One day after Goldman Sachs finally capitulated on its call for four rate hikes next year (one hike more than the Fed’s dot plot, and four more than the not-quite-one hike that futures markets are currently pricing), Paul Tudor Jones, the founder of Tudor Investment Corporation, has one-upped the bank’s chief economist, Jan Hatzius (who published a note yesterday forecasting less than a 50% chance of a rate hike in March), by becoming one of the first Wall Street titans to forecast zero rate hikes next year.
Billionaire investor Paul Tudor Jones: Fed won’t hike rates in 2019 from CNBC.
During an interview on CNBC, PTJ said the Fed is unlikely to raise interest rates in 2019 as tumbling commodity prices threaten to trigger an economic slowdown as lower prices put deflationary pressure on the US economy (already, the market is leaning toward pricing in a higher likelihood of QE4 than another rate hike).
ANDREW ROSS SORKIN: So you don’t think they’re going to hike in 2019?
PAUL TUDOR JONES: No, no, no. I don’t think they’re going to hike in 2019.
ANDREW ROSS SORKIN: Really? I mean, by the way, the market still expects them to hike in 2019.
PAUL TUDOR JONES: There’s 20 basis points – there’s not that much priced in. But I don’t think they’re going to hike. No.
In fact, the market is pricing in just 11bps of hiking next year (and 13bps of rate cuts in 2020)…
But instead of the dovishness driving stocks back to record highs, PTJ believes the deteriorating economic outlook will lead to a lot of volatility in 2019. He wouldn’t be surprised to see “ten down, ten up” – meaning US stocks moving 10% higher YTD (or more) and 10% lower YTD (or lower). Indeed, that might be a conservative estimate, PTJ said.
The Fed’s forecasts can be “problematic” PTJ said because the central bank is always basing these forecasts on old economic data, which may not be “the best way to manage an economy. Instead of focusing on the data, PTJ said he looks at commodity prices as a “great leading indicator.”
ANDREW ROSS SORKIN: I also want to talk to you about what I think is a relatively bold call that you have about what the Fed may or may not do when it comes to hikes. What do you think is going to happen?
PAUL TUDOR JONES: Well, Central Banks always, generally speaking, manage by looking in the rearview mirror. So they’re always looking at data that’s old. The whole four guidance thing locks them into these intractable paths that’s difficult for them to deviate from. And that’s probably not the best way to manage an economy, but it’s — when you’re driving that many different stake holders and you have so much momentum, it’s very hard for them to change. What’s different this time is that I started out as a cotton trader. So commodities, I was trading. That was the first thing there were no financial futures or certainly no stock index futures when I first started. And all the financial futures had just begun. My point being, I always look at commodities because they’re a great leading indicator for the economy. So right now we have the Goldman Sachs commodity index down about 15% over the past 40 days. Never in the history of the Fed have we had that kind of a deflationary impulse eight days before a hike. So just within the last two months, we’ve got this incoming data. And we had this — what I think is the bellwether of the economy telling us –
ANDREW ROSS SORKIN: There’s a problem here.
PAUL TUDOR JONES: There’s potentially a problem, right? And real question, is it supply driven or demand driven? It’s demand driven. Oh, my god. It’s funny, if you just kind of go query up ‘Goldman Sachs commodity index down 15% over the past 40 days,’ and you go look at those times through history, you find it typically is happening during cutting cycles, not hiking cycles. So this is different this time. We are hiking with this really contemporaneous set of very important data telling you ‘Watch it because you could be hiking at exactly the time you should be cutting.’ So, and if I just — the only other times we’ve even been close to this was ’74. I think the GSEN was down 11% in ’97. And then December of 2015. And so in ’74, that was the — they hiked us right into a recession. And ’97, that was one hike before we ended up getting into ’98 and all the problems associated with that. And then in 2015, that was the first hike when we went to 150 basis points and we were on pause for years. So the one thing that I would say is there’s a high probability that this hike will be — assuming they hike – will be the last one for a long time.
But equity bulls can rest assured: There should still be some opportunity to the upside next year. PTJ said he would “buy the hell” out of stocks if they should fall 10% further…
ANDREW ROSS SORKIN: Which one are you betting on though?
PAUL TUDOR JONES: Well that’s why I said I think 10 up, 10 down. We’re going to be both sides. Because I don’t necessarily know just yet.
ANDREW ROSS SORKIN: But then what do you do about it, if you are going to be ten up or ten down?
PAUL TUDOR JONES: Well, I am going to –
ANDREW ROSS SORKIN: You just play the volatility.
PAUL TUDOR JONES: I’m going to buy the hell of a ten lower for sure. To me that’s an absolute lay-up. The difference between now and say December 2015 is the market has deleveraged so much, we probably — if you think of all the buy backs which we are going to have all of next year, I can’t imagine sometimes next year we won’t be up 10% or 15% next year. I can’t imagine because we still have the same buy backs we had this past year. The difference is we are walking into next year completely, totally deleveraged. And so, if we’re being honest, the markets, a lot of time, is just about herding cattle back and forth.
Referencing some of PTJ’s earlier comments about the central-bank inspired credit bubble, Sorkin asked PTJ how much he’s worried about a deleveraging impacting markets in the near term. PTJ replied that already we’re seeing rate hikes create distress in the areas of the most vulnerability around the globe – which is just one more reason to put off more hikes.
ANDREW ROSS SORKIN: But you’ve also talked about the whole system being overleveraged, talk about deleveraged.
PAUL TUDOR JONES: Yes.
ANDREW ROSS SORKIN: How much do you worry about that?
PAUL TUDOR JONES: So – so — again, and again that’s why I think we can be both sides. We probably are sitting on a big global credit bubble. And I hope I am not underestimating the potential negative impact that popping that bubble. What’s interesting about this hike is that this one, you’re seeing that the problems coming from it, or the consequences of it, you’re seeing it – where the bubbles are greatest, you’re seeing it in China domestically on the private side, you’re seeing it in Italy who has a credit bubble in terms of their public deficits, or excuse me, their public debt. So we are seeing this hike playing out in the areas of the greatest credit vulnerability, the biggest bubbles.
Though PTJ believes the Fed will almost certainly announce another rate hike on Dec. 19 (despite St. Louis Fed President James Bullard’s suggestion that the central bank should consider a delay), we imagine we’ll be hearing similar comments from other Wall Street luminaries in the near future, as the conventional wisdom regarding the pace of rate hikes continues to shift.
Because if their comments don’t hit the tape soon, they will risk falling hopelessly behind the markets’ own view:
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