Paul Tudor Jones billionaire hedge fund legend and founder of Tudor Investment Corporation, an asset management firm, has somewhat of a cautious view on asset prices.

Paul Tudor Jones called the October 1987 stock market crash and today in a rare interview with Goldman Sachs he has expressed his cautious view on asset prices.

Paul Tudor Jones has joined the bond king Bill Gross choir who has also recently warned that “it’s the market’s last dance.”

Paul Tudor Jones called the October 1987 stock market crash and today in a rare interview with Goldman Sachs he has expressed his cautious view on asset prices.

 

Paul Tudor Jones sums up his cautious view on asset prices in a rather amusing, insightful and equally concerning way.

He likens the New Fed Chairman Jerome Powell to General George Custer before the Battle of the Little Bighorn, looking down at an array of menacing warriors. To the left of Powell is a menacing stock bubble (by every matrix), in the middle battlefield lies a fortified army of corporate credit. To the right Powell see the foreign currency fighters (that threaten USD hegemony) intermixed with the rebels (the crypto tribe). Powell looks to retreat-but he can’t because charging dead-ahead is another menacing worrier, inflation.

“Let me describe to you where I think Jerome Powell is right now as he takes the reins at the Fed. I would like Powell to General George Custer before the Battle of the Little Bighorn, looking down at an array of menacing warriors.

On the left side of the battlefield are the Stocks—the S&P 500s, the Russells, and the NASDAQs—which have grown, relative to the economy, to their largest point not just in US history, but in world history…

“US inflation is set to accelerate sharply, making bonds a very poor investment, and that the Fed must act swiftly to tackle financial bubbles created by prolonged monetary easing”

PAUL TUDOR JONES

Look to the middle and there waits for the army of Corporate Credit, which is also larger than ever relative to the economy, as ultra-low rates have encouraged it to gain in size, stature, and strength. …

And then on the right are the Foreign Currency Fighters, along with the Crypto Tribe, an alternative store of value that only exists because of the games central banks are playing. …

All of these forces have been drawn to the battlefield because of our policy experiment with sustained negative real rates. So Powell looks behind him to retreat. But standing there is none other than Inflation Nation, led by the fiercest warmongers of them all: the Commodities. That’s what Powell is facing, whether he recognizes it or not. And how he navigates this is going to be fascinating to watch,” said Paul Tudor Jones.

So the crux of Paul Tudor Jones cautious view on asset prices centers around loose central bank monetary policy which has created the bubble of everything.

But it is the bubble in bonds that is most concerning for Paul Tudor Jones.
“US inflation is set to accelerate sharply, making bonds a very poor investment, and that the Fed must act swiftly to tackle financial bubbles created by prolonged monetary easing” explained Paul Tudor Jones

“It’s just a matter of time before they discipline us”, adds Paul Tudor Jones.

So the trend of 10-year yields rising is likely to continue going forward. Paul Tudor Jones sees the 10-year yields rising to 3.75 percent by year-end as a “conservative” target.

Supply outweighing demand is likely to be a headwind on 10-year Treasuries prices and push yields up with it.
The caveat for bond prices is the central bank’s great unwind of their balance sheet.

For example, beginning next September, the ECB concludes its asset purchases. So the aggregate balance sheet of the main central banks will start contracting after nearly a decade of expansion. That will be a major data break, making it a horrible time to own bonds.

“With rates so low, you can’t trust asset prices today. And if you can’t tell by now, I would steer very clear of bonds” – Paul Tudor Jones

But lower bond prices also means higher yields, bearing in mind that bond prices and their corresponding yield is inversely related. So surely that will attract investors seeking income.

Paul Tudor Jones has another view.
“If and when the Fed raises rates enough to stop and reverse the stock market rise, that virtuous circle predicated on increasing capital gains will reverse, and bonds and stocks will decline together like they did in the 1970s,” said Paul Tudor Jones.

Moreover, Paul Tudor Jones believes that the central bank’s policy to keep interest rates at historic low levels for longer than ever in history with the aim of combating the financial crisis of 2008 has also distorted asset prices.

“With rates so low, you can’t trust asset prices today. And if you can’t tell by now, I would steer very clear of bonds.”

In other words, Paul Tudor Jones sees bonds and equities declining together and that makes sense, bearing in mind that during the hyper monetary easing phase equities and bonds prices rose together.

Put another way Paul Tudor Jones doesn’t see a rotation of capital from bonds to equities which is in contrast to Martin Armstrong’s bucking the bearish view in stocks.

“I want to own commodities, hard assets, and cash” – Paul Tudor Jones

Where does Paul Tudor Jones see the biggest risk facing investors which supports his cautious view on asset prices?

In a word it is inflation. Paul Tudor Jones believes the market is underestimating the risk of rising inflation, particularly commodity inflation.

“The S&P GSCI index is up more than 65% from its trough two years ago. In fact, relative to financial assets, the GSCI is at one of its lowest points in history. That has historically been resolved by commodities putting on a stunner of a show, stoking inflation. I wouldn’t be surprised if that happened again,” said Paul Tudor Jones.

He then cites the Japanese case where inflation accelerated in a non-linear way.
Japan in 1989 or the US in 1999—inflation did not increase in a measured way. Rather, it accelerated in a non-linear fashion until the central bank had to come in and stop it with substantially higher real rates than we have today.”

So with his cautious view on asset prices where is Paul Tudor Jones investing?

“I want to own commodities, hard assets, and cash” said Paul Tudor Jones.

He would buy stocks when the deficit is 2%, not 5%, and when real short-term rates are 100bp, not negative and needless to say Paul Tudor Jones is negative on bonds.

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