TheChek News Flow

Hedge funder famous for his ‘black swan’ strategy says there’s ‘something immoral’ about America’s reliance on debt — and future generations ‘will bear the burden for this’

Mark Spitznagel, co-founder and CIO of the private hedge fund Universa Investments, is known for making juicy returns for wealthy investors with his patented tail-risk hedging strategy, a form of market “insurance” that pays handsomely during times of economic and market turmoil. But when it comes to his generation’s debt obsession, Spitznagel sounds more like a social activist than a hard-nosed money manager.

For years, the 53-year-old has warned that the national debt—which recently surged over $34.5 trillion—is unsustainable.

He argues that, when that rising debt combines with decades of loose monetary policy that lifted asset prices ever higher, growing piles of consumer debt, and businesses’ penchant for leaning on credit during times of stress, it creates a “tinderbox economy” that could go up in flames in a moment’s notice. It’s the “greatest credit bubble in human history,” Spitznagel told Fortune last year, warning that “it will have its consequences.”

With this in mind, we decided to ask Spitznagel, who has two teenagers of his own, what this credit bubble will mean for future generations, and how he feels about his cohort’s debt-laden legacy. As usual, he didn’t pull any punches.

“We have been just incredibly irresponsible to future generations. They played no part in this, and yet they will bear the burden for this,” the hedge funder told Fortune. “We should all feel really, really bad about it—like really bad about it. It's gonna hurt people that aren't even alive today. How is that right?”

For Spitznagel, the U.S.’ unsustainable federal debt is outright unethical. He argues it’s merely a way to kick the can down the road to the next generation whenever problems emerge, particularly problems that could hurt investors’ market returns. From spending billions to save “too big to fail” banks during the Great Recession of 2008 to pumping trillions into the economy to prevent a terrible recession during the COVID era, the federal government has for decades now managed to prevent large swaths of America from experiencing economic pain during trying times. These spending policies, which have typically come in tandem with near-zero interest rates from the Federal Reserve, have helped juice markets and enable incredible post-recession recoveries in the 21st century. That’s a good thing in the short term, but avoiding worst-case scenarios via hefty deficit spending comes at a cost for future generations, in Spitznagel’s view.

It’s essentially a “massive, massive transfer of wealth brought forward from the future,” he argued. “There’s something immoral, just very simply, about public debt—that individuals can take on debt for their own benefit to be paid for by people who had no say in that debt.”

Spitznagel’s concerns about the U.S.' mounting debts aren’t without merit. A mix of costly spending bills, COVID-era rescue packages, and weak tax revenues have helped push the U.S. national debt 28% higher since 2020 alone, from $26.9 trillion to over $34.5 trillion. That left the U.S.’s debt-to-GDP ratio, which serves as an indicator of a country’s ability to repay its debts, at a record 123% in January, according to the International Monetary Fund.

Even worse, the University of Pennsylvania’s Wharton School economists found in a 2023 study that the U.S. has about 20 years left for “corrective action” to fix the national debt before it hits 200% of GDP. After that, “no amount of future tax increases or spending cuts could avoid the government defaulting on its debt,” they warned.

While the U.S. defaulting on its debts is a very unlikely scenario, and something that couldn’t happen for decades, the impact of the rising national debt is already being felt to some degree. The U.S. federal government is projected to spend $870 billion, or 3.1% of GDP, on interest payments for its debt this year, according to the Congressional Budget Office — more than the entire Department of Defense budget. For the last two decades, the U.S. has spent an average of just 1.6% on servicing its debt, about half of this year’s projections. And the CBO is forecasting the government’s interest expenses to rise to 3.9% of GDP over the next 10 years. To illustrate just how extreme the interest payments are, it should be noted that U.S. federal, state, and local governments combined spent a total of just $810 billion on education in 2023.

In total, net interest payments on the federal debt will be around $12.4 trillion over the next decade, according to the Peter G. Peterson Foundation, a conservative think tank. That’s money that could be spent on a number of far more useful things.

For Spitznagel, this expensive reality means politicians need to take action immediately to get the U.S.’ national debt back on a sustainable path. But unfortunately, he predicts, it might already be too late to do so painlessly.

The hedge funder argued that after decades of loose monetary policy and soaring debts, it may be impossible for the next generation to end the cycle of indebtedness without incurring serious consequences in the form of an epic recession. That means when today’s youth comes of age and a crisis hits, they will likely “have to do more of the same,” racking up debt to avoid worst-case scenarios.

