\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/04\/GettyImages-693466508-e1711982336998.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
Mark Spitznagel has developed a reputation as a pessimist over the years. But it\u2019s a distinction the co-founder and CIO of the private hedge fund Universa Investments has earned for good reason. When you warn, time and again, that the Federal Reserve has helped blow up the \u201cgreatest credit bubble<\/a> in human history\u201d and all bubbles eventually pop, investors\u2014and the media\u2014will tend to focus on the bearish part of your outlook. Plus, Spitznagel\u2019s patented strategy, called tail risk hedging, seeks to profit from sharp market downturns, and he\u2019s employed Nassim Taleb<\/a>, the statistician and academic who popularized the concept of the rare and unexpected event<\/a> called a \u201cblack swan,<\/a>\u201d as a \u201cdistinguished scientific advisor.\u201d<\/p>\n Nevertheless, Spitznagel says he\u2019s a bit misunderstood, and so is his strategy. Tail-risk hedging is meant to protect investors when things go wrong\u2014an \u201cinsurance policy\u201d of sorts, the Wall Street veteran tells Fortune<\/em>\u2014but the real value of that is it enables Universa\u2019s clients to invest more of their portfolios in stocks with price appreciation potential; to take on more risk, not less. As Spitznagel put it, \u201cthe entire point of it is that they can be longer.\u201d<\/p>\n Still, most media headlines about Spitznagel, including ours here at Fortune<\/em>, tend to focus on his bearish forecasts<\/a>. And while there\u2019s a clear reason<\/a> for that\u2014after all, Spitznagel recently told Business Insider<\/em><\/a> that he believes the \u201cworst market crash since 1929\u201d is coming\u2014the hedge funder has indeed been bullish in recent years. He argued in his 2023 investor letter, seen by Fortune<\/em>, <\/em>that a stock market rally was coming, and has said publicly on multiple occasions that until the Fed starts slashing rates<\/a>, markets will likely keep rising.<\/p>\n \u201cI\u2019ve talked with a couple of people and it always comes away that I\u2019m some permabear. Which is fair, because my entire life I\u2019ve been skeptical\u2026of monetary interventionism and just the destructiveness that it has on investors, on the economy, and on capital,\u201d Spitznagel said. \u201cBut at the same time, clearly, I\u2019m not a permabear. I\u2019ve been as positive on this market as I could possibly have been in the last year and a half.\u201d<\/p>\n Even now, after a nearly 10% year-to-date run for the S&P 500, Spitznagel remains, let\u2019s say, cautiously<\/em> bullish. With the Fed putting its rate hikes on pause in July 2023 and corporate announcements around AI receiving all kinds of hype, markets have been in a sentiment-induced \u201cGoldilocks zone,\u201d according to the hedge funder. \u201cAnd we have a bit more to run on this,\u201d he told Fortune<\/em>.<\/p>\n Despite his concerns about the long-term impact of our rising national and private debts, and the lagged impact of the Fed\u2019s rate hikes on the economy, Spitznagel argued that investors are ignoring these negatives and driving markets higher for now. That\u2019s because \u201csentiment was so bad in \u201822, we thought we\u2019re in the \u201870s, and that sentiment had to flip both in the markets and even in the economy,\u201d he said.<\/p>\n For Spitznagel, the current stock market rally is simply based on a relatively dovish Fed and bullish investor sentiment, \u201cboth of which are just basically juice.\u201d<\/p>\n But like any Goldilocks zone, this one won\u2019t last forever. Investors\u2019 positive sentiment alone can\u2019t carry markets higher indefinitely; fundamentals like earnings and economic growth will eventually become relevant. And Spitznagel still believes that higher interest rates are weighing on the economy, which means the fundamentals won\u2019t hold together forever.<\/p>\n \u201cThe Fed did a lot. And now it\u2019s sort of jawboning its way out of it. But it can\u2019t take back what it did,\u201d he said. \u201cMarkets follow fundamentals at the end of the day, but you can have these little Goldilocks zones where it can get sort of untethered.