Mark Spitznagel, one of Wall Street's most pessimistic hedge fund managers, said the US is at the center of 'the biggest credit bubble in human history'.
In a recent interview in the Intelligencer, Spitznagel warned that the collapse is getting closer due to the huge bubble in the US credit market. "We are in the biggest credit bubble in human history. It's all because of artificially low interest rates, artificial liquidity in the economy, and the fact that all of this has happened on a really large scale since the Global Financial Crisis."
Spitznagel, Chief Investment Officer of Universa Investments, is also known for being an advisor to Nassim Nicholas Taleb. According to the information compiled by Borsagundem.com, the book titled 'Black Swan' written by Taleb made a great impact in the investment world. The book, which brought the term 'black swan' to global markets, suggested that investors should be prepared for unexpected developments that may occur in the global economy. With the emergence of the Covid-19 pandemic, the term 'black swan' became a much more popular term.
Spitznagel said, "Credit bubbles end. They burst. There is no way to prevent them from bursting. Debts have to be paid or they end up defaulting. And of course today's debt burden is at levels that cannot be repaid."
Other prominent economists are also warning of a looming credit crisis as rising interest rates damage the economy. According to Insider, Bank of America warned that the debt accumulated over the last decade, when interest rates were very low, is about to lead to a crisis. As borrowing costs rise, about $1 trillion of private loans have the potential to default, the bank said in a statement.
Defaults and unpayable high-risk corporate loans are already on the rise. Financial giant Charles Schwab expects total corporate defaults and bankruptcies to rise by the end of this year and peak by the first quarter of 2024.
The footsteps of the debt crisis can also be heard in sovereign bond markets. This year, total US debt crossed the $33 trillion mark for the first time. Goldman Sachs estimates that under a longer and higher interest rate regime, the total costs of the US debt balance could reach a new peak by 2025.
Although there has been good news about the economy, especially on the inflation front, Spitznagel said that this news is actually a "Pyrrhic victory".
"You are declaring a victory for now, even though you will suffer later. This is exactly what monetary interventionism does: It gives you a gift now, but you have to pay for it later at a much higher interest rate. Federal bonds, of course, are exactly that. It is leaving the problem to our grandchildren."
If the credit bubble Spitznagel talks about bursts, the effects could be felt throughout the economy, including on the stock markets. "It will destroy all predictions. So I can't say that I don't think there will be a collapse. I think it will be a very big collapse," he warned.
The collapse predicted by the stock market expert may not be far away. Spitznagel said that interest rates could fall to "very, very low" levels in the "next year or two" because of such a collapse.
Despite all the extraordinary turbulence he foresees for the markets, Spitznagel advises investors not to give up on stocks in the long run. The S&P 500 Index, the benchmark index of US stock markets, has outperformed all hedge funds in the markets over a 20-year period. The stock market expert says that if he could only make one trade for the next two decades, the only thing he would buy would be an investment that tracks the performance of the S&P 500.
