Paul Tudor Jones Insight
Doug Noland
Ten-year Treasury yields were 1.86% on election day 2016, having risen 14 bps over the previous month.
Yields touched 2.60% by December 15th, before ending 2016 at 2.45%.
While bonds were relatively tranquil heading into Trump v. Clinton, equities were apprehensive.
Stocks slumped 3% in the nine sessions ended November 4th, declining to a four-month low and reducing the S&P500’s y-t-d return to 3.9%.
Stocks enjoyed a 7.4% post-election rally into year end.
Today, the S&P500 sports a y-t-d return of 23.1%, as complacency reigns.
Bonds, on the other hand, are notably uncomfortable.
Ten-year Treasury yields rose another 16 bps this week to a three-month high 4.24% - with a notable one-month yield jump of 45 bps.
This week’s 28 bps surge boosted the one-month spike in benchmark MBS yields to 75 bps.
Enthusiasm for President-Elect Trump’s tax cuts spurred a big stock market rally – and were well-tolerated by the bond market.
And while a giddy stock market today fancies Trump tax cuts 2.0 (or Harris 1.0), the bond market is much more wary than in 2016.
For me, things started veering off course when Donald Trump proposed tax-free tips while campaigning in Nevada.
Vice President Harris followed.
Trump campaigns to extend the 2017 tax cuts and further reduce the corporate tax rate.
Other ideas floated include bringing back the state and local tax (SALT) deduction, exempting Social Security income and overtime pay, and allowing auto interest as an itemized deduction.
Harris has campaigned on cutting income taxes for lower-income households, while expanding child tax credits, low-income housing credits, and small business tax deductions.
When the campaign give-away season really heated up, I couldn’t help but think of the Federal Reserve - the progenitor of “deficits don’t matter.”
Of course, politicians will push the envelope.
Just take what worked in previous elections and administrations and ratchet them up a few notches.
Trump, Harris and voters don’t know the environment has changed. Bonds know.
Treasury Securities ended June at $26.9 TN (94% of GDP) – fully double Q2 2016’s $13.4 TN (72%).
Over eight years, total Non-Financial Debt (NFD) inflated $28.38 TN, or 60%.
Federal Reserve Assets jumped $2.55 TN, or 57%.
System “repo” assets doubled to $6.98 TN.
Money Market Fund Assets inflated $3.79 TN, or 140%, to $6.50 TN.
Bond market levered speculation has ballooned.
Things turn crazy at the end of cycles.
And it will be subtle and easily ignored, but crazy is destructive.
This super-cycle is concluding with super crazy.
It’s always been a case of when markets would finally begin to impose some discipline.
It’s unfolding.
When I see yields in the US, UK, France, Italy, and Greece lead on the upside, I take notice.
Up a notable 18 bps, UK gilt yields ended the week only 11 bps below the October 14th, 2022 spike high of 4.34%.
French yields are now five bps above Spanish and 31 bps higher than Portuguese yields.
On November 4th, 2016, France’s yields were 80 below Spain and 280 bps lower than Portugal.
Five hundred and eighty bps below Greece in 2016, Italian yields are today 34 bps higher.
October 23 – Bloomberg (Michael Mackenzie and Greg Ritchie):
“The US Treasury market, already mired in one of its worst losing stretches of the year, is flashing a fresh warning sign of mounting risks as yields surge.
The so-called term premium on 10-year Treasury notes — an expression of the extra yield investors demand for owning the debt rather than rolling over shorter-term securities — has risen from near zero to just under a quarter point so far this month to the highest since last November…
As academic as the indicator may sound, the measure is closely monitored by market watchers.
It offers important information about investors’ perception of future risk — whether it be inflation, supply or anything else that extends beyond the expected path of short-term rates.”
“Legendary investor” is overused these days (it’s been a long bull market).
However, it definitely applies to Paul Tudor Jones, a 44-year hedge fund veteran – a true master of the “Masters of the Universe.”
I’ve deeply respected his market and macro insights for going on four decades.
So, when Paul Tudor Jones delves into critically important and timely analysis, I’m compelled to share it.
