"The 'Recovery' Is A Mirage" Mark Spitznagel Warns, "With As Much Monetary Distortion As In 1929"

Tyler Durden's picture

"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."


Via Investments & Wealth Monitor:

On the "recovery" in the United States...

Spitznagel: The somewhat improved economic activity that we’re seeing is based on a mirage—that is, the illusion created by artificial zero-interest rates.


When central banks lower interest rates in hopes of stimulating the economy, that intervention is not the same as a natural move in interest rates.


A genuine drop in interest rates is in response to an increase in savings, as consumers defer consumption now in order to consume later. In a high-savings environment, entrepreneurs put their capital to work to become more roundabout,1 layering their tools and intermediate stages of production to become increasingly productive. The time to make these investments is when consumers are saving, so that entrepreneurs can be in an even better position to make the products that consumers want, when they want them.


In an artificial rate environment, however, that’s not what’s happening. Instead of consumers saving now to spend later, they are spending now.


But because interest rates are artificially lower, entrepreneurs are being fooled into investing in something now that they will have to back out of later—building up what the Austrians call “malinvestment.” Therefore, the illusion is unsustainable, by definition. The Fed can’t keep interest rates low forever.


From an investor perspective, people are trying to extract as much as they can right now. Consider the naïve dividend investment argument: “I can’t afford to be in cash right now.” Investment managers have to provide returns today.


Whenever investors sell a low dividend-paying stock to buy a higher-dividend stock, some piece of progress is sapped from our economy. (The cash needed to pay that higher dividend isn’t going to capital investment in the company.)


This is the exact opposite of entrepreneurial thinking that advances the economy. Consider the example of Henry Ford, who didn’t care about paying dividends today. He wanted to plow as much capital as possible back into making production more efficient for the benefit of the consumer who would pay less for a higher-quality product.


In summary, a major message of my recent book, The Dao of Capital, is recognizing the distortions that come from central bank intervention. Because of the Fed’s actions, interest rates are no longer a real piece of economic information. If you treat them like they are, you will simply do the wrong thing.


After all, when the government tries to manipulate things, the inverse of what was intended usually happens. On that point, history is entirely on my side.

On The Government & Federal Reserve's "Interventions"...

Spitznagel: The reality is, when distortion is created, 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. While that may sound rather heartless, it’s actually the best and least destructive in the long run.


Look what happened in the 1930s, when the actions of the government prolonged what should have been a quick purge. Instead, the government prevented the natural rebuilding process from working, which made matters so much worse.


I draw a parallel to forest wildfires. Fire suppression prevents small, naturally occurring wildfires from error-correcting the inappropriate growth, and thus prevents the system from seeking its natural homeostatic balance—its natural temporal structure of production, if you will. Instead, everything is allowed to grow at once, as if more resources exist than actually do, and the forest actually gradually consumes itself. When fire inevitably does break out, it is catastrophic. This is a perfect analogy for the market process. We simply do not understand the great homeostasis at work in markets that are allowed to correct their mistakes.


Suppression that makes the cure that much worse than the initial ill, until exponentially more damage is done, calls to mind the wry observation made by the great Austrian economist Ludwig von Mises: “If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the [opposite] direction.”


As the Mises protégé Murray Rothbard would say, the catharsis needed to return to homeostatic balance “is the ‘recovery’ process,” and, “far from being an evil scourge, is the necessary and beneficial return” to healthier growth and “optimum efficiency.”


It is unfair to call the Austrians heartless because of these views. The Keynesians are the ones who got us into this mess in the first place—just like those who advocated for the suppression of natural forest fires are the ones who created the tinder box that puts the forest at risk.

On The Yellen Fed... (hint - no change)

Spitznagel: Post-Bernanke it will be more of the same. Therefore, investors need to know how to navigate a distorted world—and post-Bernanke the world is likely to get even more distorted—until the markets, ultimately and inevitably, flush out that distortion. This is why I rely on the Austrian school so much.


Austrian business cycle theory (ABCT) shows us what is really happening behind the curtain, so to speak, from monetary distortions in the economy and the creation of malinvestment. When the economy is subject to top-down intervention from the government and especially the central bank, investors need to read the signs in order to protect themselves—as well as still find a way to own productive assets.


People can avoid becoming trapped into chasing immediate returns along with the rest of the ill-fated crowd.


A far better approach is to wait for the return to homeostasis that will prevail even in the midst of pervasive distortion. In that way, investors can embrace roundabout investing by avoiding the distortion and, thus, have all the more resources later for opportunistic investing.

On investing (for retail inevstors)...

Another option for investors is a very simplistic, “mom-and-pop” strategy that starts with recognizing when you are in a distorted environment. For this I use what I call the Misesian stationarity index, which describes the amount of distortion in the economy.


