- Paul Tudor Jones recommends investors buy commodities and "hard assets."
- "We are setting the stage for accelerating inflation, just as we did in the late '60s," Jones says in an interview with Goldman Sachs.
- He predicts a rise in inflation and a surge in the U.S. 10-year Treasury yield.
Paul Tudor Jones, the legendary hedge fund manager who called the October 1987 crash, shared his bold market views in a rare interview with Goldman Sachs sent to the bank's clients.
Jones blasted President Donald Trump's corporate tax cut and Congress' recent budget spending bill. He forecasts inflation will rise as a result. The investor went on to recommend investors stay in cash or buy commodities and "hard assets."
The hedge fund manager rarely talks to the press, which makes this interview, which was sent to the bank's clients Wednesday, that much more of an opportunity to get a revealing look at his investing thought process.
Here are the highlights below from the note obtained by CNBC:
The tax cut:
"We're in the third-longest economic expansion in history. Yet we've somehow managed to pass a tax cut and a spending bill, which together will give us a budget deficit of 5% of GDP—unprecedented in peace time outside of recessions … I think the recent tax cuts and spending increases are something we will all look back on and regret."
"This reminds me of the late 1960s when we experimented with low rates and fiscal stimulus to keep the economy at full employment and fund the Vietnam War. Today we don't have a recession, let alone a war. We are setting the stage for accelerating inflation, just as we did in the late '60s."
"Bonds are the most expensive they've ever been by virtually any metric. They're overvalued and over-owned. … And if you can't tell by now, I would steer very clear of bonds. ... The markets disciplined Greece for its budget transgressions; it's just a matter of time before they discipline us. I think that time could be starting now with 10-year Treasuries rising to 3.75%, and 30-years to 4.5%, by year-end, and those are conservative targets."
What investors should own:
"I want to own commodities, hard assets, and cash. When would I want to buy stocks? When the deficit is 2%, not 5%, and when real short-term rates are 100bp, not negative. With rates so low, you can't trust asset prices today."
Technology sector's impact on inflation:
"On technology, what I've seen during this disinflationary period is the concentration of economic power into a few corporate hands. Once they have cleared the playing field of their competitors, they could ratchet up prices to decompress margins. So I am not sure these technological disruptions will continue to bring disinflation."
On central banks:
"Central banks love to look in the rearview mirror. They typically operate by waiting for the most obvious moment they can to make a decision to fight yesterday's battles. Heck, the ECB hiked rates in July 2008! It is why price targeting is such a bad idea in rate decisions, as is its first cousin, gradualism."
On low interest rate policy:
"Sitting where we are today, this grand experiment with negative real rates might seem successful: We have the strongest economy in 40 years, at full employment. The mood is euphoric. But it is unsustainable and comes with costs such as bubbles in stocks and credit. Navigating these bubbles will be one of the most difficult jobs any Fed chair has ever faced."
New Fed chair's battlefield:
"Let me describe to you where I think Jerome Powell is right now as he takes the reins at the Fed. I would liken Powell to General George Custer before the Battle of the Little Bighorn, looking down at an array of menacing warriors. On the left side of the battlefield are the Stocks—the S&P 500s, the Russells, and the NASDAQs—which have grown, relative to the economy, to their largest point not just in US history, but in world history. … Look to the middle and there waits the army of Corporate Credit, which is also larger than ever relative to the economy, as ultra-low rates have encouraged it to gain in size, stature, and strength. … And then on the right are the Foreign Currency Fighters, along with the Crypto Tribe, an alternative store of value that only exists because of the games central banks are playing. … All of these forces have been drawn to the battlefield because of our policy experiment with sustained negative real rates. So Powell looks behind him to retreat. But standing there is none other than Inflation Nation, led by the fiercest warmongers of them all: the Commodities."
"In my view, higher volatility is inevitable. Volatility collapsed after the crisis because of central bank manipulation. That game's over. With inflation pressures now building, we will look back on this low-volatility period as a five standard-deviation event that won't be repeated."
A spokesman for Tudor said the firm has nothing to add beyond what was in the interview text.
— CNBC's Patricia Martell contributed to this report.