For investors excited about possible Federal Reserve rate cuts, thinking they will provide a boost to risky assets, a $16 billion hedge fund is warning to take their wishes into account.
Mark Spitznagel is the CIO and founder of the hedge fund Universa, which focuses on risk mitigation in the face of a “black swan” event. In an interview with Reuters, Spitznagel calls the hope for an interest rate cut “a matter of being careful what you wish for.”
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Nassim Nicholas Taleb, who wrote a book on the subject of black swans just before the 2008 financial crisis and is an advisor to the Universa fund, defines a black swan event as “so rare that even the possibility that it could occur is unknown . while it has “a catastrophic impact if it occurs” that “can be explained in retrospect as if it were actually predictable.”
Part of Mr. Spitznagel’s fears stem from the way the economy has been conditioned for so many years, benefiting from huge amounts of debt taken on when interest rates were low. He argues that “this economy is built on low interest rates,” with “lag effects if you reset interest rates like we did.”
While investors who have held risky assets have benefited from the huge 27% increase in interest rates SPDR S&P 500 ETF Trust (NYSE:SPY) since its October 2023 low, Mark Spitznagel is warning that this could soon reverse, saying that “the fastest, biggest tightening ever, in some ways, into the biggest credit bubble in human history” is inevitable and that “when things are going to get really bad [it’ll probably be] too late to get out.”
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Mr Spitznagel is not alone in his concerns about a market that is getting ahead of itself.
According to Business Insider, market strategists at Stifel Investment Bank predict a “mid-quarter correction for equities” of 10% due to Fed cuts that have been pushed back even further than expected in light of persistently higher-than-expected inflation.
Even Warren Buffett Berkshire Hathaway (NYSE:BRK) has been a net seller of shares lately as they have risen, predicting at Berkshire’s most recent shareholder meeting that Berkshire’s cash position “will likely be around $200 billion at the end of this quarter” due to ” just waving[ing] in places we like.“
However, just because a Black Swan fund founder sounds the alarm doesn’t necessarily mean he’s telling him to sell everything. Instead, he warns to be careful when buying portfolio insurance, like his fund offerings. Mr. Spitznagel assures: “I’m not a permabear. I’ve been as positive about this market over the last year and a half as I could have been.”
Mr. Spitznagel has said that his strategy of hedging tail risk is misunderstood, and that “the whole point of it is that [clients] can hold their stock positions longer to benefit from potential price appreciation while remaining protected from extreme downside effects.
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This article Black Swan Fund Warns Not to Get Excited About Fed Rate Cuts as This Will Happen When “The Largest Credit Bubble in Human History” first appeared on Benzinga.com
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