FX168 Financial News Agency (North America) News Universa, a tail-risk hedge fund, warns that the first interest rate cut by the Federal Reserve indicates that the U.S. economy is about to enter a recession, and a significant market decline may force the Federal Reserve to intervene again by purchasing bonds.

Last week, the Federal Reserve announced the start of interest rate cuts to adjust monetary policy and maintain a strong labor market. However, with decreasing inflation, the economic fundamentals remain solid, and many people believe this is a precursor to an economic soft landing. However, Mark Spitznagel, Chief Investment Officer and Founder of Universa, believes this marks the beginning of a substantial rate cut, as the U.S. economy under the dual pressures of high debt and historically high interest rates may soon collapse.

Spitznagel pointed out in an interview with Reuters, "The clock is ticking, and we are on the edge of a black swan event."

Universa is a hedge fund managing $16 billion, focused on combating "black swan" events - unpredictable and hugely impactful market fluctuations. The fund profits from severe market turbulence through credit default swaps, stock options, and other derivatives. Tail-risk funds are often low-cost investments that can yield substantial returns under specific conditions, although in normal circumstances, these funds may drag down portfolios, similar to monthly insurance premiums.

During the market turmoil triggered by the COVID-19 pandemic in 2020, Universa was one of the biggest winners. Spitznagel emphasizes that the "inversion" of the U.S. Treasury yield curve is a key signal of an impending recession, also a closely watched indicator in the bond market. "When the yield curve inverts, the real countdown begins. We are now at that moment," he said.

Although the yield curve inversion between the two-year and ten-year Treasury yields has lasted for about two years, it recently turned positive, reflecting the market's expectation for the Federal Reserve to cut rates to support the weak economy. In the past four recessions (2020, 2007-2009, 2001, and 1990-1991), the yield curve returned to positive territory several months before the economic contraction started.

Spitznagel warns that the next credit tightening may resemble the global economic recession triggered by the 1929 "Great Crash." "The Fed's rate hikes have led to unprecedented levels of debt... That's why I expect we may face an economic collapse unseen since 1929."

He believes that the economic downturn may occur as early as this year, forcing the Federal Reserve to cut rates significantly from the current 4.75% to 5% to lower levels, and eventually leading to the central bank reintroducing quantitative easing - strengthening monetary policy by purchasing bonds, which typically occurs when interest rates are close to zero to address market instability.

"I do believe they will reverse policy again... I strongly feel that quantitative easing will make a comeback, and interest rates will return to zero levels," Spitznagel stated.