Well, Paul Tudor Jones apparently gets it.
Sometimes it’s hard to know how to cover these types of stories, because to anybody who spends their days steeped in the debate, the conclusions are self-evident and have been for quite a while.
That’s why it’s somewhat frustrating when the financial news media jumps all over soundbites from, for instance, Jeff Gundlach, who earlier this year branded the current noxious mix of monetary and fiscal policy in the U.S. a “suicide mission.” That is, it’s nice that these “brand names” are flagging these kinds of risks, but it’s hardly like they (the risks) aren’t readily apparent to anyone who is paying even the slightest bit of attention.
Jeff’s “suicide mission” characterization was a reference to the decidedly ill-advised decision to pile deficit-funded expansionary fiscal policy atop a late-cycle economy where the Fed is hiking rates and pulling its support for very market that’s financing the stimulus.
Clearly, that’s a recipe for disaster and it’s made immeasurably worse by the fact that the U.S. simply didn’t need any more stimulus, as illustrated rather poignantly in the following visual which shows just how anomalous it really is to be expanding the deficit in order to simulate an economy where the unemployment rate is sitting at a 48-year low.
Well, on Thursday, at the Greenwich Economic Forum in Connecticut, Paul Tudor Jones noted the obvious, which is that the tax cuts and the stimulus are prompting the Fed to lean more hawkish than they otherwise might. “Clearly the tax cut and the economic activity that has come from it has caused the Fed to raise rates”, he said.
Of course the problem is that the Fed is hiking what counts as “aggressively” in the post-crisis world and that means unwinding the very policies that have prompted everyone to gorge on debt. Artificially suppressed borrowing costs have encouraged corporates to lever up and as rates rise, that’s going to be an issue. When you throw in the fact that markets look more fragile than ever thanks, in part anyway, to a post-crisis regulatory regime where the Street is unwilling to lend its balance sheet in a pinch, you’re left with concerns about liquidity.
“I think this time it’s going to be corporate credit and I think the breakdowns are something that we have to pay attention to in the last day or two,” Jones continued, adding that “they’re really scary because, one thing about this credit bubble [is] we’ve had liquidity absolutely dry up in so many markets.”
Jones’ comments come amid palpable jitters in credit markets from investment grade (where the “BBB debate” is raging) to high yield (where folks are pondering what the read through is from slumping crude prices on a space that will likely be on the firing line anyway when the cycle turns and risk sentiment sours).
Jones also said the next trade will be a front end rates trade or, more to the point, sniffing out when the hiking cycle is over. On that score, it’s worth noting that despite Jerome Powell’s penchant for sticking to the script, markets are now pricing just 39bp worth of hikes next year, down from 50bps (or, two full hikes) just last week.
As far as whether a Fed pause would mark the beginning of a bear market as everybody suddenly asks whether a recession is looming, Jones had this to offer:
It doesn’t necessarily mean we have to enter a bear market yet. But who the hell knows.