Business

Mark Spitznagel: Picking Market Crashes Is Impossible

Mark Spitznagel, Universa Investments president and chief investment officer, discusses his investment strategy in a low interest rate central bank policy environment. He speaks with Bloomberg’s Alix steel on “Bloomberg Daybreak: Americas.”

[REITs]

Mark Spitznagel

Alix:

Joining us now is mark spitznagel, universa investment president and chief investment officer. His fund specializes in tail risk hedging and mitigating black swan events like the one we saw yesterday. That is when you see a two or three standard deviation above the norm. He predicted the market rent of 2000 as well as the commodities boom. Perfect day to talk to you. Thanks for joining us. How are you positioned in the last week, how much money did you make?

Mark:

Cannot talk about that. It has never been my job to take a crash, because top of the market. My job has always been risk mitigation. Picking crashes is impossible.

Timing crashes is impossible. If you require a forecasting your investment thesis in order to do well, I think you are doing it wrong. Remember, markets do not crash like this. Market crash like this and then this and this. It is really meant to shake out the weekends, meant to get you short at the bottom. Really it is an impressive thing to behold with the market can do. At the end of the day, what I do is provide an insurance-like playoff — pay off for my clients.

Alix:

We have a full screen that shows the move in the vix. The move in the s&p was only about 4.1%, not the biggest drop we have seen. When we saw 9% declines, you only saw a 13 change in the vix. What does that tell you about market distortions?

Mark:

We are living in a reality distortion. When it comes to what happened the last few days, what will happen ahead, all roads lead to central banks in the fed.

People have these incredibly naive trades that makes us feel we are in a benign investing environment, we are not. We have been here before, lets remember the great moderation of the mid-2000. We have seen this play out before. It will do the same thing again. It is so naive that people think they can put trades on like the short volatility trade. I think people don’t really believe it, but in this low rate environment, are forced to chase and do crazy things. I think dylan put it best, people don’t do what they believe, they do what is convenient, and then they repent. I think what we saw in the last few days was repenting, and there is more to come.

Alix:

Where?

Mark:

As far as the short volatility trade, it is easy to snicker about how naive it was, but it is a short gamma trade. There is sort of a feedback process, selling begets selling. There is no difference with people long in the market. People are long in the market because it goes up. When it goes down, people are not going to want to be long.

Alix:

But with the distortions be, say, buying the s&p, in etf products related to the s&p? When I talk to some sources high up in the market, they tell me their biggest fear is the bubble of passive investing in etf.

Mark:

This is a big problem, no doubt, but think of the landscape of problems we have, think of the over valuations we have. Look at where rates are. There is no room for there to be more monetary easing. For us to focus on the tail wagging the dog here, the derivatives market, I think we are losing sight of the big picture. It is easy to not worry about that but everything is distorted today. This is what happens when we have this type of historic monetary interventionism that we have had.

Alix:

If you had to read where we will see the most redemption, s&p, rates market, how do you think about it?

Mark:

The s&p is a risky thing to hold. Does not seem that way but it is. I expect in the coming years we will take back a decade.

Alix:

Wow. Ok, that is a call. How are you positioned for that?

Mark:

I am basically in the insurance life payouts for my clients, so it is about risk mitigation. I think risk mitigation specifically is something that People get so wrong. Everybody has this dogma of diversification, they think it is the answer to the markets we are in today, to risk in
General. The reality is, diversification has not been a good risk strategy, it has lowered your compound returns. Correlations tend to spike when you least want them to.

Alix:

We have a chart that looks at the 12-month correlation. You can see that in the Bloomberg. When that happens – wrong chart, but that is cool. We can talk about that. When you see a pickup in correlation, what is the most effective way to protect yourself?

Mark:

This is after the fact. When correlations spike, people who think they are diversified — the extreme case of that would be risk parity.
They got it wrong. It is too late at that point. This is we can’t getting flushed out here this is my point. We are going to see this feedback happen again. It will not be driven by the small area of the market. It will be driven by actual holders of stocks.

Alix:

I’m just trying to get at, if I’m investor and I have to protect myself, I was in the wrong products, what do I do? I turn to you, mark, oh what can you do?

Mark:

There is not much I can save for you. Don’t rely on Thursday risk–diversification. If you can be honest about the fact that you are not diversified and there is one big bet out there, this monetary experiment working. You don’t have something that will give you cushioned down below. If you need to reset your risk, so be it.

Alix:

In the short-term, we have that chart that I brought up. Looking at the implied volatility of puts minus the implied volatility of calls. That hit a record yesterday despite the minor move in the markets. That is what we have been talking about. You see a big move not reflected in equities. In the short-term, how do you look to make money?

Mark:

That is often times driven by the calls. That is interesting to me from a trade standpoint. Does it show a little bit of fear in the marketplace? Sure, It does come in the same way that the VIX did. There is some forced trading driving that, for sure. I don’t think the markets are expressing a belief. I think so much of where the markets today is forced trading.

Alix:

So that when you hedge is not to diversify. Is there another magic hedge that would help you, if I did own the s&p, for example?

Mark:

Perhaps owning less of it. That is all I can say. Having convex hedges is a good way to go but you are just going to get picked off if you do that. A bad idea for the public to be looking at derivatives in general. That was one of the problems with these VIX products. There are people in these things that have no business being in them in the first place. Frankly, I would put some professionals in that category. I think people should stay away from getting too fancy about it. You are making progress by recognizing diversification is not the answer.

Alix:

Mark it was a real pleasure.

Mark Spitznagel of Universa Investments, great to see you.