Black Swan fund manager warns of ‘catastrophic market failure’

“It is objectively the greatest tinderbox-timebomb in financial history – greater than the late 1920s, and likely with similar market consequences,” says Spitznagel. — Reuters

NEW YORK: Universa Investments, the hedge fund advised by The Black Swan author Nassim Taleb, is telling clients that ballooning debts across the global economy will 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, 51, the firm’s chief investment officer, wrote in a letter to investors this week obtained by Bloomberg.

Last 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 labour market and easing inflation.

Universa is a so-called tail-risk fund, designed to protect investors during the toughest of market circumstances.

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, 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 US$200bil (RM849bil) 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.

“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%. — Bloomberg

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