“ “It is objectively the greatest tinderbox-timebomb in financial history — greater than the late 1920s, and likely with similar market consequences. Now, as then, it is of our own making.” ”
That was Universa Investments chief investment officer Mark Spitznagel, warning investors that swelling global debt will eventually lead to a doomsday market crash similar to the Great Depression of the 1930s.
In its 15-year anniversary letter seen by MarketWatch, the hedge fund, advised by Black Swan author Nassim Taleb, issued a new warning on debt levels saying the world has become a “contagious inferno” that could crash the markets, though he didn’t offer a timeline to when this would happen.
“The world is just too levered today, the debt construct just too big, the forest tinderbox just too susceptible, for us to learn much from past wildfire contagions. The best takeaway is recognizing that it will be different this time and—if the logic of the Yellowstone Effect is any guide—far worse,” said Spitznagel.
“The correction that once was natural and healthy has instead become a contagious inferno capable of destroying the system entirely,” he added.
Universa’s strategy bets on extreme market fluctuations. If the S&P 500 drops 10% in a month, the fund could return on average 402% to investors, Spitznagel explains in his letter.
Spitznagel has rung alarm bells about the global economy before. Last year, he said the markets were vulnerable to a credit bubble pop, Bloomberg reported. He has long criticized central banks for low interest rates, saying they lead to excessive borrowing and inflated asset values. He has criticised the Federal Reserve for “playing with fire”.
“As we have painfully witnessed in modern times since Alan Greenspan’s tenure as Fed chair starting in the 1980s, this ultimately leads to a vicious cycle of ever larger market fires and ever greater and more desperate interventions to stop them as they rage and spread. Call this typical economic crash the ‘inferno regime,’” he said in his latest letter.
The Federal Reserve is set to release its latest decision on interest rates on Wednesday and is widely forecasted to raise interest rates by a quarter percentage point.