Black Swan Hedge Fund Predicts Market Crash in Response to Federal Reserve Rate Cuts

Black Swan Hedge Fund Predicts Market Crash in Response to Federal Reserve Rate Cuts

By Davide Barbuscia and Carolina Mandl

NEW YORK (Reuters) – As U.S. financial markets debate the timing of interest rate cuts, a tail-risk hedge fund warns that investors should make the most of recent economic optimism while it lasts, because a A move to lower rates would signal a dramatic change. stock market crash.

“It’s about being careful what you wish for,” said Mark Spitznagel, chief investment officer and founder of Universa, a $16 billion hedge fund that specializes in mitigating risks against events like this. black swan”, unpredictable and high-impact drivers of the market. volatility.

Spitznagel’s opinion is not widely shared. The Federal Reserve’s much-anticipated shift to less restrictive monetary policy has helped support stocks and bonds in recent months, even as signs of stubborn inflation have eroded expectations about the central bank’s ability to reduce interest rates in 2024.

Spitznagel says such a shift will likely only occur when economic conditions deteriorate, creating a difficult environment for markets.

“People think it’s a good thing that the Federal Reserve is dovish, and that they’re going to cut interest rates…but they’re going to cut interest rates when it’s clear that the economy is turns into a recession, and they’re going to cut interest rates in a panic as this market collapses,” Spitznagel said in an interview with Reuters.

Funds such as Universa often use credit default swaps, stock options and other derivatives to profit from severe market disruptions. These are usually cheap bets for a big, long-term gain that otherwise weigh on the wallet, much like monthly payments on an insurance policy.

Some funds, including Universa, were big winners during the extreme upheavals that shook markets at the start of the Covid-19 pandemic in 2020.

Today, Spitznagel is skeptical of the idea that the U.S. economy has entered a so-called “no-landing” scenario, in which growth continues at a steady pace despite higher interest rates.

“It’s no different this time,” he said. Higher interest rates will eventually burst “the largest credit bubble in human history,” he said.

The Fed has increased interest rates by 525 basis points since the start of 2022 to prevent a surge in inflation. Spitznagel believes, however, that the excesses accumulated during the years of ultra-accommodative monetary policy that the United States has experienced since the 2008 global financial crisis have not yet been eliminated from the economy.

“This economy is built on low interest rates,” Spitznagel said. “There are lag effects when you revise interest rates like we did.”

Investors should take advantage of the current “Goldilocks” environment, he said, referring to market hopes that the Fed can lower consumer prices without harming the economy.

“I think there will be a lot more positive euphoric feeling before this case is over,” he said.

(Reporting by Davide Barbuscia and Carolina Mandl; editing by Ira Iosebashvili and Hugh Lawson)

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