Black Swan Fund Warns Not To Be Excited For Fed Rate Cuts Since It'll Be When "The Greatest Credit Bubble In Human History" Pops

For investors excited about eventual rate cuts by the Federal Reserve, thinking they'll provide a tail wind for risk assets, a 16 billion dollar hedge fund warns to be mindful of their wish.

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 hopes for a rate cut "a case of be careful what you wish for."

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Nassim Nicholas Taleb, who wrote a book on the topic of black swans right before the 2008 financial crisis and is an advisor to the Universa fund, defines a black swan event as being "so rare that even the possibility that it might occur is unknown," while having "a catastrophic impact when it does occur" that can be "explained in hindsight as if it were actually predictable."

Part of Mr. Spitznagel's fears stem from how the economy has been conditioned over so many years, benefiting from massive amounts of debt taken out when interest rates were low. He argues that "this economy is built on low interest rates," with "lag effects when you reset interest rates like we had."

While investors who have held on to risk assets have benefited from the massive 27% rise in the SPDR S&P 500 ETF Trust SPY since its October 2023 lows, Mark Spitznagel warns that it could reverse quickly, saying "the fastest, greatest tightening ever, by some regards, into the greatest credit bubble in human history" is inevitable and that "when things are going to be really bad [it'll probably be] too late to get out."

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Mr. ​​Spitznagel isn't alone in his concerns about a market getting ahead of itself.

According to Business Insider, market strategists at Stifel Investment Bank predict "a middle quarters correction for equities" of 10% due to Fed cuts pushed back even further than expected in the face of continued higher-than-expected inflation.

Even Warren Buffett of Berkshire Hathaway BRK has been a net seller of stocks of late as they've gone up, predicting at Berkshire's most recent shareholder meeting that Berkshire's cash position will "probably be at about $200 billion at the end of this quarter" due to "only swing[ing] at pitches we like."

However, just because a black swan fund founder sounds the alarm doesn't necessarily mean he's saying to sell everything. Instead, he's warning to be mindful of purchasing portfolio "insurance," such as his fund offers. Mr. Spitznagel assures: "I’m not a permabear. I’ve been as positive on this market as I could possibly have been in the last year and a half."

Mr. Spitznagel has said that his strategy of tail-risk hedging is misunderstood, and that "the entire point of it is that [clients] can be longer" on their stock positions to benefit from potential price appreciation while remaining protected from extreme downside.

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