This Is What Paul Tudor Jones Does When He Wakes Up At 3am Every Morning

Traditionally one of lowest-profile hedge fund managers, this morning legendary trader Paul Tudor Jones allowed CNBC to interview him from his trading floor in a broad discussion covering everything from North Korea, to Fed policy, to what keeps him up at night and what he is investing in, to the risks facing the current economy, to socially responsible investing and ETFs.

Among the numerous topics covered, several stood out. The first was what PTJ would do if he were Fed chair. The answer: an overnight hike of interest rates by 150bps: “it’s where they should be” because “we’ve got 3.8% unemployment and negative real rates. And we have a 5% on the way to a 7% budget deficit. The last time that we had the unemployment rate where it is now was 2000. And we are running a budget surplus at that time of 2.5%. We were talking about bond scarcity at that time.” The result is the cause for the stock bubble that Jones has complained about in the past:

“we’ve got fiscal policy that literally came from another galaxy and we have monetary laxity. And that brew is what has got the stock market so jacked up.”

And while the Fed continues to raise rates on the short-end, the one it can control, the real question is what happens to the long-end: flattening or steepening. Here PTJ is adamant: fireworks are coming:

I think we’ll see rates move significantly higher beginning some time late third quarter, early fourth quarter.  And I think it will interesting because I think the stock market also has the ability to go a lot higher at the end of the year.

At this point Becky Quick asks why a spike in long-term rates would lead to a surge in stocks, and understandably so. PTJ’s answer: thanks to the Fed and fiscal policy, the market is now “roided out of its brains” just like Arnold Schwarzenegger, and while it’s not sustainable, there will be another last minute melt up across the market, to wit:

So Arnold, right, the guy just looked flipping amazing in it, but he was roided out of his brains. Right? And so that’s not sustainable. So here we’ve got negative real rates. We’ve got interest rates that again look unlike anything that we’ve seen in the stock market top before and we’ve got a 6% budget deficit during peace time with 3.8% unemployment. So yes I think this is going to end with a lot higher prices and forcing the Fed to shut it off. And we’ll probably go through the same thing. It’s an old story. We’ll probably play it again.

In other words, markets surge until the Fed has no choice but to crash the party at which point it crashes down.

Here Andrew Ross Sorkin had an interesting question, asking Jones “when you wake up at about 3:00 in the morning and check the London markets every morning, what are you thinking about over the past couple of weeks? What’s been the issues that have consumed you at that hour?”

The answer:

At that hour, I think the first thing I’d do is I had this running debate whether I’m going to look at the prices first or I’m going to look at my P&L first, because I’m always expecting. So I’m just thinking “oh lord, just please let the be a slow transition. Nothing dramatic — that while I’ve been sleeping something really bad has happened.” so sometimes I look at the prices and sometimes I go look straight at my P&L. So that’s the first thing I do.

What I’m thinking at that point in time is has there been any significant change that I was anticipating when I went to sleep? And it’s a good day when there’s no – when there’s nothing significant. If it — another time, another thing that you’re always doing is — particularly if you’ve got global positions is what economic releases have come out that are going to be impacting your prices? So I’m always thinking about that.

And according to Jones, his nights are about to get much more nervous because he expects a volatility explosion to hit shortly. Asked by Sorkin what is his single best (and worst) investment right now, the hedge fund legend responds that “I’m literally as light as I’ve been. I can’t remember how many years it’s been since I’ve been this light” meaning “I don’t have a lot of macro positions on right now because I think the reward risk in a variety of things has diminished at this point in time. I like to have significant leverage positions when I think there’s an imminent price move directly ahead.”



What exactly is PTJ waiting for?

His answer: “there’s a lot I’m waiting for. I think the third and fourth quarter are going to be phenomenal trading times. I have a feeling we’re getting ready to go into a summer lull.

Of course, by phenomenal trading times, one usually suggests a surge of volatility, which tends to have a negative impact on risk assets; here Jones – best known for timing the 1987 crash – predicts that a crash may come, but not immediately. In fact, when asked what he thinks will happens in Q3 and Q4, Jones answer nothing short of a repeat of 1987, only instead of a drop in stocks, he expects a melt up first in both stocks and yields… which will then be followed by a crash once the Fed ends the party:

I think you’ll see rates go up and stocks go up in tandem at the end of the year. If you ask me to kind of think of some analogy, I would pick 1987 in the U.S., not necessarily saying we’re going to have a crash but a time when you had a budget deficit, and you had stocks and rates going up for a period of time. 1999 in the U.S., that one also jumped to my mind when things got crazy the end of the year. 1989 in Japan. Again, they had strong fiscal monetary pulses that worked their way through the stock market. So I could see things getting crazy particularly at year end after the midterm elections. I could see them get crazy to the upside.

