"Black Swan" Fund Creator Explains Why Central Planning Has Doomed Us All

Tyler Durden's picture

In a must read Op-Ed in the WSJ, Mark Spitznagel, founder of "fat tail" focused hedge fund Universa, where Nassim Taleb has been known to dabble on occasion, explains the fundamental flaw with central planning, and specifically why "moral hazard" or the attempt to avoid the destructive part of natural cycles, is the greatest unnatural abomination ever conceived by man. His visual explanation should be sufficient for even such grizzled academics who have no clue how the real world works, as the Chairsatan, to comprehend why what he is doing is an epic abomination of every law of nature: "Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire." Another way of calling this, is what we have been warning about for years: delaying mean reversion does nothing but that. And when the Fed finally fails to offset the inevitable, and it will - it is a 100% certainty - the collapse and destruction will be unprecedented. Ironically, the only way the system could have been saved would be by letting it fail in 2008. Now, we are sorry to say, it is too late.

Spitznagel's Op-Ed from The Wall Street Journal

Christmas Trees and the Logic of Growth


The ubiquitous greenery of the season has me thinking conifers and stock market crashes. There is much to be learned from the coned evergreen trees that form vast forests across the Northern Hemisphere. As the oldest trees on the planet, the mighty conifers have survived threats of catastrophic extinction since the time of the hungry herbivorous dinosaurs.


The conifer's secret to longevity lies in a paradox: Their conquest has been largely the result of episodes of massive forest destruction. When virtually all else is gone, conifers show their strength and prowess as nature's opportunists. How? They have adapted to evade competitors by out-surviving them and then occupying their real estate after catastrophic fires.


First, the conifer takes root where no one else will go (think cold, short growing seasons and rocky, nutrient-poor soil). Here, they find the time, space and much-needed sunlight to thrive early on and build their defenses (such as height, canopy and thick bark). When fire hits, those hardy few conifers that survive can throw their seeds onto newly cleared, sunlit and nutrient-released space. For them, fire is not foe but friend. In fact, the seed-loaded cones of many conifers open only in extreme heat.


This is nature's model: overgrowth, followed by destruction of the overgrowth, and then the subsequent new growth of the healthiest and most robust, which ultimately leaves the forest and the entire ecosystem better off than they were before.


Pondering these trees, it is not too much of a stretch to consider the financial forests of our own making, where excess credit and malinvestment thrive for a time, only to be destroyed—and then the releasing of capital into markets where competition has been wiped out. The Austrian school economists understood this well, basing a whole theory around this investment cycle.


After the purge, great investment opportunities are created, from which prolific periods of growth emanate—provided that sufficient capital remains to reinvest into the fertile and now-open landscape.


Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire.


What obviously occurred was that the most fire-susceptible plants had been given repeated reprieves (bailouts, in a sense), and they naturally accumulated, along with the old, deadwood of the forests. This made for a highly flammable fuel load because when fires are suppressed the density of foliage is raised, particularly the most fire-prone foliage. The way this foliage connects the grid of the forest, as it were, has come to be known as the "Yellowstone Effect."


A far better way to prevent massively destructive fires is by letting the fires burn. Human intervention in nature's cycles by suppressing fires destroys the system's natural homeostatic forces.


Strangely parallel to the Yellowstone catastrophe was the start of the federal government's other fire-suppression policy with the 1984 Continental Illinois "too big to fail" bank bailout. This was followed by Alan Greenspan's pronouncement immediately after the 1987 stock market crash that the Federal Reserve stood by with "readiness to serve as a source of liquidity to support the economy and financial system," which heralded the birth of the "Greenspan put." The Fed would no longer tolerate fires of any size.


From a forestry point of view, the lessons were learned. In 1995, the Federal Wildland Fire Management Policy stated, "Science has changed the way we think about wildland fire and the way we manage it. Wildland fire, as a critical natural process, must be reintroduced into the ecosystem."


Herein are pearls of great wisdom for central bankers today. Central banks are creating a tinderbox by keeping alive many very bad investments, fertilizing them with everything from artificially low interest rates to preferential liquidity to outright securities purchases. As these institutions and instruments overrun the financial landscape, they hamper the economic ecosystem and perpetuate the environment of low growth and high unemployment in which we currently find ourselves.


