Central banks have created a bubble in the stock market, which will come down "very, very hard" when it finally prices in a series of Federal Reserve rate hikes, Black Swan investor Mark Spitznagel said Tuesday.
While the collapse of the bubble isn't a Black Swan event in the sense that it is not an unforeseen or unpredictable event, Spitznagel said he would still call it one because the market is pricing it as a Black Swan.
And when the collapse happens, it will be across the board, Spitznagel warned.
"There is one big bet out there. So diversification isn't really going to work. Timing this is not going to work," he said. "These low rates and this high valuation means that they're extraordinarily sensitive to changes in rates, extraordinarily sensitive to risk premiums and growth."
The Fed's policymaking committee meets next week and could possibly raise interest rates.
However, Spitznagel believes the market isn't pricing in a rate hike because there is collective psychology that the Fed can keep things going and is in control.
"In fact, central banks are not in control. In many ways central banks are the tails wagging the dog," he said, pointing out that central banks' balance sheets are "minuscule" compared to the whole global and derivatives market.
Spitznagel looks to profit during so-called Black Swan events. Universa Investments, which manages about $6 billion in assets, specializes in protecting investors against sharp market drops.
He said he invests with "extreme asymmetric payoffs, which means very infrequently I want them to have a huge payout, and most of the time I want to just kind of bob around, maybe lose a little bit."
He called it "insurance-like protection."
Spitznagel's bets have paid off handsomely. Last August, his firm made more than $1 billion in a single day after the Dow Jones Industrial Average collapsed more than 1,000 points, according toThe Wall Street Journal.
— CNBC's Kerima Greene contributed to this report.