Mitt Romney may be the presumptive GOP presidential nominee, but Texas congressman Ron Paul never planned to go away quietly before the Republican National Convention in Tampa in August — and neither did one of his staunchest supporters, L.A. hedge fund investor Mark Spitznagel.
It’s partly Spitznagel’s doing that Paul held out for delegates at one of the campaign's final acts, the Nebraska state Republican Party Convention, which took place a week and half ago, more than a month after the state's primary. (Paul failed to gain a plurality, dooming his chances at speaking in Tampa.) All along, the hedge funder helped keep Paul in the race, both by raising money and by providing the campaign with intellectual oomph.
Spitznagel, who runs Universa Investments, which he founded in 2007, lives in Bel Air and operates out of an office in Santa Monica. Why is the Michigan native so far out west, anyway? After all, hedge funds are supposed to be in Connecticut. Or at the very least, Manhattan. That wasn't Spitznagel's scene. "I wanted to get out of that groupthink of Wall Street," he said on the phone recently. "Everyone there is crammed into a handful of blocks." But it's perhaps more than just the non-NYC quality of L.A. that has made it a comfortable place for Spitznagel.
Libertarian roots that run deep
In a quiet way, SoCal is an ideal location for a libertarian like Spitznagel to set up shop. The Reason Foundation, a think tank that publishes the libertarian monthly Reason Magazine, has an office here. And, of course, California politics has a notable frontier self-reliance streak that appeals to libertarians, with their reverence for individual liberty above all other values. They want the least possible government, and California's ballot proposition model, for example, often makes it seem as everything in Golden State politics is always up for grabs.
While Silicon Valley is home to several libertarian celebrities, such as PayPal co-founder Peter Thiel, who has contributed millions to Ron Paul's Super PAC, L.A., too, has a deep libertarian history.
Leonard Reed, the founding father of modern libertarian intellectual activism, got his start with the L.A. Chamber of Commerce, according to Brian Doherty, a senior editor at Reason magazine. Reed started the Foundation for Economic Education, the first libertarian think tank, in 1946. One of his biggest funders, William Mullendore, worked for Southern California Edison.
“If you're a libertarian, being in L.A. is a cool way to snub the old centers of power," said Doherty, who published a book about Paul earlier this year. Doherty is talking about New York and Washington, D.C., where libertarians are often dismissed as a sideshow to the two-party main event.
It makes sense that Spitznagel would find a home in the libertarian subculture of L.A. because, despite his billions, it's not as a successful investor that Spitznagel has had his biggest impact. It's as a public intellectual, strange as that might seem to critics like the New York Times' Paul Krugman, who has accused Spitznagel of "agonizingly dumb, pound-your-head-on-the-table economic fallacies."
But Spitznagel doesn't pen those alleged fallacies for obscure pamphlets and shadowy newsletters. He publishes in the Wall Street Journal and shows up at Project Syndicate alongside economic and financial heavyweights such as Nobel Prize winner and World Economic Forum frequenter Joseph Stiglitz, PIMCO CEO Mohamed El-Erian, and reliable harbinger of economic doom Nouriel Roubini.
There's no grey area with Spitznagel. Anyone who has observed him make his billions knows that. For example, he invited Krugman's outrage for arguing that unconventional Federal Reserve monetary policies create "artificial disparities based on political privilege and economic power" between the wealthy and the not. In effect, he compelled Krugman, no fan of the big banks, to counterargue that so-called "quantitative easing" — the Fed injecting money into the banks — wasn't a giveaway to those same big banks.
Betting on the Black Swan
Certainly, Spitznagel’s investment philosophy is extremely unorthodox. He follows the example of Nassim Taleb, who popularized "the black swan" concept with his book of the same name. Black swans are exceptionally rare events, arriving suddenly in a sea of everyday, boring white swans. Spitznagel and Taleb were partners in Taleb's influential hedge fund, Empirica, and Taleb is currently an advisor to Universa. Earlier this year, Taleb also came out in support of Paul.
At Universa, Spitznagel hunts black swans pretty much exclusively. When they do finally arrive, the returns can be massive, like an astonishing 115 percent in 2008, in the throes of the financial crisis during Universa's second year of existence, according to Bloomberg. That was about as big a black swan as a black swan investor could hope for — nothing quite like having the entire global financial system on the verge of collapse to reward big bets against stability.
But this approach isn't for the faint of heart — although Spitznagel seems to have the right outwardly low-key but inwardly intense personality to hack it. Forbes noted in 2011 that Spitznagel, a conservatively casual dresser (Brooks Brothers shirts, no tie, loafers), looks "better prepared for a yacht race than for doomsday" and that he's content to lose money 95 percent of the time.
The Lasting Ron Paul Legacy?
Even though Paul has effectively stopped campaigning and, at 76, announced that he won't seek re-election after more than two decades in Congress, Spitznagel continues to see him as one of the most significant voices in politics. "He's going to be an important figure for this movement for the rest of his life," Spitznagel told me. "He'll be an important figure for generations."
Spitznagel, whom I've written about a few times before, said that he hasn't lost any of his "vigorous support" for Paul, even though the man Politico called a "libertarian crusader" (although he's not the official Libertarian Party candidate for President in 2012) and who has on numerous occasions taken Federal Reserve Chairman Ben Bernanke to task for expansionist monetary policies doesn't have a remote shot at becoming the Republican nominee.
