After years of stock and bond markets moving primarily in one direction (higher), Paul Tudor Jones say inflation is about to re-emerge "with a vengeance" and revive volatility from its yearslong slumber.
And while the explosion of volatility this week has pushed Fed funds futures traders to price in fewer interest rate hikes, Tudor believes the alarming pace of rising prices - after eight years of tumbling unemployment accompanied by nonexistent wage growth - will force the Federal Reserve to pick up the pace - leaving traders wrongfooted once again.
Tudor, who wrote a letter to investors obtained by Bloomberg earlier this week, before the US stock market's second "bloodbath" of the week said policy makers have been too permissive, leading to a general air of complacency across markets.. Instead of expressing their befuddlement over why PCE refused to markedly rise, they should've been hiking rates. Now, the "impropriety" of President Donald Trump's tax cut - which will vastly expand the Treasurys debt offerings, causing rates to spike - is going to catch investors off guard. Going into the year, many had expected stocks to "melt up" as corporations rushed to buy back shares and expand capex.
By leaving rates low, the Fed has inadvertently blown a financial bubble that, apparently, even the PPT can't handle. Jones says the present situation reminds him of the US market circa 1999.
“We are replaying an age-old storyline of financial bubbles that has been played many times before,” Jones, founder of Tudor Investment Corp., wrote in a Feb. 2 letter to clients.
“This market’s current temperament feels so much like either Japan in 1989 or the U.S. in 1999. And the events that have transpired so far this January make me feel more convinced than ever of this repeating history.”
In his letter, Jones says he sees a parallel between Jerome Powell - who took over as Fed chair on Monday - and Bank of Japan Governor Yasushi Mieno, who joined the BOJ in December 1989 amid a boom driven by speculative investment in land and stocks. Within a week, he began raising interest rates.
And given the events of the last two days, Jones's call is almost eerily prescient.
Mieno “was ultimately blamed for pricking a bubble over which he had no control,” Jones said.
“While the messenger always gets the blame, the real fault lies at the feet of the policymakers of the late 1980s who allowed systemic imbalances to build up in the Japanese stock and real estate markets.”
Jones isn't the only one who has been warning about the dangers of a sudden inflationary shock reawakening volatility.
Ken Griffin, founder of Citadel, said earlier this month that he’s concerned about quickening inflation globally amid "general complacency" around the risks of such a shock.
Jones said his $27 billion hedge fund was "carefully positioning for the possibility that inflation surprises to the upside."
He added that, when Trump made his State of the Union last week, he didn't mention how Treasury auctions will increase this year from the current projection of $583 billion to almost $1 trillion.
“It is incredible that at full employment we have passed a tax cut that will push our deficit to 5 percent of GDP,” Jones said. “Can you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing.”
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With that in mind, we'd like to remind readers who are old enough to remember of Jones' famous interview with FNN after the close of trading on Oct. 19, 1987 - a day that will live in market's infamy.