The Fed will only cut rates if panic sets in about a recession and market crash, says Black Swan investor

Stock market crash

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

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

  • He predicted that the US could see a recession and a major stock market crash before interest rates fall.

Rate cuts by the Federal Reserve may not be the blessing investors hope for. That's because the Fed is likely to ease monetary policy only if the economy is hit by a recession and the market is faltering, he famously saidBlack Swan' investor Mark Spitznagel.

In a recent interview with Reutersthe CIO of Universa Investments issued a sharp warning about shares and the economy.

According to the CME FedWatch tool, investors expect one to two cuts in 2024, which is 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 U.S. could see a recession and a market downturn before rates start falling, Spitznagel warned.

“Be careful what you wish for,” Spitznagel said Reuters. “People think it's a good thing that the Federal Reserve is dovish and is going to cut rates… but they're going to cut rates when it's clear the economy is going into a recession, and they're going to cut rates. panic when this market collapses.”

Most economists think 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 as financial conditions for businesses and households tighten. The potential for an economic correction is especially high when you consider the enormous amount of debt paid off over the past decade, when interest rates were ultra-low, Spitznagel said.

“This economy is built on low interest rates,” he said. “There are lag effects if you reset rates, as we did.”

Spitznagel's hedge fund is known for its ultra-bearish view of the market, according to the author of 'The Black Swan' Nassim Taleb among his advisors. Both commentators have issued stark warnings for stocks and the economy over the past year, with Spitznagel warning in particular about one of the largest debt bubbles in historywhich could cause the worst stock market collapse since 1929.

Universa's investment strategy is poised to benefit from seemingly unpredictable Black Swan events. The fund is known to be a 4.144% return on his investments during the pandemic stock market crash.

Most forecasters on Wall Street share a cautiously optimistic view on both stocks and the economy for the rest of this year, assuming inflation continues to trend downward while the economy continues to grow. 38% of investors said they were optimistic about stocks according to the AAII's latest Investor Sentiment Survey.

Read the original article Business insider

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