"We Are Living In A Reality Distortion" Mark Spitznagel Warns "This Is Not Over Yet"

Just a week before the biggest spike in US equity market volatility ever - something 'no one' in the mainstream even thought possible - Universa's Mark Spitznagel warned "a reckoning always follows...something really big is coming"

This is an age of massive artificial economic imbalances and systemic risks.

Repress change, and you repress all that it means. Repressing it is sheer hubris and, in Dylan’s words, “beyond your command.” You can only defer it, not stop it. (Juxtapose this view with outgoing U.S. Federal Reserve Chair Janet Yellen’s ambitious claim that there will not be another financial crisis “in our lifetimes.”) When we try enforcing stability by decree, a reckoning always follows. An unsustainable boom leads headlong to an inevitable bust. A hard rain falls.

Rather than fear it, we should “tell it and think it and speak it and breathe it.” This is Dylan’s resolve. Something really big is coming. Let the central bankers try to keep standing in its way, but as investors we need to recognize and accept its logical consequence of a return to the meaning of volatility. Change and volatility are good. “There is nothing perpetual but change”—according to Mises, who surely must have loved Dylan just as much as I do.

While this is a common theme from the guru of tail risks, his timing could not have been better. As some might say "nailed it," and Spitznagel was asked to explain how to spot market crashes coming on Bloomberg TV this week...

Spitznagel begins by pointing out the obvious, and crushing the business models of 99% of the mainstream media's guests:

"My job is not picking the top. My job has always been risk mitigation. Picking crashes is impossible... timing crashes is impossible. If you require a forecast in order for your investment thesis to do well, then I think you're doing it wrong."

The Universa CIO then reminds viewers that this is not over yet, explaining that markets do not crash in one big move but in an oscillatory drop and pop manner that "is meant to shake out the weak hands and get you short at the bottom.. really it's an impressive thing what the market can do."

"We are living in a reality distortion," Spitznagel continues, "when it comes to what happened this week, and what will happen ahead, all roads lead to the central bankers at The Fed."

"People feel we are in a benign investing environment... we are not!"

"We have been here before. Let's remember The Great Moderation of the mid-2000s - we have seen this play out before and it will do the same thing again... It is so naive that people think they can put on trades like the short-volatility trade - I think people don't really believe it but in the low-rate world, they are forced to chase and do crazy things..."

"It's easy to snicker at how naive the short-volatility-trade was, but it is a short-gamma trade - which means there is feedback process where selling begets selling... There is no difference between that and people who are long the market - they are long the market because it went up; when it goes down people are not going to want to be long."

And they are doing it again already!!

Bob Dylan put it best, Spitznagel said, "people don't do what they believe, they do what is convenient.. and then they repent... I think what we saw in the last few days was repenting, and there is more to come."

The bubble in passive investing is "a big problem," warns the hedge fund manager, but there are bigger problems:

"...think of the landscape of problems we have - think of the over-valuations we have, look at where rates are, there's no room for more monetary-easing... for us to focus on the derivatoive tail wagging the dog here is losing sight of the big picture - It's easy not to worry about that but everything is distorted today - this is what happens when we have the type of historic monetary interventionism that we have had."

Then Spitznagel dives into the uncomfortable reality for the Bloomberg TV anchor:

"The S&P is a risky thing to hold. It does not feel that way, but it is... I expect in the coming years we will take back a decade..."

"Everyone has this dogma of 'diversification'," he explains "they think it is the answer to the markets we are in today (and to risk in general)."

It's not - "the reality is that diversification has not been a good risk strategy, because correlations tend to spike just when you least want them to..."

"After the fact they realize that when correlations spike, people who think they are diversified - the extreme case being risk-parity - get it wrong and it is too late at that point... we are going to see this negative feedback happen again - but it will not be driven by a small area of the derivatives market, it will be driven by actual sellers of stocks."

Bloomberg's Alix Steel finally asks for some advice for her viewers: "Is there a magic-hedge that would help you if you owned the S&P 500?"

Spitznagel simplifies things perfectly: "own less of it! ... it's a bad idea for the public to be looking at derivatives hedges in general... that was one of the problems of these VIX products. There are people in these things that have no business being in them in the first place (and frankly I would put some professionals in that category too)."


Sages wife Mr. Universe Sun, 02/11/2018 - 12:28 Permalink

Agreed. Traded as a commodity, or a derivative, it should have risen as well. The fact that it has gone relatively nowhere in the last 6 years, like silver, is the story. I think the previous 6 year period, 2006-2012, is a far more accurate representation of its true value and for good reason; our financial system's ubiquitous decline. Everything after that period is thanks to the man behind the curtain, and his tireless smoke and mirrors. Oh yeah, and his private whoring media.

In reply to by Mr. Universe

oddjob Consuelo Sun, 02/11/2018 - 12:28 Permalink

How long?....until all major asset values are not skewed by overwhelming debt. I can use the cash to live a comfortable life and if inflation takes hold the other 2 should cushion the hurt. I can't be throwing a lifeline to a bunch over overextended boomers to rescue their insanely overvalued equities.

