The Fed will only cut rates when it's panicking over a recession and a market crash, Black Swan investor says


Stock market crash

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  • Investors should be wary of coming Fed rate cuts, Black Swan investor Mark Spitznagel warned.

  • That’s because the Fed is only cutting rates in response to a weakening economy, Spitznagel told Reuters last week.

  • The US could see a recession and major stock crash before rates head lower, he predicted.

Rate cuts by the Federal Reserve may not be the boon investors are hoping for. That’s because the Fed is only likely to ease monetary policy when the economy is slammed with a recession and the market is flailing, according to famous “Black Swan” investor Mark Spitznagel.

In a recent interview with Reuters, the Universa Investments CIO cast a stark warning about stocks and the economy.

According to the CME FedWatch tool, investors are expecting one to two cuts to come in 2024, which are expected to be bullish for stocks.

But the only way the Fed will cut rates is if central bankers see a significant weakening in the economy — meaning the US could see a downturn and a market plunge before interest rates come down, Spitznagel warned.

“Be careful what you wish for,” Spitznagel told Reuters. People think it’s a good thing the Federal Reserve is dovish, and they’re going to cut interest rates … but they’re going to cut interest rates when it’s clear the economy is turning into a recession, and they will be cutting interest rates in a panicked fashion when this market is crashing.

Most economists think the US is likely to avoid a recession this year, according to a survey conducted by the National Association of Business Economics. But high rates still threaten to spark a downturn by tightening financial conditions for businesses and households. The potential for an economic correction is especially stark when considering the huge amount of debt taken out over the last decade, when interest rates were ultra-low, Spitznagel said.

“This economy is built on low interest rates,” he said. “There are lag effects when you reset interest rates like we had.”

Spitznagel’s hedge fund is known for its ultra-bearish takes on the market, counting “The Black Swan” author Nassim Taleb among its advisors. Both commentators have cast stark warnings for stocks and the economy over the past year, with Spitznagel in particular warning of one of the largest debt bubbles in history, which could spark the worst stock market collapse since 1929.

Universa’s investment strategy is poised to gain on seemingly unpredictable Black Swan events. Famously, the fund pulled a 4,144% return on its investments during the pandemic stock crash.

Most forecasters on Wall Street share a cautiously optimistic view of both stocks and the economy for the rest of this year, assuming that inflation continues to trend lower while the economy continues to grow. 38% of investors said they were bullish on stocks over the next six months, according to the AAII’s latest Investor Sentiment Survey.

Read the original article on Business Insider



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