With almost $8 billion in assets under management and more than 40 years in the markets, Paul Tudor Jones (Trades, Portfolio) has some opinions on how the markets work. Although his macro-trading philosophy is somewhat removed from the strategies that the ordinary value investor will typically pursue, I have always found that his ability to see the big picture should be of interest to any financial professional or amateur. In a recent interview with CNBC, Jones described three things that he believes drive the market today.
An explosive combination
The first driver of market action Jones sees is the combination of ultra-low interest rates and a very lax fiscal policy:
“We have a 5% budget deficit coupled with the lowest real rates that you can imagine, with the economy at full employment. That’s the most unorthodox, and potentially most explosive, combination that you can imagine. It’s like the photo negative of 1930, when we had the last trade war, but you had tight fiscal and tight monetary policy. Now we’ve got the exact opposite.”
The comparison to the 1930s is interesting, and has been echoed by a number of other well-known investors, most notably Bridgewater’s Ray Dalio (Trades, Portfolio). The recent rise of alternative and radical voices on both the left and right has also given much fodder for comparison to the decade of the Great Depression. The looseness of both fiscal and monetary policy suggests that policymakers will have little ability to jumpstart the economy if the trade war deepens.
Election question
The second big factor hanging over markets is the 2020 presidential race:
“The second thing is that we have the presidential race, where the outcomes gives you such dramatically different economic policies. That’s huge, because you have to have a view on who the next president is going to be to have a view on where the economy is going to go and where rates in particular are going to go, as well as the stock market.”
Jones clarified that he has no idea who will be elected president in 2020, nor does he know whether President Trump will be impeached. However, he is reasonably confident that the market would react negatively to the election of a Democrat, at least in the short term, as that would imply an increase in taxes, though it would depend on the specific Democrat elected.
Trade war
The final driver Jones identified was, of course, the U.S.-China trade war:
“We had the deconstruction of 50 years of global interconnectivity, economically, financially, etc. So when we began to dismember that because of economic nationalism, it was offset by a 150 basis point drop in two-year notes. The markets have voted, and the ease that we got in interest rates, has obviously outweighed the fiscal contraction that came from the $60 billion to $100 billion of tariffs that have been imposed.”
It says a lot about how much influence low interest rates can have on the economy that the market has been able to shrug off some of the biggest tariffs seen since the end of World War II. If the trade war issue is resolved in time for the 2020 election, the Trump administration would no doubt attempt to frame that as a win, which might be enough to convince voters in key swing states. Regardless of where you fall on these issues, it’s pretty clear the three drivers identified by Jones are some of the most important factors affecting the market today.
Read more here:
- Why Buffett’s Berkshire Hathaway Bought Stocks in the 1970s
- Howard Marks: This Behavior Characterizes Almost Every Bubble
- What Is a Sustainable Growth Rate?
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