Fund Manager Black Swan Sees ‘Tinderbox-Timebomb’ in Financial Markets

(Bloomberg) — Universa Investments, the hedge fund advised by “The Black Swan” author Nassim Taleb, has told clients that rising debt in the global economy is poised to wreak havoc in markets that rival the Great Depression.

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“It is objectively the biggest time bomb in financial history, bigger than the late 2020s and likely with similar market consequences,” Mark Spitznagel, 51, the firm’s chief investment officer, wrote in a letter to investors. this week obtained from Bloomberg.

On Friday, Treasury Secretary Janet Yellen said she was pleased with US jobs and inflation data, but she was unwilling to play down the risks of a recession. While the Bloomberg Economics model puts the odds for a recession this year at 100%, some expect a slight downturn due to a strong job market and easing inflation.

Universa is a so-called tail risk fund, designed to protect investors during the most challenging market circumstances. These types of funds have an incentive to anticipate dire economic conditions, as they thrive during market downturns.

“Too Indebted”

Spitznagel has long criticized central banks for keeping interest rates too low, predicting last year that “if this credit bubble ever bursts, it will be the most catastrophic market failure anyone has ever read about.”

In this week’s letter, he added fiery new rhetoric about global debt levels. “The fix that was once natural and healthy has instead become a contagious hell capable of completely destroying the system,” she wrote. “The world is too much in debt today, the debt is just too big.”

Hedge fund managers lost more than $200 billion last year, according to LCH Investments, prompting a debate about ways to prepare for a recession. Universa’s strategy could have an average return of 402% on invested capital if the S&P 500 falls 10% in one month, according to Spitznagel. The same payoff could be 10.251% if the index plunges 30%, he said in the letter.

“This payoff profile is Universa’s core competency,” said Spitznagel. “We’ve been perfecting it for decades.”

If an investor assigned 2% of its portfolio to Universa, its compound annual growth rate would be 10.4% over the past five years, according to the letter. The total return of the S&P 500 from January 30, 2018 to January 30, 2023 was over 55%.

Universa did not specify its returns for 2022, as the S&P 500 finished the year down 19.4%.

Last year “wasn’t a very good year either, but our extra rope more than made up for it in the other years,” he said.

Doomsday predictions

Spitznagel and Taleb have already sounded the alarm about the economy, and not all doomsday prophecies come true.

In October 2013, Spitznagel told CNBC that the market was poised for a “major crash” and could plummet as much as 40%. Despite bouts of market volatility, the S&P 500 generally rallied until March 2020, when it tumbled after the pandemic brought the global economy to a halt.

While Spitznagel predicts a Depression-like recession this year, many analysts and economists believe the recession will do little damage to the US economy. Mark Zandi, chief economist at Moody’s Analytics, wrote this month that the US economy will avoid a full-on recession, but will face rising unemployment and stalling growth.

“Call it slowcession,” he wrote.

The Federal Reserve is due to issue its next decision on Wednesday and is expected to raise interest rates by a quarter point.

(Updates with Fed decision in final paragraph. An earlier version of this story corrected Janet Yellen’s last name.)

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