"It isn't about winning," Spitznagel said. "It's about how important the Austrian view on economics is. Think about what Ron Paul has done. He's framed the debate and made people talk about this notion of Keynesianism, which has been such a prominent part of government for so long." It's something that electrifies Spitznagel: "That we can even speak about this is why my support for him is as strong as ever."
To simplify: Austrian school economists maintain that government intervention in the economy is always a terrible idea. In this they oppose the disciples of John Maynard Keynes (like Krugman) who argue that government intervention in the economy is imperative because it takes the rough edges off capitalism.
Keynesianism has been the defining feature of the postwar economic orthodoxy, although various types of free-market economics have given it a run for its money over the past 30 years.
The Austrians, however, have always been outside the mainstream. It was Paul's candidacy, in the aftermath of the financial crisis and the seeming failure of Keynesian stimulus spending to revive the U.S. economy, that put Austrian school economics and its central personalities, Ludwig von Mises and Friedrich Hayek, on the national agenda. Paul even got a new generation of voters interested in their theories as he gathered youth support during his insurgent candidacy.
The Austrian school got name-checked so often during the Republican presidential debates that NPR's Tamara Keith did an eight-minute get-to-know-you radio segment on all things Mises and Hayek...and Paul.
Paul's Man in L.A.
In Spitznagel, Paul has a significant fundraiser ($2,500 per plate dinners at a $7.5-million mansion that formerly housed Jennifer Lopez and Marc Anthony), a financial advisor — and someone who can generate intellectual credibility for a contrarian politician who tends to engage in rambling interrogations of Fed policies while simultaneously advocating, quixotically, a return to a gold-and-silver standard ("bimetalism," as it's called, to distinguish it from a gold-only standard).
What really gets Spitznagel fired up are what he considers the sins of central banking — everything from flooding the economy with money to keep big banks from going under to holding interest rates at zero levels to controlling a so-called "fiat" money system disconnected from any restraining store of value, such as gold.
Those sins have been profitable for Spitznagel. He recently published a white paper in which he revealed that he's basically been investing against the Fed his entire career, profitably assuming that "central bank hedging" will ideally position him for the busts that invariably follow the booms that are fueled by artificially low interest rates (short-term rates are currently at or near zero, and long terms rates are at historic lows).
"It's hard to make the case against that being caused by the Fed," he said. "We're seeing it now at a truly unprecedented scale. It's as bad as it could pretty much be."
Spitznagel concedes that it doesn't always seem that the Fed’s policy is so detrimental to the economy. "In the short run, it looks beneficial. But it creates malinvestment — investment in the economy that without low interest rates would never have happened. It messes with the whole technical functioning of the market. Investors have the illusion of prosperity, but they wind up being fooled. It's a truly insididious thing that the Fed is doing."
The Debate about the Federal Reserve
The vast majority of educated onlookers, of course, do not think that the Fed is a ruinous force. Reuters Breakingviews columnist Dan Indiviglio, who has written frequently about economic policy and the Fed, summed up the view that the central bank is imperfect but necessary.
"They don't have a great track record for messing with unemployment," Indiviglio said. But even if that half of the Fed's mandate went away, he thinks the other half, managing inflation, is essential. "Inflation" — and its opposite, deflation — "can be very harmful, unless you have a central bank that can guide it one way or another."
Still, the Fed can't escape criticism these days, with unemployment remaining high throughout much of the country and yet another round of quantitative easing on the table as markets react to the sluggish economy and events in Europe. "Right now, nobody seems to like the Fed," Indiviglio said. "One side thinks it's doing too much, one thinks it isn't doing enough. But it did a lot more good than harm during the financial crisis."
Spitznagel knows he is not advocating anything that even vaguely resembles a mainstream view. But given the arrival of the Tea Party in American politics, and the degree to which Ron Paul influenced the Republican debate this time around, his ideas have more popular support than at any time in the recent past. With plenty of Democrats signing on, the House of Representatives just passed one of Paul's pet pieces of legislation: a bill to audit the Fed. Spitznagle is also wealthy enough to keep Paul's legacy in the national conversation, even as the Congressman himself leaves Washington.
Libertarianism in the Limelight
The GOP convention did represent one last chance for Paul to deliver his campaign message to a massive audience. Spitznagel said that he won't be traveling to Tampa to watch the convention unfold. But he did say that he's pleased that Mitt Romney, in an apparent incorporation of a Paul message into his own campaign, has come out against another round of quantitative easing by the Fed in response to continued bad economic news.
We shouldn't be surprised. It's just more evidence that the once-fringe libertarian view has been steadily infiltrating Republican politics for years. Paul's campaign for President in 2012 brought to the surface a long-submerged dispute about how the U.S. economy has been managed for the decades that the country has effectively run the global financial system. Modern capitalism, with its boom and bust cycles, relies heavily on central banks. But institutions like the Fed now play a major role in encouraging the booms, by keeping interest rates low, as Alan Greenspan did for most of the 1990s and 2000s, ultimately inflating a disastrous housing bubble.
Do we want to continue to let this happen? Whatever your answer, Paul has put the question front and center.
Before the financial crisis, Paul's economic ideas sounded cranky and antiquated, if not bizarre. The meltdown changed all that. Many wondered: Had the madman been talking sense all along? And if a few more delegates had come to his side in Nebraska, Paul would likely have gotten his air time in Tampa. He probably would have taken the opportunity to lay into Ben Bernanke and the Fed anew, with Spitznagel nodding approvingly from Bel Air.
"Libertarian concepts have been around forever," Spitznagel said. "But we never would have been able to build consensus without Ron." For Spitznagel, all this is merely the beginning.