Mark Spitznagel Warns "Fed's Frankenstein Markets Are Totally An Illusion"

Tyler Durden's picture

"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."

"Asset markets now are totally an illusion... they are pricing in an alternative reality that is so different what is going on"


"The reason for this is the Fed - the modern day Victor Frankenstein - who have created this thing that otherwise wouldn't live"


"We are led to believe there is this vigor out there, whereas in reality, if the Fed pulled out, the market would be cut in half"


"Japan is a crazy science experiment... it's a scary scary place [to invest]"

This brief clip covers a lot of ground but is well worth the price of admission as Spitznagel explains why the Fed is making the short-termist perspective of everyone from traders to corporate managers far greater...


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JustObserving's picture
Fed's Frankenstein Markets Are Totally An Illusion

We have been saying that for years now at Zero Hedge.  What took you so long? Better late than never.

Next year you will be saying gold and silver are manipulated.

zaphod's picture

The premise of the article is wrong.

The markets are pricing in the reality that the FED will print forever, and will accelerate printing on any significant dip let alone crash. 

css1971's picture

A down market won't kill the banks now. The Fed will let it fall. Maybe keep the gradient easy but they will let it down.

Obchelli's picture

Headlines like  this make me sick:

"Bank of America Leads Sector Higher as Economic Data Disappoints"


Do they have any conscience left?

Also they ramped xlf 10 cents in last second. Takes 100 down dow points to erase this.

What a nightmare


CrashisOptimistic's picture

You do realize "they" are computers?

There are nearly no humans involved.

Four chan's picture

maria is on fox news? boy you stop listening to the cheerleaders for a few months and everything changes.

Ham-bone's picture

Why since ’08 have “foreigners” been so keen to buy incredible quantities of US Treasury public debt ($4 T increase in notes/bonds..a 350% increase) while US domestic sources have decreased their holdings due to relatively unattractive yields? How did these countries function w/out massive holdings of US Treasury debt before ’08???

Why now with the Fed tapering their QE would “foreigners” continue to hold their record positions and continue adding to them? Absent rising interest rates and/or QE, the only buyer available is “foreigners”…and luckily they don’t seemed concerned w/ a profit motive. The Fed/”foreigner” combo own 80% of all public outstanding note/bond debt. Simply another $2 T and the worlds largest, deepest, most liquid debt market will be entirely un-owned by America w/ ever more debt @ ever lower yields???  Curious the "world" ex-America would want ever more US debt in a world de-dollarizing as Yuan / Euro take on greater trading roles???

What do we attribute the deviation of “foreigners” viewing Treasury’s as an attractive asset vs. domestic sources who view them contrarily? Why are “foreigners” not worried by the relatively poor yields as US states and institutions are?

Is there any reason this situation isn’t stable or sustainable?

Is the transfer of such a large % of this mid / long term debt to “foreign” holders (55% and growing) in America’s interest? If not, in who’s interest? Qui bono???

This situation of murky ownership of bad assets is not just in America, it seems repeated in Japan, Spain, Italy, France, etc. etc.


Increases in US Treasury debt “foreigners” have amassed (breakdown below)

Jan ’00 – ’07 – Dec ’13

$1 T —> $1.6 T —> $5.6 T (cumulative “foreign” held US Treasury debt)

25% —> 40% —> 55% (% of notes / bonds held by “foreigners”)

1% —> 1% —> 25% (% Fed held notes / bonds…Fed primarily held Bills until ’08)

74% —> 59% —> 20% (% domestically held notes / bonds)

180% —> 130% —> 247% (% public vs. intra-gov debt)

350% increase (public outstanding debt, $3.5 T to $12.4 T)

250% increase (intra-gov debt, $2 T to $5 T)

6.6% —> 5% —> 2.4% (net interest rate on debt)

$300B -> $270B —> $223B (net interest paid on national debt)

$9.2 T –> $13.7 T –> $16.1 T (GDP = 75% increase);

$5.7 T –> $9 T –> $17.4 T (National debt = 305% increase )

Ham-bone's picture

It's simply amazing something so farcial, so fraudulent, such clear counterfeiting with all evidence pointing to a clear crime scene w/ a suspect w/ motive, means, and clear intent...and still the band plays on.

Real options are:

1) Fed/agents of the Fed own far more of that debt than acknowledged via QE...

2) Foreigners via recycling dollars or dollar swaps w/ Fed do own all that debt...The only way this works is if the world has truly decided the dollar is and will be the reserve currency and for global growth the US must continue to increase the supply (global liquidity) to maintain the global markets despite the ever greater balance of trade and budget deficits...regardless the lack / desire for credit w/in the US.

