Schaeffer's Media Outtake: A Big Bet on Inflation

Can last year's star manager repeat his success?

by Bernie Schaeffer 6/22/2009 1:45 PM


"Mark Spitznagel made a fortune predicting the 'black swan' that hit markets last year. Now the relatively unknown hedge-fund manager is emerging from the shadow of his collaborator, Nassim Nicholas Taleb, with a big bet inflation will soar. The 38-year-old Mr. Spitznagel managed the Black Swan funds to triple-digit returns last year with a bet on volatility. The returns have brought a flood of cash, sending assets for his firm, Universa Investments LP, rising to $6 billion from $300 million ... 'Black swan' alludes to the once-widespread belief that all swans are white -- proved false when European explorers found black swans in Australia. A black-swan event is something extreme and highly unexpected. Mr. Spitznagel's winning streak now will be tested. Universa is poised to make a huge wager that will reap big rewards if inflation surges. Inflation is on investors' radar thanks to extensive economic stimulus efforts ... The new fund, expected to start trading in July, will place bets on options tied to assets expected to benefit from a big leap in prices, including commodities such as corn and crude oil, and options on shares of oil drillers and gold miners. It also will short Treasury bonds, likely to weaken in an inflationary economy ... The inflation bet marks a change for Universa. Typically, Messrs. Spitznagel and Taleb don't have an opinion about the near-term direction of the markets or economy. Rather, they argue, investors tend to underestimate the risks of major market swings. The latest wager is more of a directional bet that regulators' efforts to prop up the financial sector and the broader economy will spark inflation."
(The Wall Street Journal – "Black Swan Trader Bets Reputation on Inflation" – 6/17/09)

Schaeffer's addendum: Stock market history is replete with examples of players who experience success in a specific investment niche and for some reason to decide to move out of their "success zone" with very unhappy results. Renowned plain vanilla value investor Warren Buffett, who once referred to derivatives as "financial instruments of mass destruction," decided at a very inopportune time in early 2008 to sell put options on the S&P 500 Index. Hedge funds severely curtailed their short selling activity, just in time for last year's bear market. And pension funds – those bastions of "down the middle" stock and bond investing – were badly burned not long after they fell in love in recent years with "alternative assets" such as commodities and real estate.

Now come Messrs. Spitznagel and Taleb – who were masters of the "agnostic" approach to market direction and who instead focused on (and profited handsomely from) the market's under-pricing of volatility – with a multi-billion dollar bet "on options tied to assets expected to benefit from a big leap in prices, including commodities such as corn and crude oil, and options on shares of oil drillers and gold miners." In other words, this is very much a directional call and has very little to do with so-called "black swans." If a surge in inflation is "highly unexpected," someone forgot to tell those who have been pouring money into precious metals ETFs at an unprecedented pace and bidding up the price of gold coins to huge premiums above their bullion value.

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Schaeffer's Media Outtake: Short Memories on the Street
(6/18/2009 11:50:51 AM)

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Schaeffer's Media Outtake: Treasury Yields, SPX Moving in Tandem
(5/8/2009 1:45:05 PM)

"US Treasury yields soared on Thursday after a 30-year government bond auction saw poor demand, highlighting the balancing act facing central banks seeking to keep interest rates low while selling record amounts of debt. The investor appetite for relatively safe government bonds has diminished as US stocks have rallied on signs that the pace of the downturn has slowed. However, the rising rates threaten central banks' efforts to encourage people and companies to borrow and thereby stimulate growth. The 30-year Treasury yield rose to 4.30 per cent on Thursday from 4.10 per cent the day before after bids at the government auction came at lower prices than expected. The 30-year Treasury is now at its highest level since last November. The rise in bond yields has raised questions about whether the Federal Reserve will step up efforts – which began in March – to keep yields down through direct purchases of government bonds ... Mortgage rates have been following the government bond yields higher. A 30-year fixed-rate mortgage averaged 4.84 per cent last week, according to a Freddie Mac survey, compared with 4.78 per cent the week before. Earlier in the year, long-term mortgage rates fell to well below 5 per cent, following the Fed's purchases of mortgage debt and Treasury debt, a strategy known as quantitative easing. This prompted a wave of mortgage refinancing. This can reduce monthly payments and has given many Americans more cash to spend or save."
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