Finally, here is what Paul Tudor Jones believes will end the party:

We’ve got buybacks right now that are kind of, speaking of Arnold Schwarzenegger – they’re like the Terminator, they don’t stop. And we’re retiring equity as a percentage of total market cap and at unprecedented rate this year. Rates have got to go up enough to either shut the economy down and overwhelm from real money selling like we had ’07 – those buybacks — or to make it economically less compelling for companies to issue debt and buyback stock. This is real simple.

Indeed it is, and is precisely what we said in February in “Day Of Reckoning” Nears As Goldman Projects A Record $650BN In Stock Buybacks.”  The question is what interest rate will finally kill the Terminator unit known as Buyback 1 Trillion (2018 edition). But ultimately it really depends on just one thing:

“I think this is going to end with a lot higher prices and forcing the Fed to shut it off.

* * *



Paul Tudor Jones’ key CNBC interview excerpts below:

Jones on key market drivers:

Sorkin: let’s look more broadly just for a moment just as a macro trader in terms of the way you look around the world, the way you look at growth around the United States. You’ve talked about a potential bubble emerging. Are you still in the same place?

Tudor Jones: I think that there’s three things that are kind of driving the world today, and they all start and end here in the United States. The rest of the world — I can’t remember a time when things are as kind of boring as they are. Right? Western Europe somewhat static policy there, even though we’re going to talk about the end of QE. Japan’s been relatively unimaginative in what they’re doing in the economic situations. Same thing with China. You have some idiosyncratic stories in emerging markets, Brazil and Mexico and Turkey. But where the action is is here in the United States and that’s ‘cause you’ve got three things that are kind of pushing the prices and all the asset classes. And that’s first fiscal policy. And really fiscal profligacy. Monetary policy. And then, of course we have — and I would call it more of a trade irritant than a real trade problem. Even though you have to monitor that one closely because it can escalate.

On the threat of trade war

Sorkin: are you worried about a trade war?

Tudor Jones: you know – again, you have to put it in perspective, right? If we just look at our four biggest trading partners, we have a simple way to average a tariff of about 6%. We have one of 3.5% – or 3.5%. So there’s a 2.5% gap in unfairness, right? If what the president was trying to do was just to normalize the tariffs, it’d be 2.5% on we have a trillion and a half dollars of exports — it’s a $40 or $50 billion problem in an $87 trillion world economy. The danger would be that he’s just not trying to equalize the playing field and equalize the tariff discrepancy. The danger is that he’s trying to do away with the bilateral trade deficits country by country. And there’s a problem with that. Because we’re running a structural budget deficit. If you just balance the accounts that — typically the way that balances is you run a trade deficit to do that. So on the one hand we had this massive budget deficit that the administration and congress has engineered. On the other hand, he’s trying to do away with bilateral trade deficits and the accounts don’t balance. So it could be dangerous if he’s focusing not just on trying to get free and fair trade but to actually do away with that bilateral trade deficit. Because it’s actually jamming a square peg in a round hole.

On the Fed far behind the curve:

Sorkin: The Fed is expected to raise interest rates later this week. If you were running the fed right now, what would you do?

Tudor Jones: think rates would be 150 basis points higher right now. And that’s – it’s where they should be. We’ve got 3.8% unemployment and negative real rates. And we have a 5% on the way to a 7% budget deficit. The last time that we had the unemployment rate where it is now was 2000. And we are running a budget surplus at that time of 2.5%. We were talking about bond scarcity at that time. And now we have the exact opposite/ so we’ve got fiscal policy that literally came from another galaxy and we have monetary laxity. And that brew is what has got the stock market so jacked up.

On what he fears when he wakes up.

Sorkin: when you wake up, you wake up at about 3:00 in the morning and check the london markets every morning. What are you thinking about over the past couple of weeks? What’s been the issues that have consumed you at that hour?

Tudor Jones: At that hour. I think the first thing I’d do is I had this running debate whether I’m going to look at the prices first or I’m going to look at my P&L first, because I’m always expecting. So I’m just thinking “oh lord, just please let the be a slow transition. Nothing dramatic — that while I’ve been sleeping something really bad has happened.” so sometimes I look at the prices and sometimes I go look straight at my p&l. So that’s the first thing I do. What I’m thinking at that point in time is has there been any significant change that I was anticipating when I went to sleep? And it’s a good day when there’s no – when there’s nothing significant. If it — another time, another thing that you’re always doing is — particularly if you’ve got global positions is what economic releases have come out that are going to be impacting your prices? So I’m always thinking about that.

