"If you look at any asset price you have to be thinking, this is highly dubious to be a sustainable price."Â -Paul Tudor Jones (Trades, Portfolio)
Investing legend Paul Tudor Jones (Trades, Portfolio) talked with Goldman Sachs (GS, Financial) CEO Lloyd Blankfein last week. He not only discussed his non-profit efforts, but also the state of the market.
Capitalism must change
Jones tends to keep under the radar, but is on a mission to change capitalism. He believes inequality in society is a major risk. This is usually resolved by war, revolution or higher taxation. Jones would rather not see it resolved that way and prefers to drive toward a more just society proactively. Through the non-profit, he’s ranking companies on corporate justness. While I could critique the effort, since its top three companies are Intel (INTC, Financial), Texas Instruments (TXN, Financial) and Nvidia (NVDA, Financial), it deserves props.
Coincidentally, because Jones wants to promote his index, he is stepping into the limelight much more, which gives us a chance to learn from him and get his take on the markets.
Jones on markets
As quoted in the introduction, Jones believes: "If you look at any asset price you have to be thinking, this is highly dubious to be a sustainable price."Â
High prices for financial assets are driven by monetary policy. A policy that is not sustainable over time. Historically, real interest rates have been much higher. He views interest rates as crazy. He makes two observations:
"You know, in the long run, we have to mean revert back to a normal term premium."
"We have to get back to a sustainable fiscal policy."
He doesn't mention when it's going to happen, which is the problem with this stance. We are all dealing with it on a daily basis. Still, it's valuable to be warned once again.
Fears
Jones fears the next recession. He hopes to be positioned really short. A recession will be very frightening because there are no stabilizers. There is no monetary stabilizer. In practice, the Federal Reserve can lower rates a little, but it doesn’t have the same firepower it usually does. There isn’t any hope fiscal stabilizers will be there either. The U.S. has a deficit and a large debt load.
This is all especially unsettling because of the heightened social unrest. According to Jones, 90% of Americans owned 35% of the wealth back in 1985. Today, 90% of Americans own 23% of the wealth. He views this as an unsustainable level of inequality, quoting Adam Smith:
"If [justice] is removed, the great, the immense fabric [of human society] ... must in a moment crumble into atoms."
Jones refrains from talking about any specific investments or what to do in the current environment, but I pulled up his larger positions. It's always better to look at someone's actions rather than their words:
Jones seems to own quite a few merger and acquisition names. One, Time Warner, recently closed. But NXP Semiconductors (NXPI, Financial) is delayed pending regulatory review in China. Other than that, a heavy presence of aerospace and defense stands out as well as the large number of value investing favorites like Citigroup (C, Financial), Micron (MU, Financial), Orbital ATK (OA, Financial) and HRG Group (HRG, Financial).
