.

The government spends more money on the latest bipartisan bread and circuses bill, treasury rates increase as buyers demand more to hold ever increasing amounts of debt, private interest rates follow treasury rates up,

some private borrowers are unable to service their debts at the higher rates and declare bankruptcy, private sector interest rates increase as perceived default risk goes up

Etc.

The last time this looked like it was going to happen the Fed stepped in and bought “fallen angel” private sector bonds. This was an extraordinary intervention. They’ll probably try again next time it starts to happen.

But they may just be building up a bigger crisis. Since the start of the “extraordinary measures” era in the early oughts they’ve never had to worry about inflation as a countervailing consideration. Now they do.

datavirtue2• 3 years ago

They don't HAVE to worry about it.

nprateem• 3 years ago

It's not that 1 causes 2. It's people loading up on cheap debt, and only being able to service it at cheap levels. Interest rates rise, then suddenly people start selling investments and holding back on discretionary spending to pay their (now higher) mortgage costs etc.

So far people are eating into savings or getting pay rises, but as businesses are in the same boat they can't keep paying staff more and raising prices forever.

So at some point the wheels fall off as people and companies need to repay their once cheap debts, or else are just left with very little disposable income/capital with which to operate, reducing spending. This causes a recession.

The government being in the same boat reduces the money available for government spending too.

MichaelMoser123• 3 years ago

How we go from 1&2 to popping the credit bubble ?

People used to think, that a dramatic crash could only occur on condition of an extraordinary event. Think of country X loosing a major war + inability to pay the accrued bills.

Well, then came the subprime mortgage crisis, so now we know that we really don't know. Mr. Spitznagel is either a crackpot (most likely scenario) or he is in the know.

datavirtue2• 3 years ago

Facts are facts though, corporations frenzy on cheap loans...and they did/are. Stock buyback trends in aggregate make me nervous. Perhaps we should only allow fixed or capped interest rates but that would limit borrowing to fiat sources and probably exacerbate the issue.

ReptileMan• 3 years ago

What is his track record so far with being right?

belter• 3 years ago

Things you need to look at:

"...After the March payday, its flagship Black Swan fund has produced a mean annual return on invested capital of 76%* since the firm was created in 2008. It’s a good result, but if you were going to make the same calculation as of Dec. 31 2019, the long-term compounded return would only be marginally better than that of the S&P 500 over the same time period..." - https://www.forbes.com/sites/antoinegara/2020/04/13/how-a-go...

Also the way they report performance is singularly unique:

"Why One Firm's 3,612% Return Is Drawing the Ire of Hedge Funds" - https://www.bnnbloomberg.ca/why-one-firm-s-3-612-return-is-d...

The only question you need to ask Universa Investments is: "Did you create other hedge fund portfolios...That could possibly have similar returns out of your expertise...BUT...did not? And did you win down those after a few months or 1-2 years, before reporting on the performance of the surviving one?"

The trick above, is directly from "Fooled by Randomness" by Taleb, who is listed as “distinguished scientific adviser” by the fund.

JPLeRouzic• 3 years ago

"And did you win down those after a few months or 1-2 years, before reporting on the performance of the surviving one?"

My employer (one of the bigger French corporations) from 2005 to 2010 released each year their financial reports showing a 5% revenue gain over the previous year, which was a good performance at the time. Then a few months later, they revised their turnover and reduced it by 5%.

Apparently it was legal, and anyway no one ever commented.

When the next CEO arrived, the turnover in 2011 was reduced by 10% without explanation and again no one commented!

slushh• 3 years ago

It's only a bubble if there is no value to back it up. Is the housing market going to crash or are consumers going to be unemployed to the point that they cannot pay back the household dept?

Otherwise, I like to believe that rising dept ratios only reflect that the people who know how to invest profitably are not the people who currently have money.

With AI at the horizon, is a value of 2 high for the Buffet indicator? If only big companies have the resources to train NN, who but those traded companies is going to capture the entire GDP?

speeder• 3 years ago

A lot of people are criticizing the article without reading it, so some points of the article in short term:

1. Yes, Mark is a hedge fund manager.

2. Yes, his fund is specialized in profiting from crashes.

3. But his advice is actually sound and not an ad for his fund.

3a. He said the excessive debt will make government expenses with the debt itself become too high eventually, forcing the government to stop spending and causing recession.

3b. He said that although his fund does profit from crashes, it is something hard to do consistently and expensive, retail investors should just try to profit.

3c. He said Warren Buffet advice that is good, for example buy a cheap index, and then invest more into the index whenever there is a crash, but never let your money on hand get low enough so you would be forced to sell during the crash.

4. The article was written because the author asked Mark for advice about what to do to prepare for a eventual future crash. Mark was chosen because his specialty in profiting from crashes.

5. The headline while true might mislead people, yes Mark said the bubble is set to pop, he didn't said it will pop soon, in fact he said it will pop "Eventually" and he has no idea when it will pop. And this is why he thinks copying his strategy is useless unless if you are retail investor.

mdekkers• 3 years ago

Thank you for the great summary

em500• 3 years ago

5. The headline while true might mislead people, yes Mark said the bubble is set to pop, he didn't said it will pop soon, in fact he said it will pop "Eventually" and he has no idea when it will pop. And this is why he thinks copying his strategy is useless unless if you are retail investor.

Professional prognosticators know that for predictions about future events, you should either be specific about the event but vague about the timing, or the other way around. That way you'll often be right and be hailed as a prophet. If you predict something specific to happen at a specific time, you'll usually be wrong and look like a fool.

oezi• 3 years ago

The question is if it is true that retail investors can't guard against stockmarket downturns or if that is the point of the article to make them believe this because the hedge strategies wouldn't work without enough sheep.

Mark Spitznagel says the ‘greatest credit bubble in human history’ is set to pop

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