A Conversation with Mark Spitznagel
One of my favorite investors is Mark Spitznagel.
Of course, I admire his success. He is the “Ursa Major” among bears, having correctly (and very profitably) called the stock market crashes of 2000 and 2008.
Since then he has “fenced the bull” with his multibillion-dollar Universa Investments hedge fund that not only actually hedges (something many hedge funds, busy making huge derivative bets, forget to do) but is also structured to profit in rising markets.
Mark is an intellectual investor. In his book, The Dao of Capital, he combines the rigorous logic of libertarian Austrian economics with the Chinese philosophical tradition of harmonious flow of natural forces. (Hint: Central banks aren’t a natural force.) Forbes magazine called it “one of the most important books of the year, or any year for that matter.”
But what I like about Mark is that he’s fun to talk to. You can tell by choosing almost any quote at random from Dao:
The real black swan problem of stock market busts is not about a remote event that is considered unforeseeable; rather it is about a foreseeable event that is considered remote. The vast majority of market participants fail to expect what should be, in reality, perfectly expected events.
Mark is also an unrepentant Heartlander, born and raised (and raising his family) in Michigan, a graduate of Kalamazoo College who can still recite his college yell…
Breck-ki-ki-kex! Ko-ax! Ko-ax!
Kalamazoo! Kazoo! Kazoo!
So, what did he do when he got rich? He started a goat farm.
Idyll Farms, in Northport, Michigan, produces artisanal chèvre from pastured goats (not grain-fed, cooped-up nannies). The cheese has won Best in Class at the World Championship Cheese Contest and multiple awards, including Best All-Milk Cheese, from the American Cheese Society. And if praise like that from the American Cheese Society doesn’t make your heart skip a beat, you should get out of the Heartland and stay out.
Mark seemed to be the right person to ask about the main thing that puzzles me about the Heartland – its vast array of undervalued assets.
He and I discussed how the Heartland is full of famously sensible, friendly, and hard-working people. It contains a large portion of the most productive agricultural land in the world. The housing stock is extensive and cheap. Industrial sites and commercial locations are ready and waiting. Natural disasters – minus the occasional tornado – are rare. The climate is temperate. The location is central to every form of transportation.
We talked about how the Heartland has water to shame the West, educational attainment that’s the envy of the South, and a freedom from congestion about which the East can only dream.
“Why isn’t the Heartland booming?” I said.
The Heartland would boom if millennials, and “knowledge workers” in general, wanted to live there, but those people would want to live in the Heartland only if the Heartland boomed.
Mark described it as “a chicken and egg problem.” He said that the Heartland would boom if millennials, and “knowledge workers” in general, wanted to live there, but those people would want to live in the Heartland only if the Heartland boomed.
Mark told me about moving out of Los Angeles and back to Michigan because of the values (moral and material) that the Heartland offers… and because of the anti-business attitude that California maintains. But it was his family that he moved. He moved his company to Miami and now commutes north-south.
(Mark inexplicably claims to more than make up for his jet-setting carbon footprint with his hippie, carbon-sequestering goat pastures.)
“Why not move your business to Michigan?” I asked.
“There’s just a general expectation of where a hedge fund like mine should reside. And it’s because of the people I need to hire,” he said. “It’s about where these hip ‘quanty’ geniuses want to live.”
I said, “Maybe if Amazon put its second headquarters in Kalamazoo…”
“But it has to be cool to work for Amazon.” Mark noted, however, that Kalamazoo does have a craft beer – Bell’s. He also noted, “Be careful what you wish for.”
And true, a Heartland overrun with Seattle sensibilities would take the heart out of the place.
But in Mark’s view, Heartland difficulties run deeper than the location whims of talented people. The problem is that Heartland assets are hard assets – a wealth of land, infrastructure, and workforce.
“Our central bank monetary-led boom has made debt replace wealth for a long time. That’s not sustainable, of course. (We are ‘mining’ our soil for short-term gain.) We’ll see a return to the significance of productive stuff again I think, and that even includes farming – maybe especially farming. And the Midwest has a pretty good track record with productive stuff. Hard assets will matter again. But of course, I sound ridiculous even saying such things. Like a grumpy old grandpa.”
Artificially low interest rates have sent people off to chase yield in softer kinds of assets – causing asset bubbles.
Yield-chasing can’t last. It’s not good business. And the places where the yield-chasing is being done aren’t the places where good businesses will be built.
The Heartland states, Mark said, have to “be like Texas – better yet, Switzerland – business friendly.” And he said they were getting there. “Michigan is a right-to-work state now.” (Meaning that employees can’t be forced to join unions against their will.)
This once would have been unimaginable in the state that was Jimmy Hoffa’s home (and probable burial site after he disappeared on the way to lunch with two Mafia members).
Mark talked about how federalism is working “the way the founders wanted it to work. People are leaving states that aren’t business-friendly. They’re voting with their feet.”
“Hard assets will return,” Mark said. “The Heartland will be back. It will matter again.”