shine trader limited reports:
In an interview with CNBC on Wednesday, Paul Tudor Jones, a legendary Wall Street trader who became famous for successfully predicting the stock disaster in October 1987, said that inflation will continue to exist and pose a major threat to the U.S. market and economy.
Paul Tudor Jones believes that the number one problem for ordinary investors is inflation, which is not temporary. Inflation may be much more serious than people worry. Inflation may be the biggest threat to financial markets and society as a whole.
Why is inflation not temporary?
Jones pointed out that trillions of dollars of fiscal and monetary stimulus measures are the driving force of rising inflation. The Federal Reserve increased its balance sheet by more than $4 trillion through QE, while the U.S. government launched more than $5 trillion in fiscal stimulus. Now it’s the demand side of the equation. Since the outbreak, M2 has increased by $5.4 trillion, which is $3.5 trillion more than usual. This money can enter the stock market, cryptocurrency, real estate, or be consumed. They just wait to be used at some time, which is the reason why inflation will not disappear.
In addition, the United States has just increased the benefits of social security retirees and soldiers. This is just fuel to fuel the fire of inflation.
Another cyclical factor driving inflation is rising wages, which Jones expects to continue. Look at the unemployed vs Job Opportunities: there are 10.44 million job vacancies and 7.7 million unemployed. There is a growing mismatch between job vacancies and those who are eager / willing / qualified to fill them. Obviously, this is a structural problem of labor force, which can not be solved by zero interest rate and quantitative easing policy.
Jones expects that in the coming months, with the intervention of energy factors, price pressure will continue to rise. Last week, the two major inflation data of CPI and PPI in the United States exploded, pushing the market’s concern about inflation to a new height. The CPI of the United States rose for 16 consecutive months in September. In September, the CPI rose by 5.4% year-on-year, 5.3% higher than the market expectation, and increased by more than 5% year-on-year for the fifth consecutive month, the highest level since July 2008. PPI in the United States rose 8.6% year-on-year in September, the highest level since November 2010; In September, the core PPI excluding food and energy increased by 6.8% year-on-year, up from 6.7% in August.
The enemy of anti inflation – the Federal Reserve?
In Jones’ view, the Fed is the creator of inflation, not the opponent of inflation. He even said bluntly: “I am worried about the future of the United States. Obviously, we may have the most inappropriate monetary policy I have ever seen. We are increasing stimulus, we are still quantitative easing, and what we should do is just the opposite. We naturally despise inflation.”
Jones alluded to the high inflation period in the 1970s: “central bank officials ignore the lessons of history.” at present, the Federal Reserve is very confident and continues to add its own will to the market and push up the stock market.
When asked whether Powell would be re elected, Jones thought it was likely. However, he added that Powell is not necessarily the right person to deal with the situation before us. “Those who create problems are likely not to be the ones who solve the problems.”
The best person to solve this problem is Paul Volcker, who said in 2015, “if we follow mathematical models, we ignore the fact that people’s emotions often affect the way people continue to believe.” the Federal Reserve risks undermining the entire dollar based global financial system.
The inflation genie has come out of the bottle. If we don’t turn to attacking it, we may go back to the 1970s, when inflation was the most important issue for several presidents and fed chairmen.
What if Powell is not re elected? The moderator said that “there is a great possibility that someone more dove than Powell will be appointed chairman of the Federal Reserve”. Jones responded that it would be “an absolute disaster”.
The Fed’s November meeting is crucial
Jones believes that the Fed’s meeting on November 3 may be “the most important meeting of the Fed”, because now they are facing a dual task for the first time – that is, the price has exceeded the Fed’s inflation target of 2% and shows no signs of slowing down.
“You see inflation, you can’t see any end of it. How will you react at this meeting?” Comcast / YouGov poll showed for the first time that Americans think inflation is a bigger problem than unemployment.
If Powell continues to insist at the November meeting that the change from loose policy will be “slow and gradual”, Jones believes that this will be a sad and misleading policy. If this happens, investors should try their best to make more anti inflation products. “Don’t look at what they say, look at what they do. The Fed is actually telling people that they will fight inflation slowly and late. At some time in the future, someone will have to step in and throw down the hammer, just like Paul Volcker, chairman of the fed at that time.”
What about the anti inflation deal?
For the traditional stock / bond “60 / 40” portfolio, Jones believes that the strategy is dead. The question now is how investors can defend themselves. Jones said it was time to increase the impact of inflation, including investment commodities and Treasury inflation protected securities. In the current environment of inflation and low interest rates, investors should avoid fixed income products.
The stock market is interesting. In an inflationary environment, they are much better than fixed income. However, if the Fed takes action to solve the problem of inflation, it may depress the stock market.
If the Fed raises the short-term interest rate to 4% or 5%, for stocks, the price earnings ratio is 17 or 18, the market may fall 35%.