Mark Spitznagel, co-founder and chief investment officer of hedge fund Universa Investments, has steadily warned of bubble bursts and other extreme market events.
In an interview with the Wall Street Journalthe long-time worker of The Black Swan Author Nassim Nicholas Taleb said a severe crash was imminent and stocks could lose greater than half their value, but acknowledged that his latest warning should come as no surprise.
“I think we are on the way to something really, really bad – but of course I would say that,” Spitznagel said.
His hedge fund focuses on tail-risk hedging, a technique that goals to forestall losses from unpredictable and unlikely economic disasters, also generally known as “black swans.”
He has famously made astronomical profits from such events, including the Covid-19 pandemic, and has recently warned about US debt trends and the “biggest credit bubble in human history.”
Even though stocks have rebounded sharply from their recent highs and the S&P 500 has had its worst week since April, Spitznagel expects the market rally to proceed for months and get even wilder because the “Goldilocks phase” of easing inflation and Federal Reserve rate cuts fuel bets that markets will proceed to trend higher.
However, he also warned that Fed rate cuts are sometimes the primary signal of significant market changes, and told the diary “You don’t feel like an idiot when you make a pessimistic argument.”
Spitznagel sees parallels between today’s situation and the bursting of the dot-com bubble, but believes the upcoming sell-off will likely be even worse, adding that the present market extremes represent the “biggest bubble in human history.”
With US debt already at historic levels, the federal government’s ability to reply will likely be reduced and the economy could enter recession by the tip of the 12 months, he predicted.
Spitznagel’s recent comments reflect what he said Fortunes Will Daniel said in April that positive investor sentiment alone was not enough to drive markets higher indefinitely and that higher rates of interest were a drag on the economy.
“The Fed has done a lot. And now they’re trying to somehow talk their way out of it. But they can’t undo what they’ve done,” he said. “Markets ultimately follow fundamentals, but there are these little Goldilocks zones where they can kind of break free.”
Fed Chairman Jerome Powell and other central banks have been hinting in recent days that inflation is finally coming under control and that rate of interest cuts could come soon, with markets generally expecting the primary cut to are available in September.
But Spitznagel said in April that the results of the “fastest and biggest tightening ever, which will in some ways lead to the biggest credit bubble in human history” couldn’t be avoided. He added: “Then it will get really bad – and by that point it will probably be too late to get out of it.”
