How to Prepare for Next Market Crash

Hedge-funder and Nassim Taleb Protegé Mark Spitznagel believes the central banks have created a monster they don’t know how to stop. And when it comes (like in 2008) he’ll be ready.

by William D Cohan and cross-posted from Vanity Fair.

What do you do when the bond market is basically uninvestable and the stock market keeps hitting all-time highs and you know in your gut that none of this will end well? What do investors—big and small—do in such unfortunate circumstances, like the ones we collectively find ourselves in now? I’ve been racking my brain for years to figure that out. Increasingly desperate and with the end getting near, I called Mark Spitznagel, the founder of Universa Investments, a hedge fund that exists to help investors grapple with the inevitable market crash.

Spitznagel, 48, and a former trader in the Chicago pits and at Morgan Stanley, understands what’s been happening and how for the last decade central banks around the world have been warping our financial markets by keeping interest rates artificially low. “These monetary distortions lead to this reckless reach for yields that we are all seeing,” he tells me. He sees risk being mispriced everywhere. “Randomly go look at a screen and it’s pretty crazy,” he says. “Big caps, small caps, credit markets, volatility; it’s crazy. Reach for yield is everywhere.” He thinks we are in one of those periods where people have lost their collective minds when it comes to the financial markets.

“When the stock market is no longer tethered to fundamentals—that’s the distorted environment we live in, that’s just where we are—when that happens, any price can print,” he says. “Any price can print. We shouldn’t be surprised by anything on the upside at this point because what’s tethering the markets? People need yield and when they pursue yield because of the momentum that we have in the markets today, anything is possible”

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