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Monday, 04 July 2022 12:30 GMT

Paul Tudor Jones: Fed Is Facing One Of The Most Challenging Periods In Its History

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Following is the unofficial transcript of a CNBC interview with Billionaire Investor & Robin Hood Foundation Co-Founder Paul Tudor Jones on CNBC's“Squawk Box” (M-F, 6AM-9AM ET) today, Tuesday, May 3rd. Following is a link to video on

Fed Is Facing One Of The Most Challenging Periods In Its History, Says Paul Tudor Jones

ANDREW ROSS SORKIN: And of course, the Federal Reserve kicking off its latest policy meeting today. The central bank widely expected to raise interest rates by 50 basis points double the amount that many expected just a few weeks ago. That move along with COVID lockdowns in China and the war in Ukraine has spooked investors and led volatile markets this spring. Joining us right now to talk about all of this and so much more, legendary investor Paul Tudor Jones. Paul is co-Chairman and Chief Investment Officer at Tudor Investment Corporation. He's also of course the founder of the Robin Hood Foundation. We should say that next Monday, Robin Hood is hosting its annual benefit to raise money to fight poverty in New York City. For the past two years, the organization has provided more than $340 million in relief and support for New Yorkers living in poverty and was so very important during this pandemic. Paul, it's great to see you this morning, especially ahead of this meeting in Washington. I'm curious if you could either be a fly on the wall but maybe more importantly a whisper, a Fed whisperer. What would you be telling Jay Powell right now?

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PAUL TUDOR JONES: Oh, I'd say looking for, look for another job. I think this is one of the most challenging periods ahead for the Federal Reserve Board in its history and its certainly something that we're, I don't know if we've ever navigated anything like this. Certainly not in your lifetime or Becky's lifetime with the other codger Joe on this group. He probably remembers it like I do because I think he's my age. But we've just never seen anything like this since the 70s. So it's, it's really uncharted waters. I like to think of it as a crosshatch ocean. You know how normally in the ocean you'll have one swell that moves one direction. Occasionally you'll get a situation where you have one swell moving in one direction and then another swell coming cross hatching it creates this impression of squares in the ocean. So imagine trying to navigate that when you're in a boat where you're dealing with the swell this way and this way and this way and this way, and that's what we've got right now.

SORKIN: And what is the the captain of your ship, that you're the captain of it, how are you navigating it meaning to the extent that you're setting up your portfolio to try to get around these swells, what are you doing?

JONES: It's really hard. Normally I've got a lot of very strident ideas on things. Again, it's really hard. I'll give an example. So if you look at how much Financial Conditions Index is tightened just in the last month, the only other times that it's tightened this much and just to remind everyone Financial Conditions Index is a composite of the stock market, the dollar, credit spreads. And it's a very good indicator of the general strength of the overall economy, a good proxy for it. So it's moved so much in the last month, the only other two times I think it exceeded it were in Lehman Brothers in 2008, as well as in March of 2020. The other times since they began calculating that index back in 1980 was '81 and '82 right after the crash of '87, right after 9/11. I think twice in 2002 towards the bottom of the bear market, and then three times in 2008 and then March of 2020 during the pandemic so, excuse me, so every one of those instances are all associated with cuts, Federal Reserve Board cuts within 24 days on average. Literally, some of them within two or three days. Now all of a sudden we've got the same kind of reaction in the markets, which is clearly a risk off, credit spreads have blown out. Stocks are down 13% in the year and the dollar's up significantly. All that normally has provoked or invoked a Fed response of cutting rates and yet, we're probably the cusp of 200 basis points arises in race by mid-September so it's it's it's uncharted territories where we're going and—

SORKIN: But do you, do you look at that poll and say to yourself that a recession is coming? Do you say everything's on sale I gotta buy things? Do you say that I gotta short this market? I mean, what's the what, I know you say you don't have a strident view, but you must be telling—

