"Bearish" Mark Spitznagel Profiting Strongly Since 2009, Warns "Only So Much Debt An Economy Can Take"Submitted by Tyler Durden on 11/25/2014 21:07 -0500
Mark Spitznagel, author of "Dao of Capital" and among Wall Street's most bearish investors, is (profitably) holding out for a disaster. Despite noting that "The Fed has taken it further than it has ever taken it before," NY Times reports that Spitznagel's fund Universa has profited strongly even as stocks hit record highs. Large pessimistic bets usually lose a lot of money when stocks are rising, but Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30% return last year. While ackowledging Fed policy is capable of driving stock prices higher, Spitznagel warns, it will ultimately be self-defeating, "there is only so much debt that an economy can take on."
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The high-yield credit market remains stressed. An active week ended poorly as a heavy pipeline saw Vistaprint pull its deal citing "market conditions" as perhaps both a re-awakening of liquidity fears (Fed hawkishness concerns), price/spread moves, potential downgrades soar, and outflows signal the flashing red light that HY markets are shining is as red as ever. With buybacks having dwindled already - removing a significant leg from the equity rally - it seems CFOs are realizing that maybe they should have used some of that easy money to build as opposed to buy as they face weak growth, a lack of liquidity, and a wall of maturing debt in the next few years that will have to be refinanced at higher yields and spreads.
Mark Spitznagel: "Mises will ultimately be right yet again about the inevitable final collapse of the current asset boom brought about by credit expansion. The term “black swan” (the surprising, unforeseen event) used for bursting financial bubbles has been and will remain a misnomer - we can and, indeed, should expect such tumults to occur at some point as a consequence of massive central bank intervention and economic distortion."
Ron Paul: "As to the unwinding of this mess, I’m convinced that when the current expansion ends it will be abrupt, gigantic, and worldwide. The 43-year expansion of Fed credit and debt, delivered to us by a fiat dollar standard, and held together artificially by an undeserved trust will end badly."
We discussed the major rotation, overvaluation, and underperformance of high-yield credit markets recently as relevering stock-buying-back firms find their source of funding starting to dry up. The question is - why now? Perhaps this chart of the wall of maturing corporate debt ($3.9 trillion by 2019 which will need massive liquidity to roll-over and will eat earnings thanks to higher coupons) is what triggered the anxiety as the end of QE and start of rate-hikes looms close...
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"We live in an economic age where we’ve simply lost our ability to look at the world as potentially self-organizing (and of spontaneous order - whereby order naturally emerges from bottom-up individual interactions when things are left alone rather than from top-down control), though we suspect we’ll be reminded of it again sooner rather than later. Perhaps our takeaway from economic crises will finally be different the next time around. By all means, let’s brainstorm and see if there are ways to alleviate problems and provide relief to the suffering. But any proposal that involves using coercion on unwilling citizens should be off the table. Anything else is a slippery slope to what we have today - these serial crises."
As we explained in great detail recently, the abundance of so-called cash-on-the-sidelines is a fallacy, but even more critically the we showed the belief that these 'IOUs of past economic activity' would immediately translate into efforts to deploy them into future economic activity is also entirely false. Simply put, there is no relationship between corporate cash and subsequent capital expenditure, nor is the level of capital expenditure even well-correlated with the level of real interest rates. At this point, as John Hussman explains, it should be clear that the mere existence of a mountain of IOUs related to past economic activity is not enough to provoke future economic activity. What matters instead is the same thing that always matters: Are the resources of the economy being directed toward productive uses that satisfy the needs of others?
To understand economics experts in Feynman’s absence, the best analogy that we can think of is to the methods of a magician. Magicians operate by showing their audience a small window on reality, and then tricking people into mentally filling in the rest incorrectly. Because the economy has so many moving parts, a similar approach also works in economics. Pundits can draw our attention to a couple of indicators, ignore everything else, and make claims that sound realistic even though they make little sense in the bigger picture. One difference between economists and magicians, though, is that economists are often unaware of their trickery because they fool themselves before fooling others. To be clear, we don’t claim to be immune to such deceptions, but we do try to root them out as best we can and will do that here. We’ll look at capital expenditures (capex), in particular...