But you can’t keep borrowing forever, Spitznagel says—and he’s afraid we’re well past the point of needing to cut back. “One can make the case that at some point it stops working,” he said.

Hedi Slimane, Celine’s star designer, is getting ready to part ways with the storied French brand, several sources close to the label and its parent LVMH say. It’s the talk of le tout Paris in fashion. The timing of his exit is unknown. It could be tomorrow, or it could take a year or more, depending on how quickly LVMH finds a replacement or whether the Arnaults get angry enough to kick him out from one day to the next, the sources say.

The Arnault family, who control and run LVMH, cannot put up with Slimane’s whims anymore. There is only so much they can stand, several senior industry sources have said. That includes not just LVMH CEO Bernard Arnault but also his daughter, Delphine, who runs Dior and has a say on designer nominations and changes.

If Slimane leaves Celine, there is one obvious place he could go: Chanel. Fashion experts have predicted it for years, partly because he has a lot in common with Karl Lagerfeld, the designer who made Chanel and with whom he was quite close. Slimane’s last Celine fashion show, which was themed around Paris’ Arc de Triomphe, was very Chanel-like, with a 1960s twist.

Chanel designer Virginie Viard has given Chanel a girl-power, rock-chic vibe that Slimane could easily continue. Also, the Wertheimers, Chanel’s owners, are used to dealing with designers’ antics. The late Karl Lagerfeld demanded the impossible and always obtained it.

But as opposed to Slimane, Lagerfeld was a team player who got the best out of his colleagues, something for which they remain grateful to this day. Slimane, in contrast, is a solitary figure who rarely ventures out of his first circle of colleagues and friends. He’s also not into celebrating other people’s work and can be quite mean and aggressive if staff don’t do what he asks. That’s been particularly the case since January as pressure has been mounting on Slimane due to the brand’s sales growth declining.

“A member of his first circle told me that Hedi was leaving but we don’t know when,” a senior manager at Celine told Miss Tweed on condition of anonymity.

Viard, who stepped into Lagerfeld’s big shoes after he passed away in February 2019, embodied continuity. She was his right hand for many years. Viard has powered Chanel’s growth and helped it remain one of the industry’s most desirable brands. Now 61, the designer may want to move on and enjoy life, sources close the brand say. Or she may be asked to leave to allow Slimane to join and give Chanel fresh impetus and momentum. Slimane would centralize and coordinate the brand’s image and communication, which has been going in different directions recently, industry insiders find. Viard sticks to design. Clearly, you sense there are other sensibilities than hers behind the brand’s communication beyond its clothes. When Lagerfeld was in charge, he decided everything. All of the brand’s messages were coherent.

If Slimane joined Chanel, which is far from certain, it would not happen overnight. It may take several years, industry insiders predict. The Wertheimers are known for taking their time before making important decisions such as this one. Also, they would have to be ready to give Slimane the same amount of power and control he currently has at Celine, which is not a given either.

Industry veterans will tell you that an easy-to-manage designer is an oxymoron. It does not exist. Slimane is known for being one of the most difficult designers to work with, together with John Galliano at Margiela – but not for the same reasons. Galliano is very tough on his staff and changes his mind often, making them work long hours. Slimane’s story is slightly different. He is unapproachable. He interacts only with a small number of people. “There are only a few people who have access to the king,” one senior manager at the brand said. “With me for example, he communicates only via e-mail. I personally have only met him only once and he rescheduled our meeting many times before it happened.”

Celine’s ascent may have plateaued, but it has been one of LVMH’s biggest success stories. In 2018, when Bernard Arnault hired Hedi Slimane to take over from Phoebe Philo, he predicted the brand would more than double its annual sales. Back then, revenue stood at just under 1 billion euros. Arnault won his bet. Last year, Celine’s annual revenue surpassed the 2 billion euro mark.

Arnault’s ambition now is to make Celine reach 3 billion to 4 billion euros in annual sales. To get there, he may have to part ways with Slimane, people close to the brand say. If Slimane leaves, a source at Celine said, “life would be easier for us because we know what the brand is about and we could really improve its communication, which has been terrible.” Celine CEO Severine Merle has done a great job putting up with Slimane’s exacting demands. Staff are more loyal to her than to Slimane, Celine employees say, even though they admire the designer and think he is a genius.

