Black Swan fund manager sees ‘Tinderbox-Timebomb’ in financial markets

(Bloomberg) — Universal Investments, the hedge fund advised by “Black Swan” author Nassim Taleb, is telling clients that ballooning debts across the global economy are poised to wreak havoc on markets that rival the Great Depression.

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“It is objectively the greatest time bomb in financial history — greater than the late 1920s, with potentially similar market consequences,” Mark Spitznagel, the company’s chief investment officer, wrote in a letter to investors this week obtained by Bloomberg.

Treasury Secretary Janet Yellen said on Friday she was satisfied with US jobs and inflation data but did not want to downplay recession risks. While a Bloomberg Economics model puts the odds of a recession this year at 100%, some expect a moderate slowdown due to a strong labor market and easing inflation.

Universa is what’s called a risk-tailed fund, and it’s designed to protect investors during the toughest market conditions. These types of funds have an incentive to anticipate difficult economic conditions, as they thrive during market downturns.

“too high”

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 his message this week, he added a fiery new tone about global debt levels. He wrote: “The correction that was once normal and healthy has instead become an infectious hell capable of destroying the whole system.” “The world today is too loaded, building debt is too big.”

Hedge fund managers lost more than $200 billion last year, according to LCH Investments, sparking a debate about ways to prepare for an economic downturn. The Universa strategy can generate an average return of 402% on invested capital if the S&P 500 drops 10% in one month, according to Spitznagel. In the speech, he said that the same yield could reach 10,251% if the index collapsed by 30%.

“This profile is the core competency at Universa,” Spitznagel said. “We’ve been working to improve it for decades.”

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

Universa didn’t set its revenue for 2022, when the S&P 500 ended the year down 19.4%.

Even last year “wasn’t much of a good year, but our extra bow string more than made up for in other years,” he said.

Doomsday predictions

Spitznagel and Taleb have raised alarms about the economy before, and not every doomsday prophecy has been fulfilled.

In October 2013, Spitznagel told CNBC that the market was poised for a “major crash” and could drop as much as 40%. Despite periods of market volatility, the S&P 500 generally rose until March 2020 – when it fell after the pandemic shut down the global economy.

While Spitznagel expects a recession-like recession this year, many analysts and economists believe that deflation will not do much harm to the US economy. Mark Zandi, chief economist at Moody’s Analytics, wrote this month that the US economy will avoid a full-blown recession but will face higher unemployment and stunted growth.

“Call it slow” wrote.

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

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

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