3) other??? (ie, foreigners are just really dumb and enjoy parking their money in investments that lose money? OR Foreigners buying it all so they can dump it all? etc.)

kaiserhoff's picture

Is there any reason this situation isn’t stable or sustainable?

Well said Ham, and well thought out.  I feel your pain, and have for a while.

There is no end of fraud and double dealing here.  We need an audit, but that's exactly why we won't get one.

Ham-bone's picture

I don't know why I care - I doubt anything changes if /when it becomes known that the Fed runs a shadow QE of $x T's (half/double their formal $4 T QE) alongside their formal QE. 

This may simply cement the bond market is dead and rates will forever be lower deficits may be ever larger.  

Guess what I'm saying is the deeper we go the darker it gets?

game theory's picture

There's not much of a mystery about why foreigners keep buying treasuries. Most is trade...the chinese keep taking paper and sending us stuff. Some is rich bankers/execs taking cash overseas in briefcases...or the gov't airlifting crates of cash to Afghanistan where it "disappears" (into contractors pockets). It all comes back eventually in the form of bond purchases. At some point, when the Fed stops its own fraudulent buying of treasuries, reality might return.  Perhaps then we'll see the real fraud...which is a bloated gov't here in the US with all the public workers lining their own pockets telling us how grateful we should be. Essentially the US imported China's central planning and our gov't workers got rich just like connected politicians in China get rich. I want to say it can't last...but I'd be lying to myself.

The bond buying continues...and the stock market keeps going up...and we get to watch the public workers battle each other for the next decade as they thumb their noses at the rest of America.


SofaPapa's picture

"The markets are pricing in the reality that the FED will print forever, and will accelerate printing on any significant dip let alone crash."


"A down market won't kill the banks now. The Fed will let it fall. Maybe keep the gradient easy but they will let it down."


These two quotes represent the endpoints of my thinking for the past three years.  Investing at this point has zero to do with fundamentals.  It is a binary question: what will the Fed do?  Either they will hyperinflate and kill the currency or they will let equities correct and save the dollar.  Which is it going to be?  This isn't investment; it's gambling on the whims of Bernanke and now Yellen.  A very sick system indeed.

asteroids's picture

Due to insane leverage, and cross linkages between parties, the FED fears a "chain reaction". They understand AIG and Leahman, but don't have the balls to bust things up or create circuit breakers. That's why we will go Japanese and QE forever or the bond market wakes up and destroys everything.

Ham-bone's picture

@ asteroids -

there is no bond "market" my post above...get that silly notion out of yer head

TrulyBelieving's picture

The question "Which is it going to be?" really struck at me. Will it be man does the moral thing, do what is right, even if it costs, or it will be man does the immoral thing, to do what is deemed right. To do what is deemed right is expediant, the anwer is not really that hard.

TheRideNeverEnds's picture

I seriously doubt that, the same people who own the FED own the majority of the total market.  That is the entire reason the FED has been printing money and giving it directly to them in order to buy more assets proping up the value of the assets that they already have and adding to the stack. 

Aaaarghh's picture

there has to be something that would make the fed think "shit, better not print more loo roll, we'll be fucked". Its just what that 'thing' is..

Ham-bone's picture

@ aaarghh

It's the other way around...everything says don't slow down or it all collapses

Aaaarghh's picture

i see that, but I just wanna know how the fed/japs know what the fuck happens if they do go all out and turn the printers to 32x

fonzannoon's picture

don't worry it's not going to slow down.

The Gooch's picture

"The premise of the article is wrong."

Damn straight.

Anyone that legitimizes ANYTHING "the fed" does perpetuates the myth.

john.smith's picture

I don't think that's true. If it were, then the markets would have priced the dollar at zero.

No, the market (if there is such a thing) is pricing that the Fed will be able to fix whatever problems that may stem from its actions in the past few years. This is especially true of institutional investors such as SWFs, Pensions Funds etc... that do not know the markets as intiricitally as banksters do.

Aaaarghh's picture

refreshing to see Maria B not chirping on about how the market can only go higher and buy stawks etc. Shit Mark Spitz was allowed to say the whole thing is a sham without a wry smile or derogatory comment from bitch face. i enjoyed the wholesome truthiness of it.

Beam Me Up Scotty's picture

Maybe she has a different handler over at Fox.  The one at CNBS probably had a mean look and a baseball bat in his hand, and had given her a note that her family would suffer if she didn't toe the line.

q99x2's picture

If you can always buy low and sell then that is an illusion that I can live with.


