Collapse risks loom as markets are the most fragile they've been in 20 years, 'Black Swan' author Nassim Taleb says

• "The Black Swan" author Nassim Taleb says he's focused on hedging against a market collapse.
• He said the market is flashing parallels to prior crashes, noting that it is the most fragile in 20 years.
• He pointed to risks like high debt levels and "crazy" stock prices in an interview with Bloomberg.

A top economist and risk expert says the US is in one of the most precarious investing environments in decades — and while some investors are cheering on the rally in stocks, he has his eye on a potential market collapse.

Nassim Taleb, author of "The Black Swan," the famed treatise on the risks related to improbable events, aired concerns over the state of the market in a recent interview with Bloomberg.

The environment, he said, mirrors prior crashes, and he added that he was focused on preparing for such an event.

"We have a lot of risks building up," the Universa Investments advisor told Bloomberg on Friday. "I would say that … my focus would be more on being hedged against an eventual market collapse because we're more fragile than we were probably at any point in the last 20 years, if not, you know, 30 years," he later added.

Taleb pointed to a handful of risks looming over the market despite the bullish backdrop for stocks over the past year.

Stock prices look "crazy," he said, noting that most of the S&P 500's rally has been concentrated in a small pool of companies linked to artificial intelligence.

Yet, it's unclear if those companies hold the most growth potential, he said, pointing to the rotation of top-performing companies during the dot-com bubble.

"AI is going to be the best investment. But maybe not at these firms," he said.

Meanwhile, the US economy has been "confusing," with uncertainty over whether some sectors are overheating, Taleb said.

World economies are also more dependent on each other, thanks to increased globalization since the pandemic. That means foreign shocks are more likely to spread, he noted, another factor that complicates the investing environment.

The West is also holding on to more debt "than we can handle," Taleb said, with the debt-to-GDP ratio in the US notching 124% at the end of September. If high debt levels are combined with an external shock, that could result in a "death spiral," Taleb has previously predicted.

Meanwhile, investors are coming out of a period dominated by lower interest rates. Many market participants are used to steering away from more "conservative" assets, and that risk-on attitude could put traders in a vulnerable position, he suggested.

"These crises happen when you expect them the least," Taleb said. "And I think we're very similar to the environment we've had in previous collapses, and the market becomes complacent. People are used to it. They might have some precaution in the beginning, but then they throw precaution to the wind … and that's when the vulnerability is going to be at its maximum."

Universa Investments is technically "market blind," Taleb said, as the firm employs an investment strategy that disregards short-term market forecasts.

Taleb and other forecasters at the firm, though, have repeatedly issued downbeat predictions on stocks and the economy over the short term. Mark Spitznagel, Universa's founder, said earlier this year he foresaw the S&P 500 entering a "face-ripping rally" before seeing the worst crash since 1929, thanks partly to precarious conditions brewing in the credit market.