"Crash Expert" Black Swan Fund: U.S. stocks will rise significantly, followed by a "1929-style crash"

Mark Spitznagel, the manager of the "black swan" fund in the United States, believes that the current market environment in the U.S. resembles the frenzy just before the end of the "Roaring Twenties." He predicts a significant rise in U.S. stocks, but a severe adjustment is also brewing, which could lead to the most serious crash since 1929.

On September 22, the head of Universa Investments stated in an interview with The Wall Street Journal that he foresees U.S. stocks may continue to rise in the short term, the S&P 500 index may "quickly" reach 8000 points, indicating about a 20% upside from current levels. Spitznagel pointed out that factors such as interest rate cuts by the Federal Reserve create ideal conditions for further market gains.

However, he warned that this rise will be a prelude to disaster. Spitznagel compared the current market conditions to those of 1929, arguing that years of repeated federal government intervention in the market and economy have caused risks to accumulate like dry tinder, potentially igniting a fierce "firestorm."

Spitznagel is a protégé of Nassim Nicholas Taleb, the author of "The Black Swan," and his hedge fund is known for its unique tail risk hedging strategy, which does not predict market timing but instead buys protection when the market is optimistic and hedging costs are low. This strategy has allowed him to achieve remarkable returns for clients during the bankruptcy of Lehman Brothers, the "flash crash" of 2015, and the market circuit breaker triggered by the COVID-19 pandemic.

Dangerous Signals Behind Market Frenzy

The core of Spitznagel's prediction is that significant gains are often a dangerous signal of a market peak. He likens the current environment to early 1929, when the stock market also experienced a significant acceleration before the crash.

Historical data seems to support this pattern. Since 1980, the annualized return of the S&P 500 index in the 12 months leading up to the start of a bear market has averaged as high as 26%. In the last 12 months before the market peak in 1929, the market's rebound was more than twice this average level. This phenomenon of late-stage frenzy is now reappearing across multiple indicators.

According to data from State Street Bank last month, institutional investors' equity exposure has reached its highest point since November 2007, just before the financial crisis erupted.

Additionally, the proportion of stocks held by American households has also reached a historical high, surpassing the peak during the tech bubble. Other signals include the risk premium on investment-grade bonds dropping to its lowest point since 1998 last Friday, while trading volume on U.S. stock exchanges is nearing historical records.

Spitznagel concluded, "Markets are anomalous; their existence is to fool people."

A "Powder Keg" of Risk Accumulation

Spitznagel attributes the potential upcoming crash to long-term market intervention. He used a vivid metaphor: the practice of quickly extinguishing small forest fires, while temporarily avoiding losses, has allowed too much deadwood to accumulate in the forest. Once a fire occurs, its scale will be devastating He believes that the market rescue actions taken by central banks and governments in various countries are precisely this practice, which has pushed market valuations close to historical record levels, laying the groundwork for a severe future correction. This continuously accumulating systemic risk is the main reason he believes the scale of a crash could be comparable to that of 1929.

Although Spitznagel's views sound alarming, he does not recommend that individual investors time the market based on such predictions. In fact, he expressed a similar view in July 2024, predicting that the stock market would face serious problems after experiencing a "final frenzy," but since then, the S&P 500 index has risen by 23%.

His fund strategy is also not based on timing. Universa provides protection for traditional investment clients such as pension funds by buying exotic tail risk derivatives during market optimism, allowing them to participate in market upswings with greater peace of mind.

Spitznagel himself also pointed out: "For investors, the biggest risk is not the market, but themselves." He suggests that as long as they can stick to long-term holding, individual investors who cannot purchase complex tail risk protection can still achieve substantial long-term returns