"Black Swan" Investor Warning: Fed Rate Cuts May Not Necessarily Bring Benefits

According to the famous "Black Swan" investor and Chief Investment Officer of Universa Investments, Mark Spitznagel, the rate cuts by the Federal Reserve may not bring the benefits that investors hope for. This is because the Federal Reserve is only likely to ease monetary policy when the economy is hit by a recession and the market is in trouble.

In a recent interview with Reuters, Spitznagel issued a stern warning about the US stock market and economy. According to the CME Group's FedWatch Tool, investors expect one to two rate cuts in 2024, which is seen as favorable for US stocks.

However, Spitznagel warned that the sole reason for the Federal Reserve to cut rates is if they see a significant weakness in the economy, which means there could be an economic downturn and market crash before rates fall in the US.

Spitznagel told Reuters, "Be careful what you wish for. People think it's a good thing when the Fed takes a dovish stance and lowers rates, but officials will only cut rates when the economy clearly enters a recession, and when the market collapses, they will cut rates out of panic."

According to a survey conducted by the National Association for Business Economics, most economists believe that the US may avoid an economic recession this year. However, high rates could still trigger an economic downturn by tightening financial conditions for businesses and households. Spitznagel said, given the significant debt accumulated over the past decade in a low-rate environment, the possibility of an economic correction is particularly prominent.

He said, "This economy is built on low rates, and there is a lag effect when the Federal Reserve adjusts rates."

Spitznagel's hedge fund is known for its extremely pessimistic view of the market, with advisors including Nassim Nicholas Taleb, the author of "The Black Swan". Over the past year, both commentators have issued severe warnings about the US stock market and economy, especially Spitznagel warning that one of the largest debt bubbles in history could trigger the most severe stock market crash since 1929.

Universa's investment strategy aims to profit from seemingly unpredictable black swan events. It is worth mentioning that the fund achieved a 4144% investment return during the stock market crash amid the pandemic.

Most Wall Street forecasters hold a cautiously optimistic view on the US stock market and economy for the remainder of the year, provided that inflation continues to decline and the economy continues to grow. According to the latest investor sentiment survey by AAII, 38% of investors say they are optimistic about US stocks in the next six months