A top Wall Street executive is warning of a 1929-style crash, where the stock market will go up significantly before crashing catastrophically, just as it had at the start of the Great Depression.
Mark Spitznagel, the hedge fund manager behind Universa Investments who made $1 billion in a single day for his clients during the 2015 “Flash Crash,” says he is seeing similarities to 1929, the year of the Wall Street crash, he told the Wall Street Journal.
Spitznagel, a protege of “Black Swan” author Nassim Nicholas Taleb, is known for hedging tail risks, or strategies that lose some money most of the time but earn big when the market collapses.
“I’m the crash guy — I remain the crash guy,” Spitznagel told the Journal.
Spitznagel is warning individual investors against making hasty changes to their portfolios, noting those who can’t buy tail-risk protection will still make positive returns in the long run if they don’t sell.
“The biggest risk to investors isn’t the market – it’s themselves,” he said.
Spitznagel sees a strong rally ahead, with short-term gains potentially pushing the S&P stock index up to as high as 8,000 points, a 20 percent gain from today’s level, according to the report.
However, he expects the rally to eventually lead to a big, 1929-style crash, meaning there would be a large and potentially catastrophic downturn following the gains.
Spitznagel believes this, in part, because every time the market or economy runs into trouble, the Federal Reserve steps in to save it with moves such as low interest rates or bailouts.
He compared it to how firefighters quickly put out forest fires only to have too much dry tinder accumulate, leading to “firebombs.” Because of today’s near-record stock valuations, the eventual “firebomb” could be explosive, according to the report.
If a major sellout is looming, as Spitznagel says, large gains now would not be out of the norm, according to the report. Since 1980, the S&P 500 has returned 26 percent annualized in the 12 months preceding the start of a bear market, or a sustained market downturn.
The last 12 months’ rally has been twice as high as that average ahead of the 1929 peak, according to the report.
Both individual and professional investors typically increase their stocks during times like today, according to the report. Strategists at State Street said that institutional investors’ exposure to equities has reached its highest since November 2007, just before a vicious bear market.
“The markets are perverse,” Spitznagel told the outlet. “They exist to screw people.”