CNBC's Andrew Ross Sorkin interviewed Tudor Jones at this week’s Robin Hood Investors Conference.
It’s straight talk from a brilliant macro thinker and statesman.
It should today be a crowded field of economists, central bankers, investment professionals, and other statesmen trumpeting similar messages.
Instead, it's mainly voicelessness or hogwash.
Below are excerpts from the interview:
Paul Tudor Jones:
“For me in the hedge fund world, this is kind of the macro super bowl coming up on November 5th.
Some elections are not that binary.
This one is binary - not so much because of which candidate wins.
But it’s binary in the sense of what is the markets’ response going to be – to either candidate if they win.
We can either continue down the path we’ve been on… or we may have that point of recognition where all the sudden the markets have different ideas than what the candidates have been espousing…
I think it’s really important that we frame where we are right now.
And where we are is an incredible moment in U.S. history.
What I really want to talk about is the debt trajectory that we’re on.
We’ve gone in the space of 25 short years from debt-to-GDP at the federal level from about 40% to almost 100%; 60% in 25 years…
CBO says we go from 98% to 124% – that’s very conservative over the next 10 years.
If you extrapolate that 30 years – you get to 200% debt-to-GDP.
That’s obviously something that can’t go on forever – won’t.
And the question is, after this election, will there be some point of recognition – particularly with all the tax cuts that are being promised by both sides, and the spending plans?
They’re handing out tax cuts like they’re Mardi Gras beads – we’re doing tax cuts on everything from tips to (inaudible).
So, it’s crazy what’s being promised.
After the election, the fact that you’ve got 7 to 8% budget deficits as far as the eye can see, the question is, will the markets allow either candidate…
The Treasury market won’t tolerate it…
Financial crises percolate for years.
But they blow up in weeks.
That’s kind of the history of them, right.
And so, for me, this election becomes one of those seminal points where all the sudden…
We owe $35 trillion.
Our tax take is $5 trillion.
So, we owe seven times what our tax take – our revenues - will be this year.
And our deficit is $2 trillion - and it’s $2 trillion as far as the eye can see…
I was watching this Vince McMahon documentary… in it there’s a term I’d never heard of called “kayfabe.”
In wrestling parlance, that represents the unspoken, unwritten, tacit agreement between the wrestlers and the fans about the illusion that’s going on in the ring – the suspension of disbelief that what’s going on in the ring is actually – we know it’s scripted, we know it’s a performance, but they ask us to think it’s genuine and real.”
CNBC’s Andrew Ross Sorkin:
“That’s what you think this is?”
Tudor Jones:
“We’re in an economic kayfabe right now.
And it’s not just the United States.
In the UK, in France, Greece, Italy, Japan – Japan being the biggest of all.
It’s this economic kayfabe.
The question is, after this election, will we have a ‘Minsky moment’ here in the United States – in U.S. debt markets?
Will we have a ‘Minsky Moment’ where all the sudden there’s a point of recognition that what’s going to happen – what they’re talking about - is actually fiscally impossible – financially impossible…”
Sorkin, shifting to Tudor Jones’ analysis of possible measures to rein in unsustainable fiscal spending:
“Let’s talk about taxes, because that’s how the money is going to get raised – one way or the other.”
Paul Tudor Jones:
“There are plenty of options.”
Sorkin:
“But there are not many ways to get to where you need to go unless you start to do some of these things…”
Tudor Jones:
“Correct.
Can I just say this.
You have to let the (Trump) tax cuts expire.
You have to… that’s $390 billion.
We’re going to be broke really quickly unless we get serious about dealing with our spending issues.
I don’t know if we’ll be able to cut spending that much. Sixty percent of our spending are transfer payments.”
Sorkin:
“If you think we’re going broke – and you think Trump is going to be the President – he’s not going to let those tax cuts expire if he can avoid it.
He does not want the corporate tax rate to go to 25%, as you’re suggesting it will have to.
He’s suggesting it should go to 15%.”
Tudor Jones:
“Just to get us to the point where we stabilize debt to GDP at where it is right now, here’s what you need to do.
