Renowned hedge fund manager Mark Spitznagel, known for his bearish outlook on the market, is sounding the alarm on what he calls the “greatest credit bubble in human history,” predicting a significant market crash.
Spitznagel, Chief Investment Officer of Universa Investments, a firm advised by Nassim Taleb, author of “The Black Swan,” has previously expressed concerns about a crash surpassing the severity of the 1929 market collapse. In a recent interview with Intelligencer, he emphasized the imminent threat posed by the colossal bubble in the US credit market.
According to Spitznagel, the unprecedented credit bubble is a consequence of artificially low interest rates and substantial liquidity injected into the economy since the 2008 financial crisis. He warns that credit bubbles inevitably burst, and the current debt levels are unsustainable, leading to defaults.
Market analysts, including Bank of America, are also cautioning about a potential credit event as rising interest rates impact the economy. The accumulation of private debt during the past decade, when interest rates were exceptionally low, is projected to face challenges, with around $1 trillion in private debt at risk of default due to rising borrowing costs.
Corporate debt is already experiencing an increase in defaults and delinquencies, with projections suggesting a surge in total defaults and bankruptcies through the end of the year, peaking in the first quarter of 2024, as noted by Charles Schwab.
Public debt is not exempt from concerns, with the US’s total debt reaching $33 trillion this year. Goldman Sachs estimates that, under a prolonged period of higher interest rates, the total costs on US debt could reach new highs by 2025.
Despite the current economic growth, Spitznagel views it as a “Pyrrhic victory,” attributing it to monetary interventionism that provides short-term gains but results in long-term consequences. He emphasizes the burden placed on future generations by accumulating federal debt.
The overarching concern is that the market may face significant challenges as the credit bubble deflates across the economy, potentially leading to a devastating crash.
Spitznagel anticipates that such a crisis might occur in the next year or two, causing interest rates to plummet to “very, very low” levels. Despite this ominous forecast, he advises long-term investors not to shy away from stocks. He believes that, over a 20-year span, the S&P 500 will outperform all hedge funds, asserting it as the sole investment he would choose if limited to a single trade over the next two decades.
