Earlier this week, at an event sponsored by his non-profit, Paul Tudor Jones suggested it’s time to be long stocks as the Fed gears up for a rate cut (or two or maybe three).
“[It’s] first rate cut 101”, he said, adding that in addition to being long stocks, rates and gold, you’ll want to be “at some point short the dollar”.
For what it’s worth, here is the actual track record for stocks around the onset of rate cuts (there are literally dozens of variations on this chart floating around at this point):
Jones also explicitly cited the tariffs as the proximate cause for the first cut being pulled forward (“I don’t think we would have had that had we not gotten into this tariff battle, and so it has accelerated everything”). And he said market participants likely don’t appreciate how consequential it would be were Trump to go all-in on China (“I think it will have a bigger impact economically than the market thinks”).
Jones’s recommendation – if that’s what you want to call it – to be long stocks hinges to a great extent on whether the Fed manages to engineer a soft landing. The problem right now is pretty simple. We summed it up as follows earlier this week in “Dueling Investor Groups And The Risk Of A ‘Fool Me Once’ G-20“:
The bottom line is that either this is a perfect environment for risky assets as central banks’ renewed commitment to accommodative policy provides downside protection and underwrites carry mania/yield chasing, or else the global economy is headed off a cliff, bonds have sniffed it out, and anyone piling into risk assets on the assumption that central banks can save the day is a fool.
There’s always nuance to be had, and there is, of course, the possibility that Trump is in the process of implementing a master plan designed to drive stocks to the moon (where Wilbur Ross will be waiting at his lunar gas station). But one look at inflation expectations is all you need to know that a whole lot of folks have serious reservations about whether and to what extent central banks are capable of reflating the global economy. Indeed, Albert Edwards’s “Ice Age” thesis looks to be playing out, albeit at a glacial pace befitting of the name “Ice Age”.
Speaking of folks from SocGen, Kit Juckes (the bank’s widely-followed FX strategist) was out on Friday with an amusing little blog post that serves as both a pseudo-critique of Jones’s “buy stocks” call and a homage to what, had it not been so damn huge, would have been a cult classic, in Clueless.
Juckes retells the story of 1995’s preemptive Fed easing, a historical analog that has gone mainstream over the past month. “In 1995, the Fed eased policy preemptively [and] one notable side effect was to add fuel to an equity rally”, he writes. “Perhaps that’s why Paul Tudor Jones told Bloomberg this week that when a Fed easing cycle starts, you’re supposed to sell the dollar and buy equities.”
Juckes goes on to say that while “Mr. Jones has a very good track record, the key question is whether the Fed can indeed stave off recession.” He then neatly encapsulates the issues as follows:
Clueless was one of the most financially successful films of 1995 and while it would be unfair to say that either the fed or the market is clueless, no one is sure whether we are facing the definitive downswing in the current economic cycle, or another mini-pause. The Fed is tempted to follow the market’s pricing of rate cuts by easing and buy itself insurance against recession, again. If it succeeds, Mr Jones will win. But if President Trump’s trade policies and the downturn in the US earnings cycle mean that a bigger slowdown is inevitable, buying bonds and the yen may be the only winning trades.
Juckes then warns that the bond market seems to be loudly suggesting that averting a downturn will be a Herculean task. “The bond market leads the way, and the inflation swap market perhaps most of all”, he remarks. “There’s disinflation everywhere you look.”
The irony, of course, is that Jones explicitly flags trade policy as a huge risk to the outlook. “I think whether we impose [tariffs on another $300 billion in Chinese goods] is going to be very material for whether that’s the tipping point for pushing us into a recession”, he said, during the same remarks cited here at the outset.
Forgive me, but it seems like everyone is a bit “clueless” right now. And if you ask the world’s foremost authority on being clueless, that’s exactly the point.