Paul Tudor Jones, a macro-investor described by Reuters as ‘one of the giants’ after ostensibly predicting the 1987 global stock market crash, has fired a warning shot to Jerome Powell and the wider fed ahead of its two days policy meeting.
“If they say ‘we’re on path, things are good,’ then I would just go all in on the inflation trades. I’d probably buy commodities, buy crypto, buy gold,” Jones said in a CNBC interview.
That’s due to concerns regarding inflation which has reached 5% in the United States, while in Europe it has just about reached 2%.
Powell last year announced a policy of tolerating inflation above 2% for some time following a period like ours where inflation has been below 2% for a significant period of time.
That’s presumably to swing the economy away from low inflation by tightening once there is sufficient room for what we would argue as potential policy mismanagement, while they would say for potential maneuver at all.
Fed is currently out of ammo, however much they might deny it, besides outright printing through debt buying. At the inflationary end, Fed is fully armed. So they don’t fear inflation. What they probably fear is striking the delicate balance of tightening while not crashing.
Their job is basically same as Jones. While Jones wants to sell the dollar to bulls before they become bear, and thus there is plenty of appetite for dollar buying, or indeed wants to buy from bitcoin/gold bears before they become bull, Fed wants to remove the dollar by effectively erasing it through bond selling or raising interest rates to a growing army of bulls while not emboldening bears.
If Jones goes wrong, then at the very worst the estimated $44 billion of assets under management throughout his many companies would be burned.
If Fed goes wrong, trillions would be burned. Especially in this sort of market, which some would say is a captured market in as far as arguably Fed has no room for movement currently.
“If they course correct, if they say, ‘We’ve got incoming data, we’ve accomplished our mission or we’re on the way very rapidly to accomplishing our mission on employment,’ then you’re going to get a taper tantrum,” Jones said. “You’re going to get a sell-off in fixed income. You’re going to get a correction in stocks. That doesn’t necessarily mean it’s over.”
Exactly. Which is why fed is not going to say that. We know what fed is going to do because they’ve said what they will do.
4%, 5%, or even higher inflation for some time is not a worry because we have the tools to fight inflation, is what fed has said.
We want inflation to reach a higher level than the 2% target and to stay there for some time, this is what they’ve said and we don’t know if they have achieved it because one or two months are obviously not ‘some time’ and hitting their new target of 4% or 5% is obviously not a cause for alarm because they aimed for it.
What is a cause for alarm and how long is some time? Journalists tried to get an answer, but obviously without much success, with the best answer probably being what the reasonable man thinks is cause for alarm and is a long time.
One month at 5%, while Europe is at 2%, isn’t either. Seven months, or two years, maybe. A jump to 10% and then staying there, maybe. 5% for the month of May is instead exactly what they aimed.
So if they’re not going to embolden the likes of Jones, they presumably will have to keep course, with maybe some little tinkering to throw some bones to little bears so that the bulls feel comfy.
I love bitcoin, it’s maths, Jones said. 2+2 is 4 today and will be 4 in 2000 years. He bought some in May 2020 when bitcoin was $13,000. Now he says:
“The only thing that I know for certain is I want to have 5% in gold, 5% in bitcoin, 5% in cash, 5% in commodities, the other 80% I don’t know” under an inflationary model.
He is personally estimated to be worth more than $5 billion, so if he bought $250 million in bitcoin is not clear, but this 80/20 distribution somewhat obviously suggests he is a bull as that 80 will presumably go to stocks because where else would they go after taking out commodities, cryptos and cash.
Jones apparently doesn’t play in the middle, when bulls are running or bears are running. He plays during the change of guards, aiming to tap tops and bottoms.
One way to set tops is maybe to provoke them. Sweat Powell to a mistake that crashes the market, but if we take him at his word regarding this 80/20 distribution, he himself maybe doesn’t think he will succeed.
Nonetheless he does highlight the difficult position someone like Powell now finds himself in, but from a macro perspective it isn’t clear this suggestion of a higher than usual period of inflation is necessarily wrong.
We know giant companies are sitting on trillions in cash and wages are not really keeping up, with the economy prior to the pandemic not quite shocked out of the 2008 crash.
Forcing an increase in the velocity of money by letting inflation ride for some time may be one way to change the guards, in this case hopefully from a potentially ascending bear to a dominance retention bull.
That risks in theory an untamable beast of high inflation, but that’s perhaps where the trick of ‘some time’ comes in.
Untamable inflation kicks off only when the general expectation becomes an ever rising or a continuously high inflation. If it is instead for some time, then it might not.
To make it ‘for some time,’ fed can become more imposing once there is ‘some time,’ with it having a huge arsenal of weapons, including the burning of the money it created pretty much as quickly as their printing.
One needs to distinguish therefore between fed and an individual or institutional investor. The latter have an interest in hedging with bitcoin or commodities just in case, while keeping the tap on fed’s juice through stocks. Fed has an interest in equalizing the whole market, which necessarily means picking winners and losers. Losers in this case being cash savers – whether corporate or otherwise – and winners being investors.
This policy is unlikely to change anytime soon, because an ammo-less fed necessarily needs some ammo and it can’t get it without inflation.