Black Swan Fund: When the US recession is approaching, interest rates will drop to close to zero again

The Zhitong Finance App learned that the tail risk hedge fund Universa said that the Federal Reserve's first interest rate cut indicates that the US recession is imminent, and the financial market may once again experience a sharp decline, which will force the central bank to bail out the market by buying bonds.

Last week, the Federal Reserve announced the beginning of interest rate cuts with the aim of readjusting monetary policy and stabilizing the labor market. As inflation falls, the economy remains relatively stable. Many people think this marks the beginning of an easing cycle and heralds a “soft landing” for the economy.

However, Mark Spitznagel, chief investment officer and founder of Universa, believes that this is only the beginning of aggressive interest rate cuts. The US economy is heavily indebted, and despite its strong performance so far, it will soon collapse due to historically high interest rate pressure. “The countdown is on. We have entered the 'Black Swan' area.”

Universa is a $16 billion hedge fund that is focused on responding to “black swan” events — events that are unpredictable and have a huge impact on the market. The fund benefits from severe market turbulence through credit default swaps, stock options, and other derivatives.

Tail risk funds are usually low-cost long-term bets for extreme situations, similar to monthly insurance premiums, which may slow down portfolio performance in the short term. Universa was one of the big winners when the market was extremely volatile at the beginning of the COVID-19 pandemic in 2020.

Spitznagel pointed out that the recent “reversal” phenomenon 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're at this stage right now.”

The US two-year and ten-year Treasury yield curves have been inverted for about two years, but recently, with short-term yields falling rapidly due to the possibility that the Federal Reserve may cut interest rates to support a weak economy, the yield curve has returned to a positive value. Prior to the last four recessions (2020, 2007-2009, 2001, and 1990-1991), this curve was also corrected a few months before the economy began to shrink.

According to Spitznagel, the scale of the next credit crisis could be similar to the “Great Crash” that triggered the global recession in 1929. He said, “The Federal Reserve is raising interest rates in such a huge, unprecedented debt structure... that's why I think we're going to face a crash we haven't seen since 1929.”

He also predicted that the US economy may fall into recession this year, which will force the Federal Reserve to cut interest rates sharply from the current 4.75%-5% interest rate level, and eventually push the central bank towards quantitative easing (QE). “I really think they'll save the market again... I'm convinced that quantitative easing will return and interest rates will once again be close to zero,” Spitznagel said.