Kirk2NCC1701's picture

"artificial fabrication".  As opposed to what other kind of "fabrication?

css1971's picture

Well obviously, natural fabrication.

Beam Me Up Scotty's picture

Certainly not natural lubrication though.

bsdetector's picture

This may sound crazy but shorting the market just keeps it going. 

fonzannoon's picture


Mark Spitznagelguy: Japan looks solid here and I have capital raised for a fund to invest in a combination of PIIG bonds and social media stocks. 

Maria: What? But just a few months ago you said....(cut off)


Yen Cross's picture

     I wonder if he'll reverse his call next week or month and join " Team Capitulation" with Willy Gross and the other outsiders.

Mr Giggles's picture

There is no market, what is a market.

Free exchange.

Gbmnt is mkt no gbmt no mkt.

only amicable settlement or violent.

You have change for assine.

Spastica Rex's picture

That's Franken-steen!

Its_the_economy_stupid's picture

Where is the chart that shows foreign ownership of the S&P?

Prettiest wallflower at the dance.

agent default's picture

Anybody who hasn't figured this out in the past four years, deserves to get slammed.

forwardho's picture

Have refered to this mess as a fantasy, a mass delusion for 5 yrs now. A good friend has told me that yes, this is all a fantasy, but it is the reality we are living in.

Until all the framework is in place to handle masses of starving humans, it will continue.

In the interim, we know what they have to do in order to keep the ball swinging and that makes it a fixed game, which has been used to great advantage.

Anyone who keeps more than one month of fiat in a bank at this point deserves to have it confiscated. No possibility of gain, only risk.


Der Wille Zur Macht's picture

Tail-hedging, as formulated by Nassim Taleb and Spitznagel, is the quantitative investment corollary to Austrian Economic philosophy. In a way, both have a fatalistic, "que sera, sera" point of view and acknowledge that something as inherently complex as markets CANNOT be explicity modeled and predicted. One must thusly prepare proportionally to the effect. Outliers/Black swans/big sigma occurrences get bolstered while smaller bets are placed on those around the mean. There's a reason that NNT considers Bastiat, Hayek, Mandelbrot, and several others as part of his biggest influences. They're all correct, just writing from different vantage points; somebody just needs to make the formal connection.

q99x2's picture

I'm doing an analysis on Frankenstein the book at this very time. The monster was very smart and often while reading the mind could easily inagine that Victor was crazy and the monster was only another side of his personality--not real.

But the monster was real and killed those that were innocent.

Gather the pitchforks, those with power, and kill the beast before it is too late. Sell high and use some of that money to fight back before the monster comes tp get you.


dcohen's picture

I don't know why we even have a market anymore if they don't let it fluctuate, better to have a fixed rising market in a perfect straight line that only allows you to buy (being 100 % sure that it will NEVER make any tick down )

Chupacabra-322's picture

Hehehehe... How about if I up you & do you one better.

The Criminal UNITED STATES, CORP. INC is an illusion posing as a functional Government of & for the people & by the people when they are not.

It's literally a Corpprate Criminal Fascist UNITED STATES, CORP. INC.


You've been had.

LawsofPhysics's picture

Damn, a lot of scared paper-pushers out there suddenly having their "captain obvious" moments.

rsnoble's picture

Looking at the charts I think 50% off isn't nearly low enough.

That would be a joke.  You'd reach DOW 8k within weeks and then they'd have a 4 year bull run all the way back to 12k sighting 'better than expecteded' the entire way and then we will be right back to overpriced garbage and a shit economy.

Let's get to the real reset................S&P 400.

Bonapartist's picture

666 (DJIA - not S&P) has such a nice demonic ring to it

SharkBit's picture

Wonder how many hedge fund managers Maria has blown?

starman's picture

hm, does he mean my assets are overvalued?

CultiVader's picture

Yes, all but your phyzz Au

StopIt.Now's picture

All but the silver and gold you buy... which are at record (i.e. manipulated) lows... BUY now so you can enjoy the 'tapering' later!

chirobliss's picture

The fallacy of all this moaning and gnashing of teeth is the fatuous belief that markets are as natural and free as gravity and sunrise. Markets are a creation of those with the power to organise themselves into a cartel, nothing more–nothing less.

The stupidity of these "independently-minded, sage investors" making all this noise is that they only alert the rest of us to two important facts...

1. They bet the wrong way and got hosed

2. They are sore losers.

Refer back to my description of markets, and simply note that the fed is the cartel member with the biggest bag of market controlling funds. That is all.

DOGGONE's picture

Look at the truth:
The Public Be Suckered