It is the greatest tinderbox-timebomb in financial history - greater than the late 1920s and likely with similar market consequences. It is of our own making. That was the chief investment officer of Universa Investments, Mark Spitznagel, who warned investors that a doomsday market crash will eventually lead to a doomsday market crash similar to the Great Depression of the 1930s.
In its 15-year anniversary letter seen by MarketWatch, the hedge fund, advised by Black Swan author Nassim Taleb, issued a new warning on debt levels, saying the world has become a contagious inferno that could crash the markets, though he didn't give a timeline for when this would happen.
Today, the world is just too levered, the debt construct just too big, and the forest tinderbox just too susceptible, for us to learn much from past wildfire contagions. The logic of the Yellowstone Effect is not any guide, so the best takeaway is to recognize that it will be different this time and — if Spitznagel believes that the logic will be far worse, said Spitznagel.
He added that the correction that once was natural and healthy has now become a contagious inferno that can destroy the system completely.
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The strategy of Universa bets on extreme market fluctuations. Spitznagel said that if the S&P 500 drops 10% in a month, the fund could return on average 402% to investors.
Spitznagel has previously rung alarm bells about the global economy. Last year, he said the markets were vulnerable to a credit bubble pop. He has criticized central banks for their low interest rates, saying they lead to excessive borrowing and inflated asset values. He has criticised the Federal ReserveFederal Reserve for playing with fire. As we have seen in modern times since Alan Greenspan took over as the Fed Chair in the 1980s, this ultimately leads to a vicious cycle of ever larger market fires and ever greater and more desperate interventions to stop them as they rage and spread. In his latest letter, he said that the typical economic crash was the inferno regime.
See: Fed will deliver quarter-point rate hike along with one last hawkish sting in the tail.