"Crash expert" Black Swan Fund: U.S. stocks will surge, followed by a "1929-style crash"

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Mark Spitznagel, the American "Black Swan" fund manager, believes that the current US market environment resembles the frenzy at the end of the "Roaring Twenties," with US stocks set for a significant rally, but a violent correction is brewing, possibly leading to the most severe crash since 1929.

On September 22, the head of Universa Investments said in a recent interview with The Wall Street Journal that he foresees US stocks may continue to rise in the short term, and the S&P 500 may "quite quickly" reach 8,000 points, representing about 20% upside from current levels. Spitznagel noted that factors such as Fed rate cuts have created ideal conditions for further market upside.

However, he warned that this round of gains would be a prelude to disaster. Spitznagel compared the current market situation to 1929, arguing that repeated interventions by the federal government in the market and economy over the years have allowed risks to accumulate like dry tinder, potentially igniting a ferocious "firestorm."

Spitznagel is a protégé of Nassim Nicholas Taleb, the author of "The Black Swan." His hedge fund is renowned for its unique tail risk hedging strategy, which does not aim to time the market but buys protection when the market is optimistic and hedging costs are cheap. This strategy has delivered stunning returns for clients during Lehman Brothers' collapse, the 2015 "flash crash," and the pandemic-induced market meltdown.

Danger Signals Behind Market Mania

The core of Spitznagel's prediction is that major rallies are often dangerous signals that the market is peaking. He likens the current environment to early 1929, when the stock market also experienced a marked acceleration before the crash.

Historical data seems to support this pattern. Since 1980, in the twelve months prior to the start of a bear market, the S&P 500's average annualized return has been as high as 26%. In the last twelve months before the peak in 1929, the market's rebound was more than twice this average. This phenomenon of end-stage euphoria is now appearing in various indicators.

According to State Street data last month, institutional investors' equity exposure has reached its highest point since November 2007, right before the financial crisis broke out.

In addition, American households' stock allocations have also reached historic highs, exceeding the peak during the tech bubble. Other signals include the risk premium of investment-grade bonds falling last Friday to its lowest level since 1998, while trading volume on US stock exchanges is approaching record highs.

Spitznagel summed up: "Markets are anomalous; their very existence is to fool people."

The "Powder Keg" of Accumulated Risk

Spitznagel blames the impending potential crash on prolonged market intervention. He used an apt metaphor: the practice of quickly extinguishing small forest fires, while temporarily avoiding loss, allows too much dead wood to accumulate in the forest, making any eventual fire catastrophic in scale.

He believes that central banks and governments' market rescue actions are precisely this, pushing market valuations to near record levels and laying the groundwork for a future severe correction. This accumulation of systemic risk is the main reason he believes a crash could rival that of 1929.

Although Spitznagel's views seem cautionary, he does not recommend individual investors try to time the market based on such forecasts. In fact, he made similar predictions in July 2024, warning of serious problems after a "final party" in the stock market, but since then, the S&P 500 jumped 23%.

His fund's strategy is also not based on market timing. Universa buys exotic tail risk derivatives when the market is optimistic, offering protection to traditional investment clients like pension funds, so they can more confidently participate in market gains.

Spitznagel himself points out: "For investors, the greatest risk is not the market, but themselves." He suggests that as long as one can hold for the long term, individual investors who cannot buy complex tail risk protection can still achieve decent long-term returns.

Risk Warning and DisclaimerThe market has risks; investment requires caution. This article does not constitute individual investment advice, nor does it take into account any specific user's particular investment objectives, financial circumstances, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their specific situation. Investing accordingly is at your own risk. ```