Black Swan Fund: US economic recession is imminent, interest rates will drop close to zero again
Tail risk hedging fund Universa warns that a US economic recession is imminent, believing that the first rate cut by the Federal Reserve is a signal of this trend. Despite the current strong economic performance, high interest rates will lead to a collapse. The fund focuses on dealing with unpredictable market shocks, profiting from market turmoil using derivatives. Chief Investment Officer Mark Spitznagel points out that the change in the yield curve of government bonds signals the approaching economic recession, which could trigger a credit crisis similar to that of 1929
According to the financial news app Zhitong Finance, the tail risk hedging fund Universa has stated that the first rate cut by the Federal Reserve indicates that a US economic recession is imminent, and the financial markets may experience another significant decline, which will force the central bank to rescue the market by purchasing bonds.
Last week, the Federal Reserve announced the start of rate cuts, aiming to readjust monetary policy and maintain stability in the labor market. With inflation decreasing and the economy still relatively stable, many believe this marks the beginning of an easing cycle, signaling an "economic soft landing."
However, Mark Spitznagel, the Chief Investment Officer and founder of Universa, believes this is just the beginning of aggressive rate cuts. The US economy is heavily indebted and, despite its strong performance so far, is likely to collapse soon due to the historical high pressure of interest rates. "Time is running out, we have entered the 'black swan' zone."
Universa is a hedge fund managing $16 billion, focusing on dealing with "black swan" events - unpredictable events with a huge impact on the market. The fund profits from severe market turmoil through credit default swaps, stock options, and other derivatives.
Tail risk funds are typically low-cost, long-term bets against extreme scenarios, similar to monthly insurance premiums, which may drag down portfolio performance in the short term. Universa was one of the big winners during the extreme market volatility at the beginning of the COVID-19 pandemic in 2020.
Spitznagel points out that the recent phenomenon of the "un-inversion" of the US Treasury yield curve indicates that a sharp economic recession is imminent. "When the curve returns to normal, the real countdown begins, and we are now in that phase."
The yield curve between the two-year and ten-year US Treasury bonds has been inverted for about two years, but recently, with short-term yields rapidly declining due to the Fed's potential rate cuts to support a weak economy, the yield curve has returned to positive territory. In the months before the past four recessions (2020, 2007-2009, 2001, 1990-1991), this curve also turned positive.
Spitznagel believes that the scale of the next credit crisis may be similar to the "Great Crash" of 1929 that triggered a global economic recession. He said, "The Fed is raising rates in such a huge, unprecedented debt structure... that's why I believe we will face a collapse unseen since 1929."
He also predicts that the US economy may fall into a recession this year, which will force the Fed to significantly cut rates from the current level of 4.75%-5%, ultimately pushing the central bank towards quantitative easing (QE). Spitznagel said, "I do believe they will save the market again... I firmly believe that quantitative easing will return, and rates will once again approach zero."