A note from legendary hedge fund billionaire Paul Tudor Jones—you may recall he called the October 1987 crash—has been making the rounds this week for its grim predictions and language that feels like it’s out of the old testament.
“If I had a choice between holding a U.S. Treasury bond or a hot burning coal in my hand, I would choose the coal. At least that way I would only lose my hand,” Jones wrote in the note.
In the note, he says that inflation is about to appear “with a vengeance” and may force the new Federal Reserve chair, Jerome Powell, to accelerate interest-rate hikes.
Powell was sworn in as chairman of the Fed on Monday, inheriting a U.S. economy in its third-longest expansion on record, with unemployment and inflation near historically low levels. Tudor Jones hinted at the parallels between Powell and former Bank of Japan Governor Yasushi Mieno, who was sworn in in December 1989 amid a boom that was driven by speculative investments in land and stocks. Within just a week of Mieno taking the helm, he began raising interest rates.
Mieno “was ultimately blamed for pricking a bubble over which he had no control,” Tudor Jones wrote. “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.”
Tudor Jones said that U.S. policy has focused on a “low inflation problem” and years of near-zero rates amid economic expansion will have “painful” consequences. He thinks policymakers should have been more aggressive in tightening policy and “rejecting the fiscal impropriety associated with this most recent tax cut.”
“We are replaying an age-old storyline of financial bubbles that has been played many times before,” Tudor Jones, founder of Tudor Investment Corp., wrote in the February 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.”
“It is incredible that at full employment we have passed a tax cut that will push our deficit to 5 percent of GDP,” Tudor Jones wrote. “Can you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing.”
The 10-page letter broke into the news cycle just as U.S. stocks began tumbling amid concerns that quickening inflation will force interest rates higher, and at a time when President Trump’s ballooning federal budget deficit will force the U.S. to borrow more than $1 trillion this year—84% more than in 2017—which risks worsening the frenzy behind the global sell-off in stock markets seen this week.