On his best/worst investment and how he is timing the next move:

Sorkin: Which single best investment that’s working for you right now? And single investment that maybe hasn’t worked for you the way you thought?

Tudor Jones: probably right now, in my position, I’m literally as light as I’ve been. I can’t remember how many years it’s been since I’ve been this light.



Sorkin: meaning you’re most in cash?

Tudor Jones: meaning I don’t have a lot of macro positions on right now cecause I think the reward/risk in a variety of things has diminished at this point in time. I like to have significant leverage positions when I think there’s an imminent price move directly ahead. I don’t like having positions and is probably a fault of mine at times just because I think ultimately interest rates are going up or I think ultimately the dollars going to go higher. I’d much prefer to be leveraged right at that point when they move the most so I’m not subject to unexpected events  overnight or over the course of weeks or months.

Sorkin: is there something you’re waiting for?

Tudor jones: There’s a lot I’m waiting for. I think the third and fourth quarter are going to be phenomenal trading times. I have a feeling we’re getting ready to go into a summer lull.

Sorkin: summer lull? And what do you think is gonna happen in the third and fourth quarter, though?

Tudor Jones: oh, I think we’ll see –– I think we’ll see rates move significantly higher beginning some time late third quarter, early fourth quarter.  And I think it will interesting because I think the stock market also has the ability to go a lot higher at the end of the year.

Why he sees a spike in yields and stocks, and why the US economy reminds him of 1987:

Becky Quick: You made a couple of comments about the broad market earlier. You said you think we may be headed into a summer lull right now but that you do think in the third and fourth quarter it will get more interesting and interest rates, you think are going to go much higher. You also said you thought stock prices have the potential to go much higher at the end of the year too. And I just wondered if you could tell us why. Because normally when people say interest rates are going to go up sharply, that that could act as gravity on stock prices. Why do you think they both go up?

Tudor Jones: Let’s just put things in perspective where interest rates are. We have negative rates. If you go look at what has shut off the stock market historically, it’s been real rates on the something in the neighborhood of like 200 basis points. We’re negative right now. So when you’ve got a lot of tech companies growing at 20% per year, who cares about a hundred basis points? Who cares, right? So I think you’ll see rates go up and stocks go up in tandem at the end of the year. If you had to — if you ask me to kind of think of some analogy — I would pick 1987 in the U.S., not necessarily saying we’re going to have a crash but a time when you had a budget deficit, and you had stocks and rates going up for a period of time. 99 in the U.S., that one also jumped to my mind when things got crazy the end of the year. 1989 in Japan. Again, they had strong fiscal monetary pulses that worked their way through the stock market. So I could see things getting crazy particularly at year end after the midterm elections. I could see them get crazy to the upside.

The market as Arnold Schwarzenegger: “all roided up”:

Sorkin: crazy to the upside. But you’ve been talking about a bubble in the equity markets as well on the downside.

Tudor jones: All right. You’re too young because you’ve never seen this movie “Pumping iron”…

Sorkin: This is the Arnold Schwarzenegger movie. I know the movie.

Tudor Jones: So Arnold, right, the guy just looked flipping amazing in it, but he was roided out of his brains. Right? And so that’s not sustainable. So here we’ve got negative real rates. We’ve got interest rates that again look unlike anything that we’ve seen in the stock market top before and we’ve got a 6% budget deficit during peace time with 3.8% unemployment. So yes I think this is going to end with a lot higher prices and forcing the fed to shut it off. And yes, the reason I picked a couple of those years is if you look at the stock market relative to gdp, we’re at levels that historically in some other countries led to a blowoff and some type of economic contraction. And we’ll probably go through the same thing. It’s an old story. We’ll probably play it again.

Sorkin: but what are you looking for as the top then? Or the tipping point?

Tudor jones: We’ve got buybacks right now that are kind of, speaking of Arnold Schwarzenegger – they’re like the terminator, they don’t stop. So — and we’re retiring equity as a percentage of total market cap and at unprecedented rate this year. Rates have got to go up enough to either shut the economy down and overwhelm from real money selling like we had ’07 – those buybacks — or to make it economically less compelling for companies to issue debt and buyback stock. This is real simple.

Free "dummies guide" to trading options

Did you know trading options can actually be safer and more profitable than buying and selling stocks? Video and plain English training guide reveals how to get started tonight. 100% free.

Download now.

You May Also Like

About the Author: TTR Admin