In reply to by Consuelo

Dilluminati Sun, 02/11/2018 - 11:22 Permalink

I think all classical analysis on this market is much a waster of time.  With AI, Robotics, Crypto-currency, and the results of disastrous decisions in respect to immigration and consequences thereof politically.   It will be a black swan event nobody is discussing specifically, but these are anything but stable environments and certainty which markets love 

BritBob Sun, 02/11/2018 - 11:28 Permalink

Good time to invest in Oil?

Falklands Oil - 

Falkland Oil Project Eyes Green Light This Year as Prices Rise - 11 Jan 2018


  • $1.5 billion of capex is required to achieve first oil
  • Premier Oil, Rockhopper are partners on Sea Lion project

An oil project off the tip of South America is on track to get the go-ahead by the end of this year as the companies involved in the development work to secure $1.5 billion in financing.

It’s eight years since Rockhopper Exploration Plc discovered the 220 million-barrel Sea Lion field off the Falkland Islands. A green light for the project -- which is operated by Premier Oil Plc -- would signal renewed confidence in the outlook for the oil industry after a three-year slump in investments due to low prices.

“The project of course is looking a lot better at $68 a barrel,” Tony Durrant, chief executive officer of Premier Oil, which holds 60 percent of Sea Lion, said in an interview on Thursday. “It’s a project that’s very sensitive to oil prices.” (Bloomberg 11 Jan 2018)

What about Argentina? And what does the law say about the ownership of natural resources?

Argentina's Continental Shelf Claims and The UN CLCA Commission (1 page):-





laser Sun, 02/11/2018 - 11:31 Permalink

Being diversified now is like wanting to go sailing from New Orleans as Katrina approaches, So you put 40% of your family on shore and go sailing anyway.

navy62802 Sun, 02/11/2018 - 11:38 Permalink

We have been living in reality distortion since 2008. Quantitative Easing has irredeemably skewed markets and created bubbles that we don't even know about yet. For a decade, the Federal Reserve has kept its lending rate so fucking low that even a whisper of a minuscule bump in lending rates will crash markets.

buzzsaw99 Sun, 02/11/2018 - 11:43 Permalink

It's easy to grin

When your ship comes in

And you've got the stock market beat.

But the man worthwhile,

Is the man who can smile,

When his shorts are too tight in the seat.

[/Judge Smails]

Vlad the Inhaler Sun, 02/11/2018 - 11:44 Permalink

For retail I would say position sizing is more important than diversification.  If your XIV bet blew up on you, it shouldn't matter because you shouldn't have more than 5-10% on the line in any one position.

shortonoil Sun, 02/11/2018 - 11:48 Permalink

With oil going back to its historic mean of $25.71, like everything else, it is a good time to get the hell out of oil. Or, short it all the way down.

Fufi007 Sun, 02/11/2018 - 11:50 Permalink

Who cares about Volatility, ups and downs?

Always trade with a safety net 'behind' you. Always trade with trailing stop-loss order and do not attempt to pick top and bottoms---go with the prevailing weekly trend and don't fight the tape !!!

SheHunter Fufi007 Sun, 02/11/2018 - 12:20 Permalink

The trailing S/L only works in an orderly market.  S/L is not for times such as now when you risk waking up one morning to find the market overnight or through the wkend is down a vast amount and not on it's way back up any too soon.  Or maybe worse, down 500 so you sold for a good loss.  Only to have the market regain the 500 by close of Europe.  S/L was good for those who got in at the bottom, or near the bottom of this rally but it is way too long in the tooth to jump into S/L now.   

In reply to by Fufi007

drstrangelove73 Jibe Ho Sun, 02/11/2018 - 18:44 Permalink

We can’t kill him again,but we could mutilate his corpse...

What percentage of Americans know that an associate FBI director passed over for promotion,brought him down as ‘Deep Throat’? .01%? .001%?


Rod Rosenstein=Mark Felts

As my old man loved to ask, “What did Nixon DO?”


One thing for sure,Trump does not =Nixon...

In reply to by Jibe Ho

francis scott … Sun, 02/11/2018 - 12:58 Permalink

            "this is not over yet..."

What idiocy!


That all the manipulation and distortions of the last 9 years

could possibly have been corrected in the last 6 weeks and 

is now over.


SRV Sun, 02/11/2018 - 13:19 Permalink

So it was just a little problem with the insane VIX derivatives...

Only the VIX is based on the S&P... yet the Dow dropped in lock step with close to 100% correlation.

swamp Sun, 02/11/2018 - 13:28 Permalink

The Justice Department under Eric Holder and Loretta Lynch and the FBI under Comey operated as fixers to keep Hillary Clinton out of prison blocking serious inquiry into arming Middle East terrorists in the Benghazi fiasco, the "Fast and Furious" gun-running operation, the Uranium-One scandal, the e-mail scandal, the corrupt Clinton Foundation and now the attempt to destroy the Trump Presidency with a mountain of lies and a bogus dossier that we now know was paid for by the Clinton campaign.