Under Slimane, Celine launched its first perfume collection in 2019 and this fall it will unveil its first make-up line, starting with lipsticks – as brands usually do.

Prior to Celine, Slimane worked wonders at Kering’s Saint Laurent and stamped the brand with his dark seditious aesthetic, which remained after Anthony Vaccarello took over in 2016. Before Saint Laurent, Slimane made a name for himself as Dior’s menswear designer. Lagerfeld enjoyed saying he forced himself to remain slim to fit into Slimane’s Dior suits. Slimane has a cult following and knows it – perhaps too well. That’s why he thinks he can get away with anything – really anything.

During the pandemic lockdowns, Slimane moved the entire Celine studio to Ramatuelle, the village on the hill near Saint-Tropez. That move not only cost a lot of money but disrupted the lives of his team, who had no choice but to follow him. Then, Slimane got angry at Conde Nast’s new global content strategy launched three years ago. In reaction, he forbid Celine to feature in any of the company’s glossy magazines, whether in the form of advertising or features. These include all the various editions of Vogue, GQ and Vanity Fair. “Celine is not even allowed to give them a photo of a piece of clothing or bag,” a senior industry source said. “It takes balls to do what he did, but the problem is that it has significantly reduced the brand’s visibility and that’s just suicidal.” Celine’s shows also do not feature on Vogue Runway, the main platform for watching shows. “If you are not on Vogue Runway, you don’t exist,” the source said.

Enough is enough. The Arnaults are fed up with Slimane’s whims and costly decisions. The designer decides everything, shoots every film and photo, and charges big amounts for everything he does. Slimane is estimated to be paid several tens of millions of euros a year by the brand. He managed to negotiate royalties on the line of perfume he launched in 2019 and on every piece of furniture he designed featuring in the brand’s boutiques, industry sources say. Slimane also decides the layout and design of every one of the brand’s boutiques.

“For any photo he takes, he charges 50,000 euros,” one person who works with him said. Staff at the brand feel that its communication needs to evolve. Its black and white stern photos have become repetitive. Also, Celine models are always very young and ultra thin – which goes against the current inclusive trend of featuring older and plumper models.

“It’s always the same thing. We know that the brand’s communication needs to change but Hedi does not listen to anybody,” one person who works closely with him said. “He does not surprise clients anymore. In fashion, you constantly need to create excitement, that’s how it works. But he always wants things to be his way, with his codes that never change.”

The designer gives himself credit for every product he designs and every photo featuring on the brand’s website or social media account. During the last Paris Fashion Week, Slimane did not want to do a show. Instead, he produced a film called “L’Arc Triomphe” that he shot himself. At the end, the film says CELINE and then HEDI SLIMANE. That is usually a big no-no in the industry. Brands are supposed to be bigger than the designer. But Slimane thinks Celine is him and the world should know about it.

Relations have become particularly tense between the Arnault family and Slimane in the past six months. “War has been declared between Slimane and the Arnaults,” one person close to the brand said. Internally, there’s been recurring chatter about the designer’s departure. However, it may be some time before an announcement is made. Slimane designs collections the way he wants. In his last Arc de Triomphe collection, there are very few outfits ordinary people could wear since it featured mainly ultra-short skirts and tight-fitting looks. Not everyone has the figure to wear such clothes. But Slimane does not care. That’s one of the many reasons why the Arnaults think it’s time to show him the door.

How a little-known short seller spoiled Reddit’s big debut.

Reddit’s long-awaited coming-out party is over. After more than doubling to a high of $74.90 in the days after its public debut, the stock is now trading at a still-respectable $47 or so. The man who turned down the music is 35-year-old Andrew Freedman, a partner at Stamford, Conn.–based Hedgeye Risk Management, a investment-research firm that sells its data to retail investors as well as institutional clients.

A week ago, Freedman publicized a thorough short-selling case on Reddit, arguing that its engagement and monetization rate didn’t justify its stock’s premium valuation (at around 14 times sales then). That apparently made some exuberant investors sober up: Shares fell 10% the day he made the call, and they have kept falling—$2.8 billion in market value gone. Poof!

