'There's no real good end': This Wall Street bear says America is in the 'greatest credit bubble of human history' — and it's going to pop. How to prepare your portfolio for a 'huge crash'
One of Wall Street’s biggest bears has delivered a scathing review of the Federal Reserve’s monetary policy — accusing central bankers of creating the “greatest credit bubble in human history.”
Mark Spitznagel, chief investment officer of Universa Investments, believes the Fed has created a “tinderbox time bomb” that will explode into a mega inferno — in the shape of a major market crash — in the next few years.
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In a recent interview with New York Magazine’s Intelligencer he went in hard on the Fed and global central banks in general for how they’ve rebuilt since the Great Recession.
“Credit bubbles end. They pop. There's no way to stop them from popping,” he said, adding that the Fed has brought the economy to a place “where there’s no turning back.”
An inferno waiting for a spark
Spitznagel likened the Fed's “constant monetary intervention” to forest fire suppression.
“Wildfires are an important, healthy part of the natural turnover in a forest ecosystem. They are essential,” he said. “And forest rangers suppress them, thinking that a wildfire is bad. Well, when you suppress it enough, it gets to a point where you can no longer afford to have any fires burn because they would be too big and too intense.”
And that reflects the current delicate state of the U.S. economy, according to Spitznagel.
“Previously, recessions or crashes in the markets were a healthy thing, a healthy, natural turnover in our market ecosystem,” he explained. “But now, things have gone so far that I feel like if the Fed were just to sort of give up on what they’re doing and try to let things go back to normal, there’s this real risk that now the fire destroys the entire forest, the entire ecosystem.”
Spitznagel described the Fed’s aggressive interest rate hikes — lifting the rate 11 times since March 2022, from 0.25% to 5.5% — as being “like a controlled burn,” but said there's a limit to the effectiveness of that type of suppression when the economy is such a “tinderbox.”
He added: “[The Fed] are spinning the story that they’re going to be hawkish and that they care about inflation, but they’re not going to have that luxury when the fire starts burning out of control. So much of this is the Fed just trying to talk its way out of this, but I think they all realize, and we should all realize, that there’s no real good end to any of this.”
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A bubble ready to pop
Spitznagel believes U.S. monetary policy since the Great Recession — including “artificially low interest rates" and "artificial liquidity in the economy” — has contributed to the "greatest bubble of human history."
And that bubble is getting ready to pop.
The Wall Street bear highlighted the nation's monumental mountain of debt as one of the big issues.
Spitznagel explained: “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. You can just look at total debt as a function of the economy; it’s never been greater.”
He said he doesn't know when the nation’s epic credit bubble is going to burst, but he did predict: “We’re going to see very, very low interest rates again in the next year or two ... when we see another crisis, that's pretty much inevitable.”
According to Spitznagel, the Fed is in a position where it cannot let this credit bubble burst because if it does, “it will destroy the entire forest.”
If you share his bearish outlook, here are some ways to prepare your portfolio for a “huge crash.”
Preparing for a crash
Markets go up and down. Sometimes you win, sometimes you lose. You have to be both mentally and financially prepared for both scenarios and understand that while your portfolio may shrink one year, it could see explosive growth the next.
Many money managers and investors recommend a long-term approach to investing where you pick quality stocks and you hold on to them through thick and thin.
If Spitznagel’s dire market predictions come true, you really don’t want to have all of your eggs in one basket — because that basket could easily go up in flames.
Diversifying your portfolio with a mix of assets — including stocks, bonds, real estate and other alternative assets — will help you to spread your risk.
When there’s a risk of a market crash, it can also pay to keep some cash on hand. Cash reserves in your portfolio could be the difference between you holding fast through market turmoil or you having to sell your investments at a loss.
This cash could help you realize a silver lining to a market downturn. When a market crashes, stock prices will drop — which means you may be able to buy shares in some of your favorite companies at a discount.
For this to work, it’s also important to ensure you’ve shored up your financial situation before going on a buying spree. This means having adequate cash levels to meet your monthly expenses, a well-stocked emergency fund and retirement savings that are on track.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
