The ‘Black Swan’ fund manager just said that debt is creating the ‘greatest tinderbox-timebomb in financial history’ and could have consequences similar to the Great Depression

“It is objectively the greatest tinderbox-timebomb in financial history — greater than the late 1920s, and likely with similar market consequences,” Mark Spitznagel, 51, the firm’s chief investment officer, wrote in a letter to investors this week obtained by Bloomberg.

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

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

‘Too Levered’

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

In the letter this week, he added new fiery rhetoric around global debt levels. “The correction that was once natural and healthy has instead become a contagious inferno capable of destroying the system entirely,” he wrote. “The world is just too levered today, the debt construct just too big.”

Hedge fund managers lost more than $200 billion last year, according to LCH Investments, spurring a debate about ways to prepare for a downturn. Universa’s strategy could have a 402% average return on invested capital if the S&P 500 drops 10% in a month, according to Spitznagel. That same payoff could be 10,251% if the index crashed 30%, he said in the letter.

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

If an investor allocated 2% of its portfolio to Universa, its compounded 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 Jan. 30, 2018 to Jan. 30, 2023 was more than 55%.

Universa didn’t specify its returns for 2022, when the S&P 500 finished the year down 19.4%.

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

Doomsday Predictions

Spitznagel and Taleb have raised alarms about the economy before, and not every doomsday prophesy comes to pass.

In October 2013, Spitznagel told CNBC the market was primed for a “major crash” and could plummet as much as 40%. Despite periods of market volatility, the S&P 500 generally went higher until March 2020 — when it tanked after the pandemic shuttered the global economy.

While Spitznagel predicts a Depression-like recession this year, many analysts and economists believe the downturn will do little damage to the US economy. Moody’s Analytics Chief Economist Mark Zandi wrote this month that the US economy will avert an all-out recession but will face higher unemployment and stalling growth.

“Call it a slowcession,” he wrote.

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