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Over the past few years, the U.S. economy has seemingly pulled off an incredible feat. Even with stubborn inflation and rising interest rates weighing on consumers and businesses nationwide, and wars in the Middle East and Europe subduing global growth, there\u2019s been few signs of an American recession.<\/p>\n
The bust phase of the modern business cycle that so many Wall Street forecasters said was an inevitability<\/a> not long ago appears to have gone missing. And it\u2019s not only the economy flying in the face of this conventional business cycle wisdom\u2014U.S. stocks have soared in recent years as well, despite considerable headwinds.\u00a0<\/p>\n Wall Street\u2019s bulls argue this is all an uncommon, but not unheard-of economic \u201csoft landing<\/a>,\u201d driven by consumers and businesses that are now structurally more resilient to higher borrowing costs. Some even claim we\u2019re living through a period of American economic and market exceptionalism<\/a>, or a \u201cRoaring 2020s<\/a>,\u201d due to factors like the U.S.\u2019s relative energy independence and exposure to the AI boom.<\/p>\n But for Mark Spitznagel, co-founder and CIO of the private hedge fund Universa Investments, all of these ideas are merely attempts to find a story to explain how \u201cit\u2019s different this time,\u201d when the reality is history tends to repeat itself, or at least rhyme.<\/p>\n \u201cIt\u2019s not different this time, and anybody who says it is really isn\u2019t paying attention,\u201d Spitznagel said in an interview with Fortune<\/em>, adding \u201cthe only difference is the magnitude of this bubble that\u2019s popping is bigger than we\u2019ve ever seen.\u201d<\/p>\n Spitznagel has claimed for years now that the Federal Reserve helped blow up the \u201cgreatest credit bubble<\/a> in human history\u201d with years of loose monetary policy\u2014and he\u2019s warned that all bubbles eventually pop, giving him a reputation as a permabear that he\u2019s tried hard to shake<\/a>.<\/p>\n Even now, with most Wall Street experts turning bullish this year, the veteran hedge funder is worried about the economy. He believes the negative impacts of the Fed\u2019s monetary tightening in a period with elevated levels of corporate, consumer, and government debt have simply been delayed.\u00a0<\/p>\n Recent signs of a cooling economy and peaking stock market, including a rising unemployment rate<\/a>, an increasingly wary<\/a> consumer, and volatile market action, shouldn\u2019t be ignored, according to Spitznagel, whose patented strategy, called tail-risk hedging, seeks to profit from sharp market downturns.<\/p>\n \u201cThis is a run-of-the-mill tightening process, peaking process, inversion process, moving into recession. I\u2019d be surprised if we\u2019re not in recession by the end of the year,\u201d he said.<\/p>\n Not long ago, many Wall Street forecasters were in Spitznagel\u2019s bearish camp, warning of an impending recession. But most no longer see an imminent risk of an economic or market crash. After predicting impending pain for years, Bank of America<\/a> is no longer forecasting a U.S. recession at all this year, while JPMorgan and Goldman Sachs<\/a> put the odds of recession at just 35%<\/a> and 25%<\/a> over the next 12 months, respectively, not far above the 15% historical average.<\/p>\n Still, Spitznagel\u2014who\u2019s employed Nassim Taleb<\/a>, the statistician and academic who popularized the concept of the rare and unexpected event<\/a> called a \u201cblack swan,<\/a>\u201d as a \u201cdistinguished scientific advisor\u201d\u2014brushed off the bullish views on Wall Street. He argues the current, relatively stable economy is \u201cnot inconsistent\u201d with the lagged effects of the Fed\u2019s tightening. \u201cIt takes time for the higher cost of debt to make its way into the system,\u201d the hedge funder explained.\u00a0\u00a0<\/p>\n We\u2019ve been stuck in a brief Goldilocks zone<\/a> as higher borrowing costs work their way through the economy, but that will soon end.<\/p>\n Why? Spitznagel says the Fed built up a \u201ctinderbox\u201d economy by keeping interest rates near zero and juicing the economy with quantitative easing\u2014a policy of buying mortgage-backed securities and U.S. Treasuries\u2014for as long as it did. These policies created an environment where businesses and consumers borrowed heavily to invest and spend because it was cheap, he says, and that led to high levels of debt and kept unsustainable business models artificially afloat.\u00a0<\/p>\n To his point, U.S. non-financial corporations currently had a record $13.7 trillion in debt in the first quarter of this year, according to Fed data<\/a>. And total global debt hit a record $315 trillion in the first quarter as well, according to the Institute of International Finance<\/a>. Much of that debt is government debt, but Spitznagel is worried about sustainability there, too.<\/p>\nA \u2018tinderbox\u2019 economy\u00a0<\/h2>\n