It’s no secret that countries throughout the world are incurring huge debts as they struggle to keep their economies functioning. One of the ways in which they’re coping is by printing more money, and more money—all else being equal—means higher inflation.
Paul Tudor Jones (Trades, Portfolio), the guru who operates the multibillion-dollar Tudor Investment Corp., sees rampant inflation on the horizon. In a market outlook note titled “The Great Monetary Inflation,” he wrote that governments had printed $3.9 trillion in new money, representing 6.6% of global economic output, since February. That’s the story as broken by Bloomberg on May 7; neither Jones nor his firm has confirmed or denied it.
In the note, he also wrote, “The best profit-maximizing strategy is to own the fastest horse” and “If I am forced to forecast, my bet is it will be Bitcoin.” Reportedly, his Tudor BVI Global Fund may hold a “low single-digit percentage of its assets in Bitcoin futures.” Forbes magazine made a point of running a story emphasizing that Jones was investing in futures, not the actual cryptocurrency.
Also in the note, these words from the veteran hedge fund manager: “It has happened globally with such speed that even a market veteran like myself was left speechless,” and, “We are witnessing the Great Monetary Inflation -- an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”
Now, as we’ve observed, Jones’ initiative is a small one, probably something less than 5% of the BVI Fund, and it is an investment in a derivative (futures), rather than the real thing. Still there are important implications.
It has given a substantial boost to bitcoin advocates, who now have a credible and influential player in their camp. Not that he was the first; in September 2017 I wrote about another guru, Murray Stahl (Trades, Portfolio) of Horizon Kinetics, who had written, “Within the next couple of years, cryptocurrency will probably become a legitimate asset class for investment unless it fails in some way.”
Cryptocurrency may not have failed, but over the past couple of years it has had at least one near-death experience. For a time, the price shot up, probably because of the novelty and because of fears that central banks would devalue currencies by printing too much new money. Growth turned into a bubble and when the bubble burst, cryptocurrency’s credibility took a heavy blow.
Stahl is still confident in the promise of bitcoin. In an April 2020 article, he or his team wrote that this new currency was going mainstream: “The class and magnitude of financial institutions that are now solving those [widespread acceptability] issues and competing to present commercial platforms to buy, hedge, price, custody and transact in bitcoin are, without exaggeration, the largest and highest quality in the U.S.”
Jones, too, made a similar argument and rejected any idea he was pursuing an ideological agenda. He wrote, “I am not a hard-money nor a crypto nut. The most compelling argument for owning Bitcoin is the coming digitization of currency everywhere, accelerated by Covid-19.”
Jones’ action may have been one of the catalysts that pushed bitcoin over the $10,000 mark, along with a milestone in bitcoin valuation and the Federal Reserve Board’s promise to provide liquidity in the American economy. At the Bitcoinist website, Nick Chong wrote, “Corroborating Jones’ narrative play, the Federal Reserve just committed to even more money printing in the weeks ahead. Fed Chairman Jerome Powell said that to respond to the ongoing crisis, the Federal Reserve will continue to commit to low interest rates, capital facilities for companies, and other liquidity injections.”
For investors, this may be a new way to hedge against inflation. Jones started his firm in 1980, during an inflationary crisis, and may be more sensitive than the rest of us about managing it. In that year, inflation hit 13.5%, confounding all efforts to manage wages and business costs; eventually, it was tamed by throwing the American economy into a recession, with all the pain that entailed.
The conventional wisdom then, and now, was or is to invest in real assets, such as gold and real estate, to try to offset some or all that risk. By turning to bitcoin to place a small hedge against inflation, Jones will attract considerable interest. If the hedges work as Jones anticipates, no doubt other money managers will follow, although no doubt cautiously.
Finally, if Jones is right about inflation, it could lead to another bull market for stocks. High inflation destroys wealth, especially for those who invest in fixed-income vehicles and other creditors. Imagine buying a government bond or other fixed-rate investment when the inflation rate is higher than your yield. Your wealth is evaporating as you watch and worry.
One way around that is to ditch some or all your fixed-rate securities and invest in equities. While they’re not always perfect hedges, companies do have the option of increasing their prices to keep up with rising input costs. Thus, there can be increasing demand for stocks and decreasing demand for fixed-income investments.
In 2020, the dynamics are different than they were in the 1980s. Since the financial crisis of 2008, the Federal Reserve has kept interest rates low, with the result that fixed-income vehicles have been generally out of favor.
In conclusion, Jones may have done something significant, or perhaps just something novel. If it’s the latter, then it will be just a passing news item soon to be forgotten. But if he’s right and this purchase of bitcoin futures turns out to be wise, he will begin changing the investing landscape.
Disclosure: I do not own bitcoin or any assets managed by Jones or Stahl.
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