Seeing periodic, naturally occurring catastrophes as part of the growth cycle requires thinking more than one step ahead, not only longer term but, more specifically, intertemporally. This is perhaps an insurmountable cognitive challenge, both to investors and central bankers in today's news-flash world. When contemplating the forest, we may intuitively understand nature's logic of growth. Yet when we look at the seeds of destruction we have sown through current monetary policy, it is clear we are lost in the trees.


Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments L.P., based in Santa Monica, Calif.

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GeneMarchbanks's picture

Conflagration cometh.

JumpinJonnyK's picture

Ron Paul supporters needed!!!  Please sign the petition at www.ronpaulblowback.com!!  Help stop the media bias against Ron Paul!!

GeneMarchbanks's picture

'Help stop the media bias against Ron Paul!!'

Why? Last I checked corporate media was the most hated thing in America. It can only help.

Oh regional Indian's picture

Wow now RP. Wow! All the time. be interesting to see.

But as to this excellent article, re-gurgitating the obvious @ $2,000 a word + 2% of ad revenue....

The post six-sigma world was obvious to some of us a loooong time ago.

I'd written this in May 2008:


We always speak of six-sigma as a statistically improbable outcome in any normal distribution.  I firmly believe, we don’t live under the same bell curve that all our assumptions are based on.  We live in a four or even five sigma world from our current code assumption set.  Worthy of pondering.

v Macro economic trends: The US Dollar is under severe, sustained pressure. If true impact of “Real” inflation is accounted for, the canary has already fled the coal mine. 


v China is staggering under its own curious set of circumstances of a large population set “herded” into rapid “development” mode, much like India.  Most of the “gains” are hype. Credit, cheap and plenty until recently (private equity had moved it into the right hands in preceding years), being the sole driver (flogger?) of growth.


v The sub prime mess (and all its attendant tentacles of cause and effect in the world financial systems) is scary with just the lit fuse sparking.  When it really goes off, all bets are off.  Talk of lack of understanding of higher order cause and effect.

v Energy prices are reset in the public mind at dizzying rate (12 dollars a barrel of Brent Sweet Crude is not such old memory), currently 130 dollars a barrel.  Associated inflationary impact is hitting the

majority of the world’s population. 


v On a similar somber note, a discussion on our world’s geo political situation. Every major war in history was a resource war as is every major conflict today. There is a relentlessly hawkish bias in the global dialogue, with too many vested interests in the war – pie.  Oil, minerals, territory / markets and now water. Also, in large theatre wars, multi-generational trauma creates multi-generational conflicts.  Grim but true.


v An increasingly nuclear world adds the requisite potential for a runaway reaction!  Our world is ever increasingly polarized with ever greater potential for conflict.







IBelieveInMagic's picture

It's not that the Feds doesn't understand this phenomenon -- it's just that they are fearful that these "relatively" small fires can wipe out the special place that the USD holds in global financial system -- all these desparate measures are an attempt to hold on to the USD's pre-eminent position which requires them to tolerate the harmful behavior of their spawns (the large US banks). It's anologous to PTB tolerating the behavior of their depraved children in PTB's desire to hold on to power...

eureka's picture

Central Planning: 

Federal Reserve Bank, Federal Bureau of Intelligence, Central Intellgence Agency, Pentagon, Home-Land Security, US Federal Government. 

Central Planning = Central Control = Zero Freedom = Empire.  

Ron Paul 2012 = No More Empire ! ! !


IBelieveInMagic's picture

You appear to have naive belief that one man can change the course of history -- you are in for a rude shock!

Oh regional Indian's picture

But you believe in magic, yes?

TorchFire's picture


The magic is the remaining vestiges of free market (largely underground at this point). The time line of the downward spiral is ultimately a function of the persistent viability of innovation via the remaining free market as it provides the lifeblood from which requisite productivity to maintain the statist government can be siphoned. Time to play dead... and then spring on their damn throats when they hold a mirror to our mouths.

AldousHuxley's picture

One man can change history especially if he is a top leader....just ask Germans about Hitler.



Ron Paul's not changing....he merely represents the growing sentiment amongst responsible citizens that both democrats and republicans are hurting rather than helping America.


What sort of liberal vote for Bush's bankster bailouts and wars?

What sort of conservatives vote to spend tax money on Bush's bankster bailouts and wars?

Think for yourself's picture

Because you think Hitler was a self-made man? Notwithstanding his advisors and manipulators, where did his funding come from?

