‘Greatest Bubble’ Nearing Its Peak, Says Black Swan Manager
Universa’s Mark Spitznagel, who has made billions from past crashes, sees last hurrah for stocks before severe reckoning
Talk is cheap when it comes to where stocks are headed, but investors’ ears perk up when Mark Spitznagel speaks.
One reason is that he has made some spectacular scores, including earning $1 billion in a single day, since setting up tail risk hedge fund Universa Investments in 2008. The other is that he steadfastly hasn’t relied on any sort of short-term view to do so.
The enigmatic quant, a protégé of “Black Swan” author Nassim Nicholas Taleb, loses money almost every day through a complex strategy that pays off only during very volatile periods. A few calamities—the 2008 crisis, the 2015 Flash Crash and the Covid-19 market meltdown in 2020—have been enough for a stock investor with a small allocation to his fund to trounce a classically diversified 60/40 stock and bond portfolio.
But now he sees a major selloff approaching with stocks potentially losing more than half of their value. Yet predicting even approximately when the market will crash is a lot harder than hedging a portfolio against it—many would say impossible. In the same way that so many fund managers and strategists always sound optimistic, scary talk sounds like a shrewd marketing exercise for someone insuring against tail risk.
“I think we’re on the way to something really, really bad—but of course I’d say that,” joked Spitznagel in an interview this week.
Universa’s business is hardly begging for clients these days, though, despite an unusually calm market with stocks near record highs. Spitznagel thinks the rally will continue for months and get even wilder. That is because the market is in a “Goldilocks phase” as inflation falls and Fed easing fuels bets on further gains. But rate cuts are often the starting gun for big market reversals, he says. Another contrarian sign: Some holdouts in the investing community remain cautious.
“You don’t feel like a fool for making a bearish argument,” he says.
Until recently, that is. In May, Morgan Stanley strategist Mike Wilson turned bullish shortly after losing his spot on the firm’s global investment committee. And just recently JPMorgan’s Marko Kolanovic, who stuck to his pessimistic guns through the AI rally, lost his job. Fund managers who haven’t jumped on the AI bandwagon, owning stocks like Nvidia NVDA -2.61%decrease; red down pointing triangle, are licking their wounds. These episodes have echoes of the dot-com boom: In late 1999, months before the S&P 500 peaked, Merrill Lynch’s bearish strategist Charles Clough left the firm.
Spitznagel predicts an even worse shakeout than a quarter-century ago because the excesses are more extreme—the “greatest bubble in human history.” High public indebtedness and valuations make a Washington-led rescue harder to pull off. He sees today’s benign slowdown in inflation overshooting and says the U.S. economy could enter a recession by the end of the year.
The ominous language Spitznagel uses to describe the macroeconomic situation is a “Mega-Tinderbox-Timebomb.” His analogy is subtler than it sounds: Governments have been so active tamping down any conflagration in the economy that the dry brush of debt and other hidden risks have built into the ingredients for a severe blaze.
How should mere mortals without access to tail risk hedges respond to his prediction? Probably by doing nothing, says Spitznagel.
“Cassandras make terrible investors.”
Staying passively invested in stocks is the best long-term strategy, he says. The basic purpose of the protection Universa sells is to make professional fund managers comfortable taking that risk and then to provide them with extra cash when bargains appear. Individual investors won’t have clients yank their money away in a bad year so those who can stomach steady contributions to an index fund despite scary headlines will do fine.
They should do better in the long run than wealthy investors who buy increasingly popular structured products designed to blunt market volatility. Why does he think so? One reason is that their building blocks, like put-spread collars, include the derivatives Universa buys for its fund. The long-term drag it creates on buyers’ returns represents his edge.
“We love the put-spread collar guys,” he says. “It’s never been a good trade.”