Prophet of doom warns investors of coming depression

It is objectively the greatest tinderboxtimebomb in financial history — greater than the late 1920s . . . Mark Spitznagel, Universa Investments

Universa Investments, the hedge fund advised by The Black Swan author Nassim Nicholas Taleb, has told clients that ballooning debts are poised to wreak havoc on markets rivalling 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, the firm’s chief investment officer, wrote in a letter to investors this week.

On Friday, Treasury Secretary Janet Yellen said she was 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 US recession this year at 100 per cent, some predict a mild downturn due to a strong labour 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.

Spitznagel has long criticised 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 about 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 US$200 billion last year, according to LCH Investments, spurring a debate about ways to prepare for a downturn. Universa’s strategy could deliver a 402 per cent average return on invested capital if the S&P500 sharemarket index drops by 10 per cent in a month, according to Spitznagel. The payoff could be 10,251 per cent if the index crashed 30 per cent, he said in the letter.

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

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

In October 2013, Spitznagel told business news channel CNBC that the market was primed for a “major crash” and could plummet as much as 40 per cent. Despite periods of volatility, the S&P500 generally went higher until March 2020 — when it plunged amid the Covid-19 pandemic.

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.