Oooh.... right. 

shortus cynicus's picture

We may be at least 100% sure, that he wasn't supported by jewish bankers from New York, and no one who helped him has managed then to get elected into presidential office.


Bringin It's picture

"no one who helped him has managed then to get elected into presidential office.

Right.  Had to leave that plum for the kid and the grand kid.

surrational's picture

Maybe not one man, but Dr. Paul has created a movement which is greater then one person.

monoloco's picture

Maybe so, but ALL the other candidates are tools of empire, oligarchy, and oppression.

crzyhun's picture

Ron Paulsy is like the the broken clock...right twice and way wrong otherwise!!

Bringin It's picture

Typical Ad hominem bs from a troll.  You have the floor.  State your case.  Make your argument.

jeff montanye's picture

twice a day beats not at all.   vote for ron paul: something good (end the endless wars, jail the banksters/reorganize the tbtf, restore the constitution) rather than nothing good (obama).

AnarchoCapitalist's picture

I think you hit the nail on the head. Bernanke is not dumb, just morally corrupt. He fears that the USD will lose reserve currency status and that he will in turn lose power. The problem with politicians and their appointed clowns in The Fed is that they desire power more than they desire to do what is noble.

karzai_luver's picture

CORRECT, they KNOW it's insolvent at all levels and if anything like 2008 again , it's GONE OVAH KAPUT KABLOOIE!



Endurus's picture

Libertarian and damn proud of it...BUT.... Persoanlly... RP is tooooo far for me.

To sit back and say that America should be completely isolationist is frankly naive.

The last time we did that resulted in something called WWI and WWII... With that said.... should we pull out of our interests in most of the world??? Yes... over the next ten years... but to leave a VOID where once was the most indisputed power can only lead to more cronyism and long term side effects for us to deal with.

I'm all for shooting a hostage... breaking a leg.. taking a leap of faith if you will because our system is so corrupt it must fall to be rebuilt.

I just don't believe that ron paul is the man to do it.

Unfortunately I don't know of anybody who is that has a remote shot of winning...... but mark my words... if Obama gets a 2nd term... we may not be having an election the next cycle around.

Socratic Dog's picture

Ron Paul is too extreme for a libertarian?  What the fuck?

OldTrooper's picture

No, RP is too extreme for a sock-puppet spreading approved Republicrat propaganda.

karzai_luver's picture

WWX is coming no matter what.

Take a shot and try to avoid it.

Either that or collapse from within as the SOviet Union did in trying to show how tough and militarily superior they were.

The US is even worse off as we are trying to prove how tough and superior we are to your "enemy" who if you goofballs are to be believed doesn't care and wishes to die.

How stupid is that.

A military build chasing it's own tail until self exhaustion.

yeah, that's some strategy there dude. Heh, I sunk your battleship!

"the last time" -----bwhaaaaa---- you know that "last time" the world looked nothing like it does now. Those who are trapped by history will never see the bus coming.


Deer in the headlites time.



Stuppy's picture

I also disagree with a totally isolationist policy, but you don’t have to agree with everything a candidate believes and it might actually be better than a totally interventionary (made up word) policy.

RockyRacoon's picture

Be wary of how you throw around the term "totally".   I wouldn't describe Dr. Paul's policy as total isolationism.  Not meddling in the affairs of others is not a new concept.   Warnings about same are abundant in the writings of famous politicians and statesmen.   Having a tolerant immigration policy is not isolationist, for example.  Belief in FAIR and FREE international trade is not isolationist.  Beware...

akak's picture

It must also be pointed out that the foreign policy of non-interventionism that Ron Paul advocates, and which is erroneously and misleadingly mislabeled by warmongering statists on both the political right AND the left as "isolationist", is precisely the same foreign policy currently followed by EVERY other nation on earth --- and somehow, it more or less works.

Jonas Parker's picture

No, the last time we weren't isolationist resulted in WWI . The Treaty of Versailles ending WWI resulted in WWII. Get your history right!

sschu's picture

The last time we did that resulted in something called WWI and WWII

I guess I would ask for an explanation of why American isolationism resulted in WWI and WWII?

Not saying our unwillingness to get involved did not prolong or make things worse, but to assign responsibility to those policies is a point I do not get.

There are those who think our involvement in WWI actually was a negative, not sure I agree, but a case can be made.


Questan1913's picture

"To sit back and say America should be completely isolationist is naive"?  Really?  Here are just a few examples of America minding its own business.

