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Black Swan Fund warns not to get excited about Fed rate cuts as that will be when “the biggest credit bubble in human history” bursts
Black Swan Fund warns not to get excited about Fed rate cuts as that will be when “the biggest credit bubble in human history” bursts
For investors excited about possible rate cuts by the Federal Reserve, thinking they will provide a tailwind for risky assets, a $16 billion hedge fund warns to be mindful of their desire.
Mark Spitznagel is the CIO and founder of hedge fund Universa, which focuses on mitigating risks in the face of a “black swan” event. In an interview with Reuters, Spitznagel calls hopes for a rate cut “a case of being careful what you wish for.”
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Nassim Nicholas Taleb, who wrote a book about the black swan topic shortly before the 2008 financial crisis and is a consultant for the Universa fund, defines a black swan event as being “so rare that even the possibility of it occurring is unknown”, while at the same time having “a catastrophic impact when it occurs” which can be “explained retrospectively, as if it were actually predictable”.
Part of Spitznagel’s fears stem from the way the economy has been conditioned over so many years, benefiting from huge debts incurred when interest rates were low. He argues that “this economy is built on low interest rates,” with “lag effects when you readjust interest rates like we did.”
Although investors who held risky assets benefited from the huge 27% increase in SPDR S&P 500 ETF Fund (NYSE:SPY) since its October 2023 lows, Mark Spitznagel warns that it could reverse quickly, saying that “the biggest and fastest squeeze ever, in some respects, in the biggest credit bubble in human history” is inevitable and that “when things are going to be really bad [it’ll probably be] Too late to leave.”
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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 10% correction for stocks mid-quarter due to Fed cuts delayed even longer than expected in the face of continued above-average inflation.” expected.
Until Warren Buffett in 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 “only oscillations[ing] in fields we like.“
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However, just because the founder of the Black Swan fund sounds the alarm doesn’t necessarily mean he’s saying sell out. Instead, he’s warning to be careful when buying portfolio “insurance,” like his fund offerings. Spitznagel assures: “I’m not a permanent bear. I’ve been as positive on this market as I could have been for the last year and a half.”
Spitznagel said his tail risk hedging strategy is misunderstood and that “the bottom line is that [clients] may be longer” on their stock positions to benefit from potential price appreciation while remaining protected from extreme losses.
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This article Black Swan Fund warns not to get excited about Fed rate cuts, as that will be when “the biggest credit bubble in human history” bursts originally appeared in Benzinga.com
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