You let the Trump tax cuts expire – that $390 billion.
You need to raise the payroll tax on every single working person 1% - that’s another big slug.”
Sorkin:
“What do you think that does to jobs?”
Tudor Jones:
“We’re clearly going to have a period of contraction, which hopefully - it’s going to be really important for the Fed to be able to offset the fiscal contractionary that’s going to come.”
Sorkin:
“Then you want to increase the individual tax rate all the way to a top rate close to 50%.”
Tudor Jones:
“Hold it.
I don’t want to do any of this stuff.
What I’m telling you is, we’ve got to be serious about where we are fiscally.
There’s a whole set of options, right.
We could go in and cut 25% of the federal workforce.
Some people may do that…
I’m simply showing some of the things that you can do.
You’d have to raise the tax rate on the top – I think probably everyone over $200 grand – probably have to raise that to 49.5%.
If you do all these things – all these things.
Raise social security from 65 to 70.
If you do all these things – means test Medicare.
If you do all these things, all you do is you get to a primary balance.
What that means is you stabilize debt-to-GDP.
You’re still actually increasing your debt…
It excludes the interest cost.
Which, oh, by the way, the interest bill this year is larger than every single line item except Social Security.
It’s larger than defense spending. It’s larger than Medicare.”
Sorkin:
“Given all the things you’re saying, are you off buying gold and bitcoin…”
Tudor Jones:
“I think all roads lead to inflation…
I’m long gold.
I’m long bitcoin.
I think commodities are so ridiculously under-owned, so I’m long commodities…
The playbook to get out of this is that you inflate your way out.”
October 25 – Bloomberg (Carter Johnson):
“Mohamed El-Erian says that gold surging to a fresh record reflects how global financial institutions are deliberately diversifying away from the US dollar…
‘When we try to relate the moves in gold this year to traditional, financial and economic variables — interest rates, the dollar — the relationships have broken down,’ said El-Erian…
The ‘secular’ move can be attributed to two fundamental drivers, he added.
‘One is the slow diversification away from the dollar in the reserves of central banks around the world…
The other is a slow diversification away from the dollar payment system.’
While the move has been slow, ‘the bad news is the momentum is building up,’ said El-Erian…”
Mr. El-Erian penned his Sunday FT piece, “Why the West Should be Paying More Attention to the Gold Price Rise,” three weeks after his “The Federal Reserve’s Insurance Policy - Big Interest Rate Cut is Yet Another Evolution in Paradigm of Liquidity Dominance.”
Gold has jumped 6.9% since the Fed fifty, with Silver surging 9.8% and Platinum rising 4.0%.
Curiously, El-Erian doesn’t mention the Fed in his gold analysis.
“The playbook to get out of this is that you inflate your way out” (Tudor Jones).
The Fed slashed rates despite loose conditions and market speculative Bubbles.
When I contemplate financial and economic variables supporting the big moves in precious metals prices, I look to massive fiscal deficits, tottering debt loads and unrelenting Credit excess, and precariously speculative financial markets.
Importantly, these are global phenomena.
Mounting speculative leverage, severe economic maladjustment, and associated fragilities ensure ongoing Fed and global central bank “whatever it takes” monetization.
Moreover, Beijing has commenced what will evolve into Herculean reflationary measures hastily discharged to hold financial and economic crises at bay.
The Dollar Index has gained 2.9% y-t-d.
Gold and Silver’s rise has less to do with the dollar (slow de-dollarization) than it does deeply flawed monetary and central bank doctrines, unhinged inflations in debt and marketplace liquidity, and a monstrous global financial structure today acutely vulnerable to de-risking/deleveraging.
Central banks are trapped in forever monetization.
It’s not coincidental that precious metals are in heightened demand as markets begin the process of reassessing prospects for some of the world’s largest government bond markets.
Treasuries provide global debt markets with a frail foundation.
And I’m with Paul Tudor Jones in fearing that the U.S. election is a possible catalyst for trouble.
It’s been a much too long wait for markets to impose some desperately needed discipline.
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