JONES: Well I mean look, clearly you don't want to own bonds and stocks. You start with that. It's going to be very, very, a very negative situation for either one of those asset classes. Right? You can't think of a worse macro environment than than where we are right now for financial assets. And, again, one of the reasons I think maybe the biggest differentiator between now and those other periods over the past 40 years is look at the level of overvaluation that we were both in rates as well as as in stocks. So that's one reason why even with this tightening in financial conditions, we've still, the Fed still probably has to raise rates to get inflation under control. Heck, we had CPI greater than 8%, maybe it comes down to 4% this year, maybe it comes down to 3% if they stay the course and stay tight in 2023. If you've got inflation greater than 3% on average, your purchasing power declines, cuts in half in 13 years. It's why I wish we could go back to those halcyon days of sub 2% inflation when you didn't have to worry about the value of your money. You didn't have to worry about what you were doing with regard to pay raises and you didn't have to worry about a hole pricing and a variety of things that all of a sudden become that much more important. And trying to again just have a normal business that you didn't have to to have to think about when inflation is 3% and higher and you don't have to think about when inflation is 2% and under. I think the biggest lesson that we've all learned certainly, central banks have learned with experimentation they did in 2019, 2020 with average inflation targeting is that be careful what you ask for. Sub 2% Inflation is a much better problem to have than inflation above 2%. It's very difficult to calibrate once it escapes like it has now that's the scary part for Jay Powell is the genie's out of the bottle and we've seen in history when the genie's gotten out of the bottle, it's really really hard to put it back in there. So no, I wouldn't want to I wouldn't want to be in his seat right now.

SORKIN: But but if you don't want to own bonds and you don't want to own stocks, what do you want to own? You want to own, you want to own oil? Is this a commodities play for you? What's the—

JONES: So again, you put me in a tough spot because I don't want to be the purveyor of gluten. And if we look at the 70s, there was virtually nothing that you could own that had a positive return. Gold did a round-tripper, commodities did a round-tripper, stocks pretty much went nowhere, bonds, and, you know, have negative returns over that period. So I think we're in one of those very difficult periods where simply capital preservation is, I think the most important thing that we can strive for I don't know if it's going to be one of those periods where you're actually trying to make money because again, just look where we are right now. We've got negative 5% long real rates that's unprecedented. We've only seen that two or three times in history. One was at the end of World War II then twice in the 70s, one was in '74, and one was '78. You just, again, I keep coming back to the 70s because it's the only other comparable period that we're in right now is a really, really challenging time for virtually anything. It was, it was a fantastic time for macro, for my business. You had rollercoaster rides all the time, where you pretty much ended up back in the same spot quite often. So if there was a strategy that I would want to employ right now, if someone put a gun to my head, I'd say simple trend following strategies, they're not too popular today. They haven't worked really that well for the past decade. They didn't work when central banks were at zero rates. They'll probably do really well I think in the next five or 10 years because we're probably going to be in one of these stop start patterns with central banks. Remember, they've got they've got these clashing things. Inflation, inflation on the one hand, slowing growth on the other and they're going to be clashing all the time. So I think we had four different Fed chairs during the 70s because no one could get it right between growth and inflation and they tried everything right we that's when we tried wage, wage and price controls which didn't work. We tried that for a period of time. And then finally you had to bring in the closer Paul Volcker to just absolutely crush the economy in the middle of another inflationary binge in '79 and it's I don't know if we'll get to that point. But I think there's huge volatility, huge volatility probably straight ahead.

JOE KERNEN: We had buttons Paul. We had buttons, win buttons, whip inflation now buttons, and for the record, you are quite a bit older than I am.

JONES: But I look so much prettier though.

KERNEN: A matter of months. You're a matter of months older than I am, and I resemble that remark at codger too so I'm on the record, I do resemble that you would say that. Paul, I just want to ask you quickly then because you've been positive about crypto and Bitcoin and in an environment like this where it's obvious these are speculative assets benefiting from all this free money, how on earth can you not look at Bitcoin and say, what am I thinking? This could be a giant, speculative bubble and then my question therefore is, is it a symptom of this giant bubble or is it an antidote or an answer to what caused the bubble in the first place?

JONES: Joe I just gotta tell you, my third daughter says, is that man going to annoy you again? Why does he always annoy you? And—

KERNEN: Have I annoyed you?


KERNEN: She just reads it I think.