This simple, back-of-the-envelope strategy would be to buy when the index is low and sell when it is high. In other words, people should stay out of the market when it is distorted and thus preserve their capital to deploy after the inevitable purge and correction, when productive assets become bargain-priced. Such an approach has resulted historically in an annualized 2-percent outperformance of stocks. Logically it makes sense, and when you look at it empirically, it’s incontrovertible.


Yet, admittedly, in the world of investing, sitting with one’s arms folded and not taking advantage of a rising market pumped up with distortion, is difficult—even though avoiding the enticement leads to better intermediate means for positional advantage to be exploited later.


It is difficult to do and may even feel anticlimactic. Nonetheless, the disciplined Misesian approach is healthier for one’s portfolio.

On the worst case scenario...

the Fed keeps winning and the illusion continues. The equity markets keep ripping along.

On extreme monetary distrortion and the Q-Ratio...

In simplest terms, the equity Q ratio is the total corporate equity in the United States divided by the replacement cost. Another way to think about it is the appraised value of existing capital in the United States divided by what it would cost to replace or accumulate all that capital.


This ratio has tremendous meaning from an Austrian standpoint, as it reflects what the markets are saying about the state of distortion in the economy.


This aptly illustrates Mises’s concept of “stationarity.” (In a stationary economy, in the aggregate, balance is achieved between the return and replacement costs.) The farther the ratio moves above “1,” the more monetary distortion there is in the economy. For this reason, and as a tip of the hat to the man who gave us the Austrian business cycle theory, I call this ratio the Misesian stationarity index, or MS index for short. When the MS index is high, subsequent large stock market losses and even crashes become perfectly expected events.

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 (except the 2000 peak, which got a bit more ahead of itself). And all were caused by monetary distortion. As the Austrians show us, the business cycle is a Fed-induced phenomenon.

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Iam Yue2's picture

"the purge that occurs after massive distortion is painful, but ultimately, it’s far better and healthier for the system."

Fuck the system.

Squid-puppets a-go-go's picture

now let's see the same chart again with 'line 33 (net worth)' adjusted by the removal of mark to fairyfarts accounting

mjcOH1's picture

But on a positive note, in 1929 Stalin was unanimously elected dictator for life in the Soviet Union.   Forward!

NoDebt's picture

That dow chart stops in early 1930, which if you don't follow it out to it's conculsion, looks like no big deal.  

July, 1932:  41.  (Admittedly, we were still on a gold standard then, which has profound implications when making comparisons)

Everyone thinks they understand the system.  Everyone thinks that it can be quantified to an approximate number on the back of a cocktail napkin.  The inter-dependencies are being UNDERESTIMATED, just as they were in 2008 and every time before that.  

I've been 1/3 cash since August (posted multiple times on ZH).  That may not be conservative enough.  Don't ask about what I hold in physical gold, I don't talk about it other than to say it's not zero.  

National Blessing's picture

I don't see a crash in America.  Our economy is like a gut-shot bear.  I see endless Japanese-style recession.  We might be caught in this swamp for the next fifteen years.  Things are grim.

Squid-puppets a-go-go's picture

ok, but if the whole globe has quickly caught up with japan in japanification, and if the japanese supernova finally explodes....

prains's picture



this is the plan

Al Gorerhythm's picture

Why so, bro?  I'm in need an opposing point of view.

sixsigma cygnusatratus's picture

Dammit, just when my RCA stock (along with ENE and WCOM) was starting to make a comeback. 

Peter Pan's picture

What does he mean by a tremendous amount of monetary distortion?

Name me just one thing that is not distorted. Just one.


Interest rates?

Asset values?


Winston Churchill's picture

Found something.

Just unzipped my fly.

No distortions there thank goodness.

Everywhere else,not so much.

geno-econ's picture

Many on Viagra-----huge distortions good for no more than 4hrs. How long before Fed distortions require seeing a Doctor to prevent complete collapse ?

Al Gorerhythm's picture

That fucking cult is one giant distortion.

Miffed Microbiologist's picture

Well, Bernanke is devil spawn but he is not stupid. The man clearly knows a sinking ship and chose to bail and let another take the fall. Absolutely fucking brilliant. Some of us won't forget dear and you and your buddy Greenspan should be wise to realize that.


Squid-puppets a-go-go's picture

and i kinda notice in western circles that a 'historical first appointment of a woman' to any post of power happens between when an iceberg has gouged the side, but before the ship fully sinks

Iam_Silverman's picture

"and i kinda notice in western circles that a 'historical first appointment of a woman' to any post of power happens between when an iceberg has gouged the side, but before the ship fully sinks"


Oh Lordy, we're doomed!  Does that mean that Hillary Clinton will take over the reins from our current president?

If so, I must find someplace better to live.  Does anyone here have Simon Black's personal cell number?

