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Tail-risk hedge fund Universa sees stocks surging further

before

1929-like crash

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Delayed effects of rate hikes will cause downturn but

process

may take time

By Davide Barbuscia

NEW YORK, Sept 23 (Reuters) - Market euphoria could

carry U.S. stocks another 20% higher before giving way to a

collapse on the scale of the 1929 crash that ushered in a global

recession, according to tail-risk hedge fund Universa

Investments.

The benchmark S&P 500 has gained about 13% this year, hitting a

fresh record high on Monday after the Federal Reserve last week

cut interest rates for the first time since December.

The central bank has indicated more cuts are likely as it

tries to counterbalance a weakening labor market, which could

add to and broaden Wall Street's rally.

For Mark Spitznagel, chief investment officer and founder of

Universa, stocks may rise roughly another 20% from current

levels, driving the S&P 500 index - which was last at

about 6,653 points - to over 8,000 points.

However, he warns that this ascent is likely to be followed

by a historic crash as the U.S. economy is expected to buckle

under the burden of still high borrowing costs.

"I do expect an 80% crash ... but only after a massive,

euphoric, historic blow off rally," said Spitznagel in an

interview. "I would argue we're in the middle of that (rally)

right now, not at the end of it."

Miami-headquartered Universa is a $20 billion hedge fund that

specializes in protecting against "black swan" shocks - rare,

high-impact events that jolt markets - using financial

instruments such as credit default swaps, stock options, and

other derivatives that gain value during extreme market

dislocations. Its average return on capital since its founding

in 2007 is over 100%.

Investors use such tail-risk funds as insurance, as they carry

small costs that drag on performance until disaster hits and the

payoff is massive. Universa proved the point in 2020, emerging

as one of the big winners amid the market chaos unleashed by the

COVID-19 pandemic.

"Universa is the most bearish expression of the market there is,

and clients use us to be longer the market ... which is

paradoxical," said Spitznagel, adding he remains bullish for the

time being.

Spitznagel had said last year investors should seize the

"goldilocks" moment for markets caused by expectations that the

Fed could tame inflation without hurting the economy, and

predicted that euphoria would build further before giving way to

a crash.

He also said in a separate interview later last year, when

the Fed started easing monetary policy, that a U.S. recession

was imminent.

While the economy has held up well since then, Spitznagel argues

it is still propped up by the excesses of ultra-loose monetary

policy since 2008, and that the full impact of sharply higher

rates that followed the pandemic has yet to be felt.

"We're going to see the consequences of that ... it takes time,"

he said.