\u201d<\/p>\n We may be in a Goldilocks zone now, but when the Fed starts cutting interest rates, which many on Wall Street expect to happen this year, Spitznagel argued that it will be a sign that the economy is feeling the weight of years of rising borrowing costs in an era of surging public and private debts.<\/p>\n The fallout from the \u201cthe fastest, greatest tightening ever, by some regards, into the greatest credit bubble of human history\u201d can\u2019t be avoided, he added, arguing \u201cthat\u2019s when things are going to be really bad\u2014and at that point, it\u2019s probably also too late to get out.\u201d<\/p>\n Ok, but what about being bullish? I thought Spitznagel said he was bullish? And yes, \u201cagain, I\u2019m sounding like a permabear right now,\u201d the hedge funder admitted.\u00a0<\/p>\n But with AI hype growing and the Fed \u201csort of apologizing\u201d for raising interest rates so aggressively ever since it paused its hikes last July, according to Spitznagel, we are in one of \u201cthese zones where everything feels really good, where there\u2019s sort of this middle ground.\u201d So he\u2019s at least bullish in the near-term, even if he still fears a crisis could hit at some point.<\/p>\n In Greek mythology, Cassandra was a princess of Troy who had the curse of being able to see the future\u2014but not being believed by anyone she warned. (This was particularly fateful in her warning to the Trojans that the famous horse the Greeks gave them was not a gift, but a trick.)<\/p>\n Investors reserve the term \u201cCassandra\u201d for those who make prophetic forecasts that are ignored by the masses. But the thing is, when it comes to managing money, those who purely preach doom and gloom, without understanding the power of the markets and the American economy over the long term, don\u2019t end up doing too well, according to Spitznagel.<\/p>\n \u201cI can\u2019t say this strongly enough: Cassandras make terrible investors,\u201d the hedge funder said, repeating himself for emphasis and adding: \u201cwith no exception.\u201d<\/p>\n The comment, which might be seen by some as a critique of fellow hedge funder Michael Burry of Big Short fame, who goes by Cassandra B.C.<\/a> on X<\/a>, is admittedly a bit odd coming from Spitznagel\u2014a man who, again, has warned just this past year about \u201cthe greatest credit bubble in human history\u201d and \u201cthe worst market crash since 1929.\u201d\u00a0<\/p>\n But at the same time, Spitznagel does always stick to one of Warren Buffett\u2019s key bullish principles: Don\u2019t bet against America. The Wall Street veteran said that\u2014even with a brewing debt crisis and mounting odds of a stock market crash\u2014over the long term, American businesses will continue to innovate and expand. \u201cYou can be very, very long term positive, but understand nevertheless that there are crises ahead,\u201d he explained.<\/p>\n Spitznagel believes investors would only hurt themselves by trying to time market entries and exits. And he warned that professional investors who tell the masses to flee stocks often do so at the worst possible time. These doomsayers have the luxury of being able to wait a long time for a payoff, but most Americans don\u2019t have that time or capital.<\/p>\n Now, as investors\u2019 euphoria over AI continues to grow, Spitznagel said that \u201cwhat\u2019s going to end up happening is all those Cassandras are going to finally buy into this market at the highest, which probably isn\u2019t too far away.\u201d<\/p>\n Too often, he said, investors end up buying at market highs, and then selling when there\u2019s a crash. Instead of that, Spitznagel recommends the average investor keep some extra cash on hand, ensuring that when there is a market dip, it won\u2019t force them to sell at the worst moment.\u00a0<\/p>\n If all you do is buy and hold the largest American businesses, a market crash is merely an opportunity to load up for the long term, he argued. Even the reputed permabear who fears a debt crisis is coming believes the best option for the average investor is to simply buy and hold the S&P 500 for the long haul, adding to your position when the market falls.<\/p>\n \u201cIf I was only allowed to make one trade for the next 20 years, and I had to do it today, and I [could] not touch a portfolio for 20 years, I would buy the S&P [500],\u201d he said. \u201cBecause remember: Cassandras make terrible investors.\u201d<\/p>\n<\/div>\n\nThe Goldilocks zone\u00a0<\/h2>\n
But remember: \u2018Cassandras make terrible investors\u2019<\/h2>\n