PhilofOz's picture

Last time I looked on Betfair, the odds of Hillary winning the presidency were 2.52 buy and 2.8 sell and way ahead of any other possible contender. Betfair have proven over time to be extremely accurate at any point in time. It is a scary prospect as I was of the understanding Benghazi had ruined her chances. An endless line of brain-dead puppets for banksters!

chunga's picture

The nuts that keep telling us about this awesome recovery remind me of the dope on the viarga commercial.

Supposedly he's a rugged cowboy who's been around the block a few times and is really cool and smart. He's clever enough to unload his horses out of the trailer and have them pull out his stuck truck.

But actually he's pretty stupid considering right before that he drives his truck straight into the only mud fuckin puddle for miles around.

booboo's picture

Well what they didn't show you was him standing on his front bumper mounting the mare, I mean, thats what I concluded from the commercial...isn't that what everyone else thought........Oh come on, I can't be the only one.........well?

NoDebt's picture

"But actually he's pretty stupid considering right before that he drives his truck straight into the only mud fuckin puddle for miles around."

That's really a pretty good analogy for how we operate, don't you think?  I haven't seen anything in recent years that isn't a purely defensive response to problems that "magically" just appear in our path (but should have been easily anticipated with even the slightest foresight).

Iam_Silverman's picture

" I haven't seen anything in recent years that isn't a purely defensive response to problems that "magically" just appear in our path"


Hah!  So true!  Whocouldaknowed?

Al Gorerhythm's picture

I was driving through the desert in Mexico once. Longest, straighest damned road I've ever been on. Nothing but straight road, topez, and rocks. Bored outta my gourd and right in the middle of four hours of lazer-straight, up comes a sign that says, " Beware of Curves". That fuckin road went on, dead straight, for the next 4 hours.

Moral: 1) You've gotta be patient; that corner suprised the shit out of me. 2) The man (in charge) has a sick sense of humour.

Sudden Debt's picture


Atomizer's picture

COVERED LIKE A THAI HOOKER or a bath house gay lover.


Sudden Debt's picture

I don't judge anybody's preference... but shouldn't you watch your language with words like that? there might be kids reading this site... just saying....

Atomizer's picture

You’re correct. I should be more politically correct.




yogibear's picture

Trillions more of distortion coming from the IMF soon. After QEen Yellen turns on the spigot again. They cannot let deflation happen. They would rather hyper-inflate to a collapse and have the 1% win. 

CheapBastard's picture
Weatherford International to Cut 7,000 Jobs by Mid-Year


Oilfield-Services Firm Announces Workforce Reduction of More Than 10% in First Half By
Tess Stynes  Updated Jan. 30, 2014 8:08 a.m. ET http://online.wsj.com/news/articles/SB1000142405270230397370457935244122...
xamax's picture

But on CNBC they always say the recovery is here ??????

Keyser's picture

CNBC's only redeeming value is when Rick Santelli blows a gasket when he has to discuss logic and reason with Steve LIESman. 


lasvegaspersona's picture

So much pessim/real.... ism for a Saturday

J S Bach's picture

Everything economic today is a "Fed Induced Phenomenom".  That's why we need to abolish it entirely and return to a debt-free honest money system.

Winston Churchill's picture

Can;t argue with that.

Shame it will not happen without a total collapse first.

At which point, it will not matter much in a Mad Max world.

Keyser's picture

And the great Rothschild experiment in world domination through monetary control will fail, miserably. Too bad they will suffer no pain in the collapse from over 2 centuries of raping and pillaging. 

Anusocracy's picture

But the Fed is a "Government Induced Phenomenon".

Government has always been an unnecessary evil. It is the playground of the worst psychopaths, nothing else.

Yen Cross's picture

  Inflation is a central banksters "wet dream". 

  That is all...

Playtime's Over's picture

I just want the bottom to appear so I can die knowing that my beloved country can start to mend.  No funny money.

Atomizer's picture

Don't get bent on a few negative arrows. Laugh & enjoy on destroying the glass house they live in. Food for thought.

Yen Cross's picture

  Atomizer, I know where my core is. You're definitely top of the list!

NoDebt's picture

I don't count down-arrows.  A little trick I learned from the BLS.

Iam_Silverman's picture

"I don't count down-arrows."

Ooops!  Never admit to that!  Just say that you "seasonally adjust them" prior to assigning a value.

q99x2's picture

They didn't have Bitcoin in 1929 and the FEDs computers weren't making the graphs for the indexes.

This time is different.


Atomizer's picture


you’re going to learn that the multi-millionaires are just as broke as a EBT card carriers.. Over leveraged to the hilt. The hand full of decision makers remain the ones who are shitting bricks. So glad to see these inbred fucks take each other out. It’s about time! Be patient.

Yen Cross's picture

    Great  thought. Atomizer I read every thing you quote. Why? Because I trust you!

  You are an articulate / awe fuck it. I like and trust you! end of story

Atomizer's picture

Our ZH family makes us more aware. This is the beauty of the fight club!

Pixies - Bone Machine