JONES: No, she she she says, he always asks you the hardest questions, is he going to do that again.

KERNEN: This is not hard, is it. Actually, this, here's what I was going to start out by saying, if you ignore Paul Tudor Jones, ignore him at your own peril. And you may not always be right but you and Druckenmiller, it's I mean, there's there's not many guys like you. So I mean, I really want to hear your answer on this because I'm bullish on Bitcoin. I don't see how I can be.

JONES: Yeah. So first of all, thanks for the question. It's a great question. Here's what I see. I see this generational divide and it's, it's, it's a digital divide. And unfortunately, Joe, you and I are probably on the other side of it, though I think we're both scrambling as fast as we can to understand it. If you look and I see it all the time in our quant groups, I see it all the time in my kids' friends, if you look at the smartest and brightest minds that are coming out of colleges today, so many of them are going into crypto, so many of them are going into the internet 3.0. It's hard not to want to be long crypto because of the intellectual capital, just the sheer amount of intellectual capital that's going into that space and clearly, if you think about the ultimate dream of crypto, it's a borderless internet right where all of a sudden, you have blockchain as the verification code to allow anyone on the internet to instantly connect because the blockchain verifies who they are and then that opens up just huge possibilities. Clearly, central banks and central governments are not going to necessarily be huge fans of that, particularly when it comes to using crypto as a medium of exchange. That's the number one thing that's holding it back is the fact that you're not going to get buy ins from governments because they lose the ability to control the creation and the supply of money. Having said that, in a world where we're starting to de-globalize and breaking down and actually probably go in reverse, that ability to have the borderless internet, that ability to have, to have a store of value outside of necessarily having your money to nominate whether it's in rubles or wan or dollars, it becomes very attractive. So I've got my modest allocation to crypto. I have a trading position on top of that, that goes from fully invested to zero and I'd say right now I'm modestly invested and I would, I would think that it's going to have a a bright future as we roll through these rate hikes at some point in time, a lot of it depends on what our central bank does. A lot of it depends on how serious we are about fighting inflation. I kind of think that when we get down to it, and that might be September, could be November I mean, we can easily be at 2.5% rates in September. Right? That's just 50 a meeting for four meetings. That'll be a different world. You'll now have, you know, now the cost of owning crypto, gold and other inflation hedges will be, will be more significant and it'll be interesting to see whether that's enough to quell inflation. If not, they're gonna have another leg higher or if the Fed stops short, you're gonna get another leg higher in inflation. Just one divergent comment, I was at dinner last night with the head of a really big conglomerate in the States and they're an energy, they're known as an energy company, but they have just a multitude of investments and he made two really important points. One was they're not investing in energy because the ESG concerns are so great that it just makes them want to stay away from that space, and they can't get credit because banks don't want to fund that because of ESG concerns. So I thought, well, I thought that was very telling it makes me a lot more constructive on on oil and commodities than I was before. I heard that, he also mentioned because they have some businesses in Russia, that the lagged impacts of inflation are just now really starting to manifest themselves. So much of what we saw at year end with rising wages, supply chain issues, they're actually just now starting to push through and will continue to push through over the course of the next couple of months. So if you look at the history of inflation, there's a hysteresis effect when there's a big lagged effect of it. So I think we're not going to see clearly inflation's not accelerating, it's decelerating. But I think it's going to be much harder to tame than we think and it can take much longer, and it's going to be much more challenging for financial markets as a result, and if we stopped short, like we did in the mid-70s, remember, we had inflation balls and '70 another one that looks just like now the end of '73 beginning of '74, they, the Fed hiked enough to put us into recession, late '74 and then they stopped and then we got that massive inflation bulge in the latter half the decade. And I again, you're gonna have to really watch what central banks do here. How serious are they about truly killing inflation?

SORKIN: Hey Paul, you mentioned ESG. You started JUST Capital, wanted to ask you about the headline of the morning around the country which is this draft opinion that would effectively strike down Roe versus, Roe v. Wade, and how you think business is going to react to it and how if in fact it goes through how business should react to it? We've already seen companies around the country speak out on lots of different social issues in certain cases paying to have their employees go to other states for these things, for abortions and the like. This is an issue where 70% of the country is apparently when you look at the polls on the other side of where the Supreme Court is and what kind of pressure companies are gonna have from their own employees and also from customers?