Invaded Canada twice  Invaded and conquered Mexico  Invaded and conquered Hawaii and the Phillipines Over ten separate invasions of South and Central American countries  Attacked Korea and China 1880 to 1907  Forced Japan to submit to "gunboat diplomacy"  Has a bad habit of attacking or overthrowing governments that aren't part of the world wice central bank cartel.... Libya, Iran, Iraq, Afghanistan etc Your knowledge of history, gained from thousands of hours of television watching is laughably absurd.  Your use of the word "we", as if you are actually part of the grand plan of empire building is beyond naive and enters the realm of pathological delusion.  And I have maqrked your words sir....You want a dictator.

falak pema's picture

is it true that the RP I'm thinking of loves above all a highly testo charged black jew as his main political supporter in next election?

That's the ideal american supporter profile of this RP that I dream of! 

If it is, it means O'bammy doesn't fit the bill. I know he isn't a jew...for the rest...

In fact none of his own tribe, from Bachmann to Newt, fits the bill. Michelle, 'cos she's a woman, Newt, 'cos he isn't cute.

I wonder if our RM is a jew; cos he does fit the bill, with his Zulu stuff.


Maybe, I'm being tongue in cheek. I'll have to ask the head shrink of Zh : Cog Dis.

No media bias intended. In fact I find the real RP very truthful in WORD, even if he is on a planet of his own with a lot of guys from ZH. For matching DEEDs to words we'll have to elect him first...

The RP I refer to is not necessarily the RP you look up to. All resemblance, of my Holographically constructed candidate, to real persona alive, is purely fortuitous.


Return2Sanity's picture

Good thing we have the MSM to explain to us that:

Ron Paul can't possibly win...because only the VOTERS support him.

He doesn't understand modern economics...because he thinks it's a BAD IDEA for our money to be backed only by our faith that the government will control its spending.

His foreign policy is too radical...because he thinks we should find out if a country is really a threat to us BEFORE we invade it.

Maybe they would also like to convince us that he's invisible too...because nobody can see him when the lights are out!


saints51's picture

I understand the foreign policy issues with RP but guess what? Who cares about foregin policy. How can we help the world if we can not help ourselves. So imo you can throw the foreign policy in the garbage. We don't have the money to help others and at this point our advice with current leadership is like a 4 year old with a coloring book.

NumberNone's picture

MSM says Ron Paul will destroy the Iowa caucus...he must be a bad person.  Already spinning the bullshit about the illegitimacy of an Iowa win.


karzai_luver's picture

well as I said long ago and has been proven over and over they have a small amount of truth, iowa is useless.


it is nothing like the majority of amerika.


augmister's picture

DENIAL – FACTS = Irrational Strategy

ucsbcanuck's picture

Try selling that to people in a democracy. Not gonna work.

ucsbcanuck's picture

You're right, forgot the inverted commas.

You know, the "democracy" we live in that is effectively a popularity contest where the winner is determined by how good they look and speak and how much hopium they can provide the populace.

centerline's picture

For sure. TeeVee nations we have become. People get "edumacated" by the likes of celebrities. So, we have politicians instead of statesmen.

omniversling's picture

more than campaign funding? Corporatocracy =$trillions of it = Sockpuppet reps.

q99x2's picture

Try selling that to people in a democratic republic that was taken over by drug dealing racketeering inbred banksters and blackmailed politicians. Still not going to work. But its gonna be exciting...different...The two headed baby Jesus Emanoel is now one.

shortus cynicus's picture

USA is not a democratic country, it's a republic.

lunaticfringe's picture

Well, I'll be damned but I just wrote a little something about this. Central planning is for the nationalistas. Nationalism v patriotism...the subtle differences. One is for the aristocracy, the other term is reserved for the serfs. http://thecivillibertarian.blogspot.com/2011/12/nationalism-v-patriotism...

midgetrannyporn's picture

We must prop up the deadwood at all cost.

RockyRacoon's picture

Even the Forest Service policy is flawed.   Letting fires burn should include areas where fools built houses.  Insurance companies would soon learn to exclude some areas of the country from coverage if the Forest Service let fires burn as Mother Nature fully intended.   That's picking and choosing who benefits and who doesn't.   Oh, I forget.  The Federal Government would step in and provide that insurance, like they do for people who build on naturally moving beach front property.   Silly me.