World at risk of financial crisis to rival Great Depression, warns ‘Black Swan’ hedge fund

An American hedge fund advised by the economic guru known as “The Black Swan” has warned a debt timebomb risks pushing the global economy into a downturn rivalling the Great Depression.

Mark Spitznagel, chief investment officer of Miami-based Universa Investments, said levels of borrowing were so high following a decade of low interest rates that they now risked triggering a “contagious inferno” that could envelop the financial system.

“It is objectively the greatest tinderbox-timebomb in financial history – greater than the late 1920s, and likely with similar market consequences,” the 51-year-old told his clients in a letter reported by Bloomberg.

Mr Spitznagel’s firm is advised by Nassim Taleb, a Wall Street trader turned economics professor dubbed the Black Swan after his 2007 book of the same name presciently warned of failings in the banking system ahead of the global financial crisis.

The doomsday prediction comes after Nouriel Roubini, another economist known as “Dr Doom” who accurately predicted the 2008 crisis, also warned rising rates threatened a huge crash as firms struggled with higher borrowing costs.

Universa presents itself as a specialist in “tail risk mitigation”, industry jargon for investing client money in a way that protects their funds in almost any circumstances.

It has a record of issuing dire market predictions, not all of which have come to pass, and Mr Spitznagel is a well-known critic of central banks, having long argued that they kept interest rates too low for too long.

Last year he warned: “If this credit bubble ever pops, it’s going to be the most catastrophic market failure that anyone has ever read about.”

In his latest letter to clients, he ramped up his warnings further, pointing to current debt levels.

Global debt stood at $290 trillion, or 343pc of gross domestic product in the third quarter of 2022, according to the Institute of International Finance (IIF).

In November, the IIF warned that rising interest rates could trigger a “dangerous increase in debt service costs” that could tip businesses and governments over the edge.

Mr Spitznagel told Universa clients: “The correction that was once natural and healthy has instead become a contagious inferno capable of destroying the system entirely.

“The world is just too levered today, the debt construct just too big.”

Mr Spitznagel said his firm’s investment strategy could have a 402pc average return on invested capital if the S&P 500 drops 10pc in a month, according to Bloomberg.

That payoff would jump to 10,251pc if the index crashed 30pc, he added.

“This payoff profile is Universa’s core competency,” the hedge fund tycoon said. “We’ve been refining it for decades.”

His warning comes after previous dire predictions fell flat.

In October 2013, Mr Spitznagel told CNBC the market was primed for a “major crash” and could plummet as much as 40pc. That did not happen.

Despite his latest prediction, many other economists believe the global economy will avoid a recession this year.

The International Monetary Fund (IMF) on Tuesday upgraded its global growth forecast for 2023 to 2.9pc, from a previous projection of 2.7pc.

Meanwhile, the US Federal Reserve will release its next rates decision on Wednesday and is widely expected to raise them further by a quarter point. The Bank of England is expected to follow on Thursday with a rate rise of 0.5 percentage points to 4pc – the highest level since the 2008 crash.