Off the top, Universa's Mark Spitznagel explains that "high-frequency traders are making markets more jumpy" and the idea of HFT as a liquidity provider is a fallacy since as he notes "that liquidity won't be there when they most need it," especially when there is one-way order flow such as in the flash crash. Spitznagel then crushes the 'cash on the sidelines' meme but explaining that while corporate cash balances have soared, net debt has actually gone up beyond the highs of 2008. As we have previously discussed, "the idea that corporate balance sheets are so strong right now is entirely wrong," as investors are conveniently focusing in one piece of the balance sheet (assets not liabilities). Maria B just can't fathom it but Spitznagel's words are clear - scale the cash on the balance sheet against debt and we are as bad as we were in 2008.
"The market is an artificial fabrication," Universa's Mark Spitznagel warns in this brief but revealing interview, adding that "to think this can persist is simply naive." Talking to Maria B on FOX, Spitznagel thinks the market could be cut in half if the Fed stepped away now and points out the fallacy of a belief in any persistent tapering as the Fed will step right back if the market goes down. The gap between the market's "alternate reality" and actual reality is something that simply cannot persist and explains now is the time to be out, to prepare for when the market reprices (as opposed to suggesting people short the market) which is exactly what traders are not doing - as it would be irrational to think longer-term, "if they don't make their next week, month, quarter; they won't be around." "The reason for this is the Fed - the modern day Victor Frankenstein - who have created this thing that otherwise wouldn't live"
In 1928, just as income inequality was surging, stocks were soaring and monetary distortions were rearing their ugly head, the now infamous words "a chicken in every pot and a car in every garage" were integral to Herbert Hoover's 1928 presidential run and a "vote for prosperity,' all before the market's epic collapse. Fast forward 86 years and income inequality is at those same heady levels, stocks are at recorderer highs, the President is promising to hike the minimum wage to a "living wage" capable of filling every house with McChicken sandwiches and now... to top it all off - Maserati unveils their (apparent) "everyone should own a Maserati" commercial. It would seem that chart analogs are not the only reminder of the pre-crash era exuberance and its recovery mirage and massive monetary distortions.
"Today there is a tremendous amount of monetary distortion, on par with the 1929 stock market and certainly the peak of 2007, and many others," warns Universa's Mark Spitznagel. At these levels, he suggests (as The Dao of Capital author previously told Maria B, "subsequent large stock market losses and even crashes become perfectly expected events." Post-Bernanke it will be more of the same, he adds, and investors need to know how to navigate such a world full of "monetary distortions in the economy and the creation of malinvestments." The reality is, Spitznagel concludes that the 'recovery is a Fed distortion-driven mirage' and the only way out is to let the natural homeostasis take over - "the purge that occurs after massive distortion is painful, but ultimately, it’s far better and healthier for the system."
Nearly 100 years ago, on December 23, 1913, the Federal Reserve Act was signed into law, giving the U.S. exactly what it didn’t need: a central bank. Many people simply assume that modern nations must have a central bank, just as they must have international airports and high-speed Internet. Yet Americans had gone without one since the 1836 expiration of the charter of the Second Bank of the United States, which Andrew Jackson famously refused to renew. Not to be a party pooper, but as this dubious anniversary is observed, we should ask ourselves, Has the Fed been friend or foe to growth and prosperity? ... In actuality, the Fed’s modus operandi has been to trick capitalists into doing things that are not aligned with economic reality.
A major issue is the growing disparity between rich and poor, the 1% versus the 99%. While the president’s solutions differ from Republicans, they both ignore a principal source of this growing disparity. The source is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price. (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm… dun, dun, dun… the Federal Reserve. The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.