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Investors should be wary of upcoming interest rate cuts from the Fed, warned Black Swan investor Mark Spitznagel.
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That’s because the Fed only cuts interest rates in response to a weakening economy, Spitznagel told Reuters last week.
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The U.S. could experience a recession and a major stock market crash before interest rates fall, he predicted.
Interest rate cuts by the Federal Reserve may not be the boon investors are hoping for. That’s because the Fed is likely to loosen monetary policy only when the economy is hit by a recession and the market is weak, according to famed “Black Swan” investor Mark Spitznagel.
In a recent interview with Reuters, the CIO of Universa Investments issued a strong warning about stocks and the economy.
According to the CME FedWatch tool, investors expect one to two cuts in 2024, which should be positive for stocks.
But the only way for the Fed to cut rates is if central bankers see a significant slowdown in the economy – meaning there could be a downturn and a market drop in the U.S. before rates fall, Spitznagel warned .
“Be careful what you wish for,” Spitznagel told Reuters. “People think it’s a good thing that 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 that the economy is slipping into recession, and they’re going to cut interest rates.” in Panic when this market collapses.
Most economists believe the U.S. is likely to avoid a recession this year, according to a survey by the National Association of Business Economics. But high interest rates still threaten to trigger a downturn by tightening financial conditions for businesses and households. The potential for an economic correction is particularly great given the amount of debt taken on over the last decade when interest rates were extremely low, Spitznagel said.
“This economy is built on low interest rates,” he said. “There are lag effects when you adjust interest rates like we did.”
Spitznagel’s hedge fund is known for its extremely pessimistic market assessments and counts “The Black Swan” author Nassim Taleb among its advisors. Both commentators have issued 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 trigger the worst stock market crash since 1929.
Universa’s investment strategy is designed to profit from seemingly unpredictable black swan events. Famously, the fund returned 4,144% 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, expecting inflation to continue falling as the economy continues to grow. According to AAII’s latest Investor Sentiment Survey, 38% of investors said they are bullish on stocks over the next six months.
Read the original article on Business Insider