JONES: Well, I have to admit, I haven't had a chance to really form an opinion on that. I don't mean to duck the question. I hope they don't overturn it on a personal basis. I haven't had a chance to really get my head around how companies should react. I keep thinking that that's much more of a personal issue. Yeah, I don't want to try to comment on that just yet. I hope they don't do it. That would be my personal opinion. I look at—

SORKIN: Let me just ask you—

JONES: One thing, can I just say one thing? The one thing that I see if you want to define it and again, I say this with my Robin Hood hat on, if you want to define poverty in America, easiest way to do it is to point, is to find a single female, head of a family, one paycheck earner and trying to support a family. If you wanted to solve poverty would do everything we could to encourage a two parent family with two paychecks supporting a family so I've always thought that that's our goal to actually beat poverty. So I want to make sure that a child comes into a loving situation where they have everything that's going for them, two caring parents, and that's kind of the way that I look at the whole thing. We just got to encourage that as much as we possibly can because that's how you'd beat poverty. It's that simple.

SORKIN: What's your reaction though, it may be more broadly to what's happened for example in Florida, Governor DeSantis taking aim at Disney clearly over their position about his position we're seeing, we're seeing companies as we said, speak out on these social issues but then in many cases, have some kind of political retribution that actually has a business impact and how you think businesses are going to react as a result of that now.

JONES: It's, it's again, I'm torn on this issue because on the one hand, I keep, I know that businesses need to be involved certainly on a variety of issues such as making sure that their employees most important of course, is making sure that their employees are living above the poverty line and paying a wage above the poverty line. But I know from our polling at JUST that there's a whole host of issues that Americans think that companies should be talking about. It's and again, I look at the fight between Disney and the governor there and their arguments, there are some arguments on both sides of the issue. Again, forgive me, I'm just not, I'm not informed enough to really speak to it that much.

SORKIN: Let me ask you a final question which is something you're very informed about which is Robin Hood, this foundation that you that you started so many years ago and has done so much remarkable work for the city of New York. The big benefit coming up next week. If there was one thing you could do with Robin Hood now, what would it be?

JONES: I think we just got to keep on doing what we're doing. The benefit next week, our centerpiece is going to be on childcare. Boy since the pandemic, we've lost 1,500 childcare centers in New York City and they're just so so important and the reason they're important is a working mother, a single parent mother has to have a place to take her child so she can go earn that paycheck to get her family out of poverty and childcare centers. We know the benefits of early childhood. Here's here's an interesting fact that I didn't know, you can forecast prison beds, incarceration rates 15 years from now by the number of third graders that can't read in a county and the reason why is because 90% of a child's development, cognitive development is done by the age of five. So childcare is so important because you have these great places where kids can aggregate and that's where they socially develop and so many of their, their their so many of their mental faculties are developed during those socialization, those developmental programs. So we think that childcare has a nine to one payoff for every dollar contributed. You get nine times, a kid that doesn't go to childcare is probably going to be something like 33%, 33% fewer earnings than in for the rest of their lifetime than a kid that does go to childcare. So our benefit next Monday night, we got an unbelievable benefit. We've got John Legend, Charlie Puth. We've got John Mulaney and we've got two or three phenomenally big announcements and to quote the, my favorite line from one of my favorite movies that Joe will remember,“This could be the greatest night of our life.” But we're not getting into the death mobile from“Animal House,” we're gonna get into the fun mobile at Robin Hood filled with hope. It's gonna be awesome. And we've got a bunch of really wonderful surprise announcements that I think will be big for New York City and I hope everyone can go to and contribute or buy a ticket and come. It's going to be a beautiful night of rejuvenation I think.

SORKIN: Paul, we commend you on all the good work you're doing. You gave us a lot to think about with the markets this morning. I, I know that we're gonna be talking about a lot of it and we appreciate you joining us this morning. Good luck next Monday.

JONES: Thanks so much. Have a great day.

SORKIN: Thanks, you too.


Updated on May 3, 2022, 11:04 am


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