Paul Tudor Jones is one of the legendary hedge fund investors who called out a 1987 crash and delivered fantastic results to the investors. He is the founder of Tudor Investment Corporation, which has been operating since 1980.
One of the things he says investors should focus on is short-term Treasury yields to determine the market bottom in stocks. Jones stated that he anticipates that as the American economy enters a recession in the coming months, equities and bonds will continue to decline although Joe Biden claims the opposite.
"Inflation is a bit like toothpaste. Once you get it out of the tube, it's hard to get it back in. The Fed is furiously trying to wash that taste out of their mouth," says @ptj_official. "If we go into recession, that has really negative consequences for a variety of assets." pic.twitter.com/504lAqd8Oi
— Squawk Box (@SquawkCNBC) October 10, 2022
While regular investors are reporting losses on both their stocks and bonds, the surge of market volatility is opening up many doors for macro traders like Jones. The latter often outperforms when markets are bad. Of course, interest rate hikes are putting enormous pressure on both of these assets, but some know how to use them for their own benefit.
Related article: Cathie Wood – economy and a critique of the Fed
“These are spectacular times for macro, and great times for macro are generally not great times for general investment. Macro works when everything is broken a bit. That’s when you have the volatility that’s really best for the type of trading that I do,” Jones said.
The Federal Reserve has begun shrinking its $9 trillion balance sheet, which caused massive volatility in markets. Rate hikes that are occurring this year are the most aggressive since the 1980s. Moreover, other central banks are joining Fed by raising rates at a fast pace. This caused the CBOE volatility index VIX to climb high many times this year.
What does Jones recommend?
Jones responded that he has a “playbook” that has been successful in the past when asked how investors should handle the markets during a recession. Before U.S. equities find a bottom, Jones anticipates that short-term rates will stop moving higher and start going down.
“When we get into that recession there will be a point when the Fed stops hiking and it starts to either slow down, or even at some point it will reverse those cuts, and you’ll have a massive rally in a variety of beaten down inflation trades including crypto,” Jones said.
Jones asserted that this argument, which is supported by the fact that yields have increased by more than 3.5% since the start of 2022, is making 2-year Treasuries TMUBMUSD02Y, 4.291% look more appealing. As a result, bond yields rise as prices drop in these cases.
Also read: Will ads save or destroy Netflix?
In the end, Jones anticipates that the Treasury yield turning point will contribute to the start of a significant rebound for assets that have fallen as inflation has risen. Even Bitcoin and the whole crypto market should gain as a result. Basically, all risk-on assets are expected to rise when the Treasury yields turn around.
Even though markets are in a very tricky position for investors, Paul Tudor Jones pointed to an intelligent fact on how to be patient and wait for things to turn around. This crisis is just history repeating itself, and it will end sooner or later like it did in the past.