Going short on Reddit is a bit of an irony and possibly a dicey situation. After all, Reddit is the platform where meme-stock traders planned the gigantic GameStop short squeeze in 2022, and it’s pretty easy to imagine Redditors rallying again to protect their home base, tightening a vice around any shorts following Freeman’s advice. More fundamentally, Reddit shareholders will face volatility simply because of the limited supply of Reddit shares. Any share-price movement—up or down—will have dramatic effects.

Of course, Freeman knew all this when he made the call. “Look, it’s not my first rodeo. We’ve done these things before,” he said this week between client meetings in Boston. “But I am surprised by how fast the stock went down.”

His firm, Hedgeye, has been around since 2008, but it’s a small shop compared to the short-selling world’s big names (the Chanoses, the Ackmans, the Einhorns). Little outfits like Hedgeye don’t typically get such an outsize impact as Freeman did with his Reddit report. So how’d he managed to do so in this situation? Seemingly it was a combination of two factors: some luck and good timing. Freedman publicized the call right as the stock took off and tapped into existing skepticism about its growth prospects and unprofitable tech companies more generally (as you can see from Reddit’s valuation falling from $10 billion as a private company in 2021 to $7.4 billion today). To Hedgeye’s credit, the company doesn’t have the glaring conflict of interest inherent in most short selling, where short-sellers go out in public to talk down a stock—thereby increasing the value of their own position. Hedgeye doesn’t trade at all.

Freeman is a lot like how you imagine a Redditor: young, male, very online. He started trading in elementary school—“I can still hear the AOL dial-up tone,” he said—selling stocks through the college savings account his parents had opened for him. In his first role at Hedgeye, he covered boring ol’ health tech.

In 2020, he switched over to tech and media. “Then Covid hit and things got crazy,” he said. As the pandemic sparked a loop of panic and mania in those industries, Freeman made a number of thoughtful calls—a short on Pinterest that rode the stock from roughly $70 to the low $20s from 2021 to 2022; another short on Snap, tracing it from over $80 to under $15; and a well-timed long bet on Meta Platforms, which went from $150 to $400. Obviously, no one gets it right all the time. Freedman went long on Warner Bros. Discovery in January 2023 when shares were around $12—they’ve since dropped to around $8.40—and doubled down on a Netflix short in June 2022 just as the stock shot up from under $200 to more than $600.

As for Reddit, Freedman hopes the critics of his short see it as “nothing personal,” he said, so much as a case of “stock prices getting divorced from reality” as anything else. In short selling, “the only time it gets personal is when management is so liberal with the truth, they start to hurt people. Like in the case of AMC. I think Adam Aron is a horrible CEO. People have lost a ton of money.” That sound you hear is investors sharpening a whole other set of pitchforks for him.

The Ad-Hoc Committee will review the situation with all interested parties (including the Consortium composed of EQT, TCV and Mr Denis Ladegaillerie, as well as the historical shareholders of Believe1) to determine next steps in relation to the possible evolution of the Company’s control and will inform the market accordingly.

Galeria, which is the combination of the Kaufhof and Karstadt retail chains in Germany, recently went bankrupt in the wake of the financial collapse of its owner, the Vienna-based Signa retail and real estate group.

NRDC Equity Partners, the private investment firm controlled by Richard Baker and his family, is expected to win a bidding process to acquire the bankrupt Galeria in Germany, according to sources.

NRDC is said to be partnering with Bernd Beetz, the former chief executive officer of Coty, in the deal. A winning bid could be revealed as soon as Monday, the sources said.

The New York-based NRDC is led by Jack Baker, the son of Richard Baker, and Lucas Evans. NRDC invests in retail, real estate and consumer brands.

NRDC is a separate and unrelated business from the retail group HBC.

Richard Baker is CEO and governor of HBC, which is the majority owner of Saks, the luxury e-commerce site; The Bay e-commerce marketplace in Canada, and Saks Off 5th, the upscale off-price e-commerce company. HBC also wholly owns the Hudson’s Bay, the operating company for Hudson’s Bay’s brick-and-mortar stores in Canada, as well as SFA, which operates Saks Fifth Avenue stores, and O5, which operates the Saks Off 5th stores.

In addition to potentially acquiring Galeria, there has been widespread speculation that Baker is close to a deal to acquire the Neiman Marcus Group, through HBC.

Representatives from NRDC could not be reached.

Galeria filed for bankruptcy after its Austrian parent Signa, headed by René Benko, collapsed in a financial crisis.

