Paul Tudor Jones predicts soaring inflation and falling bond prices

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Paul Tudor Jones, the hedge fund manager who called the October 1987 crash, issued a stern warning about the financial markets.

“We have the strongest economy in 40 years, at full employment. The mood is euphoric. But it is unsustainable and comes with costs like bubbles on stocks and credit,” Jones said in an interview with Goldman Sachs sent to the bank’s clients in a note on Wednesday. “With rates so low, you can’t trust asset prices today. And if you can’t say it now, I would skip the bonds. … Bonds are the most expensive they have ever been by virtually any measure. They “are overvalued and over-possessed. “

The hedge fund manager blasted the tax reform bill and congressional budget spending bill.

The Republican tax overhaul, which President Donald Trump enacted in December, lowered the corporate tax rate to 21% from 35%. Jones predicts that inflation will rise accordingly.

“I think the recent tax cuts and spending increases are something we are all going to look back on and regret.… Together [they] will give us a budget deficit of 5% of GDP – unprecedented in peacetime outside of recessions, ”Jones said. “It reminds me of the late 1960s when we experimented with low rates and fiscal stimulus to keep the economy at full employment and finance the Vietnam War. … We are preparing the ground for accelerating inflation, just as we did in the late 1960s. ”

To trade in such an environment, the hedge fund manager recommended that investors stay in cash or buy commodities and “durable assets”. He set a “conservative” target of 3.75% at year-end for the 10-year US Treasury yield.

The 10-year US Treasury yield, which moves inversely to bond prices, hit a four-year high of 2.95% last month after the strong January jobs report. The yield traded at 2.83% on Thursday.

It was not the first time that the famous macro-trader warned investors to invest in bonds.

“We are in the throes of a burgeoning financial bubble,” Jones wrote in a note to clients in early February. “If I had a choice between holding a US Treasury Bill or a burning coal in my hand, I would choose coal.”

Other major investors have spoken out against the overvalued fixed income market and the dangers of inflation. Warren Buffett told CNBC on Monday that he believes long-term investors should buy stocks rather than bonds.

“If you had to choose between buying long bonds or stocks, I would choose stocks in a minute,” Buffett said.

In its annual letter to Berkshire Hathaway shareholders released on Saturday, the Oracle of Omaha recommended investors stay in stocks due to the negative impact of inflation on the purchasing power of fixed income securities.

A spokesperson for Tudor said the company had nothing to add beyond what was in the text of the interview.

– CNBC’s Patricia Martell contributed to this report.


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