- Financial markets are headed for a "huge crash," the bearish hedge fund manager Mark Spitznagel says.
- He told Intelligencer he thought the US was in the biggest credit bubble in history.
One of Wall Street's most pessimistic hedge fund managers is sounding the alarm for a coming market crash, saying the US is in the midst of the "greatest credit bubble of human history."
Mark Spitznagel, the chief investment officer of Universa Investments, which counts the author of "The Black Swan," Nassim Taleb, as an advisor, has previously warned of a market crash even worse than 1929. Spitznagel said in a recent interview with Intelligencer that the crash was coming ever closer, thanks to the massive bubble in the US credit market.
"We are in the greatest credit bubble of human history," Spitznagel said. "It's entirely because of artificially low interest rates, artificial liquidity in the economy that has really happened in a big way since the great financial crisis.
"And credit bubbles end. They pop. There's no way to stop them from popping. Debts need to get paid, or they end in default. And, of course, the debt burden today is at a level that cannot be repaid," he said.
Other market experts have warned of a coming credit event as rising interest rates take a toll on the economy. Bank of America said debt accumulated over the past decade when interest rates were ultralow was about to run into trouble, adding that it saw about $1 trillion of private debt headed for potential default as borrowing costs were rising.
Defaults and delinquencies on high-risk corporate debt are already on the up. Charles Schwab said total corporate defaults and bankruptcies were likely to surge through the end of the year, with a peak likely in the first quarter of 2024.
Trouble is also brewing in the public-debt picture, with the US's total debt notching $33 trillion for the first time this year. Goldman Sachs estimated that under a higher-for-longer interest rate regime, total costs on the US debt balance could hit a new peak by 2025.
The good news is that the economy is growing, but Spitznagel said even this fact was a "Pyrrhic victory."
"You take a victory now for suffering later. That's exactly what monetary interventionism does: It's giving you something now, and you have to pay for it with a lot of interest later. And, of course, that's what federal debt is too — it's our grandchildren's problem."
All that spells trouble for the overall market, which could feel pain as the credit bubble deflates across the economy.
"It will destroy the entire forecast," Spitznagel said of the credit bubble bursting. "So I'm certainly not saying I don't think there will be a crash. I think there will be a huge crash coming," he added.
That crisis might not be far off either, and an event like Spitznagel is predicting could cause interest rates to plunge to "very, very low" levels within the "next year or two," he said.
Despite the turbulence he said he saw coming to markets, Spitznagel added that investors shouldn't hesitate to invest over the long term in stocks. He saw the S&P 500 outperforming all hedge funds on the market over a time span of 20 years, adding it was the only investment he would buy if he could only execute a single trade over the next two decades.
This story was originally published in November 2023.