HBC in 2016 bought Kaufhof in Germany for 2.6 billion euros and sold it to René Benko’s Vienna-based Signa Group for 3.8 billion euros in 2019, leading to the merger of Kaufhof and Signa’s Karstadt retail business, forming Galeria Karstadt Kaufhof. HBC reported at the time that it made a $1 billion cash profit on the transaction.

During the pandemic, Galeria Karstadt Kaufhof went bankrupt, its real estate was sold off, and now the government of Germany is selling the business out of bankruptcy. The business operates 90 stores in Germany, generating 2.2 billion euros in sales annually.

Other investments made by NRDC Equity Partners include FoundRae, the fine jewelry collection founded by Beth Hutchens in 2015. NRDC made that investment last year.

Blackouts spark fears of grid ‘collapse’ in Brazil’s biggest city

Power outages in São Paulo reflect chronic underinvestment in country’s infrastructure

São Paulo faces the collapse of its electrical grid following years of under-investment, officials have warned, as widespread blackouts disrupt activity in the largest city in the Americas.

A key financial and economic hub whose metropolitan area is home to almost 23mn people, São Paulo has in recent months suffered multiple large-scale outages that have left hundreds of thousands of people without power for consecutive days.

City officials and the federal government have pinned the blame on Enel, the Italian energy group that has operated the grid for six years, but the blackouts highlight the damaging impact of chronic underinvestment in Brazilian infrastructure.

“It is something very serious. It is very clear that Enel is unable to continue,” said Ricardo Nunes, the centre-right mayor of São Paulo, adding that he had been told by experts that the city’s grid was at risk of “collapse” within three years without significant investment.

Last year leftwing president Luiz Inácio Lula da Silva made infrastructure a key area for spending, unveiling a four-year $76bn public works programme.

But projections from consultancy Inter B suggest that infrastructure investment this year will still account for less than 2 per cent of gross domestic product, down from just under 2.5 per cent a decade ago under previous leftwing administrations, and far from enough to meet the country’s needs.

Moreover, the lion’s share of this investment is being driven by the private sector. In the electrical power sector alone, more than 90 per cent of expenditure is projected to come from private companies, according to Inter B.

Alessandra Ribeiro, a partner at consultants Tendencias, said infrastructure investment totalling 1.8 per cent of GDP was “well below what is needed” in Brazil.

Nunes’s criticisms of Enel were echoed by Alexandre Silveira, Brazil’s energy minister, who has asked regulators to start a disciplinary process that could result in company losing its operating concession. Under the terms of the current concession, which is due to run until 2028, Enel is responsible for investing in and maintaining the grid.

The furore was sparked by a blackout late last month that lasted about three days and predominantly affected the city’s poorer central region. Businesses, hospitals and schools were forced to shut, causing widespread public discontent.

It followed another days-long outage in November, which was initially caused by a storm. Experts estimated that the outage drove a 6.5 per cent fall in retail revenues compared with the same period the previous year.

Enel said it was in “full compliance with all contractual and regulatory obligations” and that the “threat of revocation of the concession could raise concerns among foreign investors [in Brazil and] harm relations between Brazil and Italy”. Rome has a stake of about 24 per cent in the utility.  

With Brazil hosting the COP30 climate conference next year, “it would not be in the country’s interest to jeopardise the good relations it has always had with Enel”, it added. The company is one of the world’s largest private renewables operators.

Claudio Frischtak, president of Inter B, said responsibility for the blackouts was partly on Enel, which despite meeting its obligations under the concession had been slow to repair the infrastructure during outages.

But he also said that the government should shoulder the blame for not closely auditing the company and for not providing new proposals to improve the power sector’s resilience.

“It’s a multiple failure. The situation we’re experiencing in the country doesn’t have a single cause,” he said, adding that extreme weather linked to climate change would make blackouts increasingly likely and the only long-term solution is a programme to lay cables underground.

The city’s power problems will probably feature heavily in campaigning for municipal elections in October.

Claudio Sales, president of the Acende Brasil Institute, said Nunes and the city government were looking for “things that can motivate the population” to back their re-election bid, while opposition politicians are using the crisis as a platform to burnish their credentials.

But he added that “Enel has almost doubled investments . . . to about R$1.5bn [$300mn] a year, compared with R$800mn invested by the previous concession holder. [Enel] has demonstrably met its quality targets.”