A billionaire hedge fund manager has sounded the alarm about an imminent market crash despite the stock market being on the rise.
Mark Spitznagel, whose firm Universa Investments specializes in betting on market volatility, told the Wall Street Journal who sees the current financial landscape as a powder keg.
Spitznagel made a name for himself on Wall Street by hedging his bets during calamitous times, such as the 2008 financial crisis and the Covid-19 pandemic.
And he warned that at this moment he believes that “we are heading for something very, very bad.”
Universa Investments chief Mark Spitznagel said the U.S. economy is on the brink of collapse, warning that “we’re headed for something really, really bad.”
Spitznagel qualified that statement by adding, “but of course I would say that,” noting how his trading strategy relies on planning for market downturns.
But his warning of a looming crisis is notable as analysts see the current U.S. economy strengthening.
The stock market has hit near-record highs, and the Federal Reserve’s rate easing at a time of falling inflation has many other hedge fund investors feeling optimistic.
But while Spitznagel described the economy as going through a “Goldilocks phase,” he does not believe it has the foundations to last.
He told the Wall Street Journal that rate cuts can often trigger market reversals down the road, and said he’s already seeing other investors follow suit despite the current state of the market.
“You don’t feel stupid for making a bearish argument,” he added.
This is an equally ominous outlook that former Home Depot and Chrysler CEO Bob Nardelli said earlier this year: FOX Business that there is currently “tremendous pressure on the fault lines of our economy, and they are on the verge of breaking down.”
Earlier this year, former Home Depot and Chrysler CEO Bob Nardelli said the U.S. economy is going through a “tough time” and warned that the economy was “set to crash.”
Spitznagel said that when the crash comes, he believes we will see a major sell-off and stocks will lose more than half their market value.
Experts point to the emergence of artificial intelligence as a defining moment for the economy, just as the dot-com boom was at the beginning of the 20th century.
This led to artificial intelligence and technology firm Nvidia becoming the world’s largest company by market capitalization in June, while major companies have also been riding the wave of gains.
But Spitznagel said that if the collapse he predicts happens, this “Goldilocks phase” could cause what the billionaire called “the biggest bubble in human history.”
He called the weak foundations of the current U.S. economy a “mega-ticking time bomb,” an ominous analogy for how high debt levels and hidden risks have turned the economy into a powder keg for a potential crisis.
However, while his outlook is far from optimistic, Spitznagel said ordinary investors would be better off not acting on his advice.
He said the best long-term strategy is to invest passively in stocks, and Universa’s tactics of helping hedge funds through bad times are not as applicable to an individual investor.
President Joe Biden is proposing a major overhaul of income and capital gains taxes as part of his 2025 budget, which one expert warned could “crush” the economy.
The looming presidential election is also making investors wary of a second term for Joe Biden in the White House, given his proposal to raise capital gains taxes.
The President has outlined plans to raise the top marginal rate on long-term capital gains and qualified dividends from 23.8 percent to 44.6 percent.
Capital gains tax is paid on investments that have increased in value in the time between their purchase and sale, for example, shares, property or cryptocurrencies.
Ted Jenkin, CEO of oXYGen Financial, recently warned that the planned increases will take effect at the same time as crucial tax cuts introduced by Trump expire. Jenkin explained that those two factors would “crush” the economy as Americans would rush to sell their assets in advance.
Under Biden’s proposal, 11 states would end up paying more than 50 percent in capital gains taxes when combined with state taxes. High-tax states like New York, California and Hawaii would be hit even harder.