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 of interest-rate hikes.
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 the market’s complacency – said policy makers have been too permissive. 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.
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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.”
* * *
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.
The seesaw is broken. Even a year ago if the stock market tanked, the bond market rallied. Now rising rates (bonds falling) are bringing about the Day of Reckoning in stocks. Congress just voted to increase spending by $300 Billion over two years. Thank God they saved our military from the horror of spending staying the same. Otherwise we could have been taken over by the Mexicans – oh wait. So inflation’s heating up while the Fed promises to sell off bonds, Congress just cut taxes and the feral government will need to sell even more bonds to finance the growing deficits. Good thing mortgage rates climbing into the 5’s – or higher – won’t affect housing values at all. Add in a few hundred extra billion per year in federal interest carrying costs and what could possibly go wrong?
After years of shock & awe markets…with en-stocked & bondaged bovines moo-ving primarily in one direction (lower)….
The real fault lies at the feet of policy(a method of gambling in which bets are made on numbers to be drawn by lottery)makers who allowed? – nay, who pledged allegiance to that magical color o’ law flag, the better to drape all the coffins with; those mouthpieces insisted, iow, not “allowed” – systemic imbalances – malinvestments, bastiat windowsmashers – to build up….
http://www.chicagotribune.com/news/ct-per-flash-policy-kings-0303-20130310-story.html
Is the Stock Market Rigged?
Paul Craig Roberts, Dave Kranzler, and Michael Hudson
On February 6 PCR asked if the Plunge Protection Team had stepped in and prevented a stock market correction by purchasing equity index futures.
Sure enough, the daily exchange volume chart shows an increase in futures activity on February 2 with sharp increases on Feb. 5th and 6th. Those are the days when the stock market averages were experiencing large point drops. So, ask yourself, would you purchase equity futures while experiencing cumulative stock market drops? One can understand shorting a dropping market, but not buying futures.
Unless this is what happened. Seeing the beginning of a correction, the Plunge Protection Team placed a futures bid just below the existing price. Traders saw the bid, recognized that the government was intervening to support the market, and the bid was front-run with the hedge fund algorithms automatically picking up the action.
Who but the Federal Reserve with its unlimited ability to create money would take the risk of buying futures in the face of a falling market. Moreover, such an infusion of money into the market does not show up in the money supply figures.
The futures purchases prevented margin calls and stop/loss orders in a heavily leveraged equity market that would have collapsed the market.
What are the pros and cons of this kind of intervention (which might have occurred also in May 2010 and August 2015)? By stopping a correction, the intervention prevented a pension fund collapse, both private and state. However, by propping up over-valued equities that the Federal Reserve’s quantitative easing created, the intervention rewarded over-leveraged speculative risk-taking and prevented price discovery. We still have an equity market whose values rest on record margin debt, stock buy-backs, and prices pumped up by money-printing. The problems waiting to come home continue to build.
The question is: can intervention prop-up over-valued, problem-ridden markets forever?
After today’s drop, we will see what happens tomorrow.