Attempts to crush inflation from the Federal Reserve may actually result in a collapse in asset prices and a huge recession, says Mark Spitznagel, Co-Founder of Universa Investments.
Universa is a “Black Swan” fund—a fund that specializes in preparing portfolios for unpredictable or high-intensity events, such as market collapses or world wars. Spitznagel, who is trained to look for potentially extreme market events, says the Fed has been inflating asset prices for almost 25 years, and as a result of low-interest rates and loose money supply, turning back to policies that once held everything in check is an impossibility. The Fed is now choosing between two bad options: even more inflation or a recession. And Spitznagel predicts that the Fed will do anything possible to protect financial markets, including increasing crushing inflation rates.
"The controlled burn can turn into a wildfire cascade," he told Business Insider. "That is the real risk here, where the Fed actually can't do anything to stop it."
Spitznagel says deflation should be taken more seriously rather than inflation being the public's main concern, as the Fed's tightening monetary policies could go overboard. Universa Advisor Nassim Nicholas Taleb added that these years of "cheap money" have created inflated asset bubbles that have caused "tumors" like bitcoin to appear. Taleb told CNBC that the past fifteen years have been like "Disneyland" in terms of high asset prices, which will be taking its toll on the economy very soon.
Spitznagel adds that central banks could very rapidly lose control if investors get spooked by the Fed attempting to cool the economy. Even if the Fed tries to normalize inflation rates, he notes, if inflation is brought down too quickly, it could cause "devastation" that would burn through the whole economy.