Overheated Markets Face Burnout
Despite flashing economic warning signs, many investors remain dangerously overconfident. While markets appear to be thriving, underlying factors show the economy moving into ‘black swan’ territory. With the yield curve’s recent shift and unemployment rates creeping upward, history suggests economic instability is on the horizon. Investors and institutions alike are turning to gold as a hedge against the growing uncertainty, indicating that the next major financial disruption could be closer than it seems.
Mark Spitznagel is the chief investment officer of the hedge fund Universa Investments. They specialize in capitalizing on unforeseen economic catastrophes known as ‘black swan’ events. He says the economy has entered ‘black swan’ territory. A booming market supported by rate cuts is making investors overconfident according to him.
He predicted the market would rally as the Fed eased into a ‘Goldilocks phase’. For him, the cuts mean a big reversal is ahead. The Goldilocks period we are in now will end before 2025. Then Spitznagel sees the biggest market bubble in history bursting. As a result, the Fed will take drastic action that ultimately dooms the economy to stagflation.
The conditions for disaster are currently unfolding. These include the lagged effects of the Fed’s aggressive rate-hiking cycle that began in 2022. Specifically, he points to the uninversion of the yield curve after years of being inverted.
“When the yield curve disinverts and then unverts, the clock starts ticking and that’s when you enter black swan territory,” Spitznagel told Bloomberg. “Black swans always lurk, but now we’re in their territory.”1
Yield Curve & the Sahm Rule Take Effect
For over two years, the yield curve was inverted. The 2-year U.S. Treasury yield has traded above the 10-year yield. When that happens, it historically has meant a recession is looming. Investors see the immediate future as more of a risk than farther out.
When the yield curve turns positive, or uninverts, right before the Fed starts cutting interest rates, a recession tends to begin shortly afterwards. A similar pattern occurred during the lead up to the Great Recession. Some economists think that the recession may not be immediate because the curve remained inverted for so long. The recession is delayed but not dismissed.
Even as the yield curve uninverts, another recession signal, the Sahm rule, went off. The Sahm rule holds that whenever the unemployment rate as a three-month average rises 0.5 percentage points from the lowest point in the past 12 months, a recession is imminent. The most recent jobs data indicates that the Sahm rule is poised to take effect.
The Move to Gold
Spitznagel cautioned against conventional approaches to diversification to protect value. He stated they could worsen a portfolio. That line of reasoning may be contributing to the upsurge in gold buying by hedge funds.
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Money managers are very bullish on gold. Hedge funds have boosted their net long positions to their highest levels since 2020. While retail gold investment has bolstered gold prices, institutional investors have had a decisive impact. Bloomberg Intelligence sees hedge fund long positions outweighing short positions by 40% – a decisively bullish sentiment. Analysts suggest gold may see a short-term reversal, only to climb again. 3
According to Bloomberg: “Gold is a bull market — it’s overdue for some bucking, which means it might drop to $2,400 an ounce, but I think it’s just a matter of time (before) it gets to $3,000.”4
The precious metal reached yet another all-time high of $2,670 an ounce this week. That caps off a series of record highs amid optimism of further rate reductions by the U.S. central bank. Gold is up approximately 60% over the past two years. 5
Gold’s climb was powered by inflationary pressures, high interest rates, and record demand from central banks. As well as the looming U.S. debt crisis. Geopolitical tensions between the U.S. and China serve as an additional tailwind for gold’s role as a safe haven asset.
Some believe the asset’s continued rise is an early warning sign for a black swan event. The “wisdom of the crowds” is responding to subtle, non-obvious signs of impending trouble—signals that may be overlooked by individuals but, collectively, point to an underlying sense that something is amiss.
Conclusion
As we enter “black swan” territory, traditional diversification strategies may fall short. Individuals should consider following the actions of hedge funds who are securing their wealth with physical gold. Putting physical precious metals in a Gold IRA can offer long term security against uncertainty. By its nature, a black swan event can happen at any time. Contact us today at 800-462-0071 to protect your portfolio while you still can.
