Off Topic with Mark Spitznagel

March 31, 2014 07:00 PM

Alpha Pages: Wouldn’t it be dangerous for our economy to go cold turkey on intervention? Would you eliminate the Fed?

Mark Spitznagel: I do think that we should let the markets float. It is the only solution. I don’t think there should be a central bank. When people make poor business decisions, they should lose money. When people take on risk and lose, they should lose money. That is basically all I am saying. When the Fed lowers rates, what they are saying is you’ve got businesses that are under water so let’s lower rates to make it look like they are not under water. It is a destructive cycle that we are stuck in. For my business, I want the Fed to keep doing what they have been doing for the last 100 years. That is my profession, I exploit the Fed and what they do to markets. But it is horribly destructive to a lot of other people.

AP: How is it destructive? 

MS: It is costing us progress in our economy. There are capital investments being made that wouldn’t be made. Every time a company borrows to pay more dividends, a little piece of our economy is sapped away. Borrowing to pay a higher dividend. It is preventing a lot of capital investment that would otherwise happen.

AP: There has been a lot of criticism of alternatives, will this push investors to traditional long equity investments. 

MS: All bets are interconnected. There is one big systemic bet that everyone is taking right now. Diversification is hard to come by. 

AP: How do you handle the current market? 

MS: You simply step aside when markets get distorted. By doing nothing I am doing something real big. A higher level example of that is what I do, which  is instead of doing nothing you actually have positions that will [create] a tremendous amount of [profit]. What is the hardest position to have right now? It is cash. The Fed knows what it is doing. It is pushing you out of something it doesn’t want you in.  

AP: Isn’t a lot of the problem the failure of Federal Trade Commission and Department of Justice in allowing too big to fail? 

MS: I hate to think that the justice department is the answer to this. A lot of the problem is thinking you are protected when you are not or the moral hazard problem; you have a backstop so you can do whatever you want. And it applies to FDIC. If we didn’t have deposit insurance all of a sudden we would have a whole subset of banks whose main selling point is that that don’t take stupid risks.

There is no discipline among depositors. Similarly there is no discipline among shareholders. Nobody should own bank stocks today. But they do because they don’t see a lot of downside. Obviously those shareholders should have been wiped out and it would have been a wake-up call to anyone that is going to buy a bank share again. Government removes discipline. It takes away discipline. I suspect that it would have made everything worse. What would have made it better is if the markets were allowed to work.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.