Low rates inflated the biggest credit bubble in history and it could "burn down the whole forest" if it bursts, hedge fund manager Mark Spitznagel said.
Spencer Platt/Getty Images
One of Wall Street's most pessimistic hedge fund managers is sounding the alarm for a coming market crash, as the US is in the midst of the "greatest credit bubble of human history."
Mark Spitznagel, CIO of of Universa Investment, which counts "The Black Swan" author Nassim Taleb as an advisor, has previously warned for a market crash even worse than 1929. That crash is coming ever closer, thanks to the massive bubble in the US credit market, Spitznagel said in an interview with Intelligencer on Monday.
"We are in the greatest credit bubble of human history." Spitznagel said. "It's entirely because of artificially low interest rates, artificial liquidity in the economy that has really happened in a big way since the great financial crisis.
"And credit bubbles end. They pop. There's no way to stop them from popping. Debts need to get paid or they end in default. And of course, the debt burden today is at a level that cannot be repaid," he warned.
Other market experts have warned for a coming credit event as rising interest rates take a toll on the economy. Debt accumulated over the past decade when interest rates were ultra-low are about to run into trouble, according to Bank of America, which said it sees around $1 trillion of private debt headed for potential default as borrowing costs rise.
Defaults and delinquencies on high-risk corporate debt are already on the up. Total corporate defaults and bankruptcies are likely to surge through the end of the year, with a peak likely in the first quarter of 2024, according to Charles Schwab.
Meanwhile, trouble is also brewing in the public debt picture, with the US's total debt notching $33 trillion for the first time this year. Under a higher-for-longer interest rate regime, total costs on the US debt balance could hit a new record by 2025, Goldman Sachs estimated.
The good news is that the economy is growing, but even this fact is a "Pyrrhic victory," Spitznagel said
"You take a victory now for suffering later. That's exactly what monetary interventionism does: It's giving you something now, and you have to pay for it with a lot of interest later. And of course, that's what federal debt is too — it's our grandchildren's problem."
All that spells trouble for the overall market, which could feel pain as the credit bubble deflates across the economy.
"It will destroy the entire forecast," Spitznagel said of the credit bubble bursting. "So I'm certainly not saying I don't think there will be a crash. I think there will be a huge crash coming," he added.
That crisis might not be far off either, and an event like Spitznagel is predicting could cause interest rates to plunge to "ver, very low" levels within the "next year or two" he said.
Despite the turbulence he sees coming to markets markets, investors shouldn't hesitate to invest over the long-term in stocks, Spitznagel added. He saw the S&P 500 outperforming all hedge funds on the market over a time span of 20 years, adding that it was the only investment he would buy if he could only execute a single trade over the next two decades.
