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Key Words: Inflation ‘single biggest threat’ to markets and ‘society in general,’ says investor who called stock-market crash in 1987

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“‘The No. 1 issue facing Main Street investors is inflation, and it’s pretty clear to me that inflation is not transitory. It’s probably the single biggest threat to, certainly, financial markets and I think again, probably, to society just in general.’”


— Paul Tudor Jones, Tudor Investment Corp.

It’s safe to say that billionaire hedge-fund manager Paul Tudor Jones isn’t impressed with the current Federal Reserve lineup as policy makers grapple with inflation pressures.

In an interview with CNBC, Jones said he feared the Fed was employing what may be the most inappropriate monetary policy of his lifetime. The Fed moved to average inflationary targeting in a bid to lift stubbornly low inflation. The Fed won that battle “in a blowout,” Jones said. Now the problem is that high inflation is likely to remain stubborn and potentially “much worse than what we fear.”

Fed policy makers led by Chairman Jerome Powell are “inflation creators not inflation fighters,” he said.

Jones won fame for predicting the stock-market crash in 1987.

Jones said the demand side of the equation, which is “$3.5 trillion greater than it normally would be” is “just sitting in liquid deposits that can go into stocks or crypto or real estate or can be consumed…It’s waiting to be utilized, which is why inflation will not be transitory.”

A large cost-of-living increase for Social Security recipients as well as the military will be “more fuel to the inflationary fire,” he said. Meanwhile, rising wage pressures will be another driver as the economy faces structural issues that won’t be resolved by low interest rates or quantitative easing.

The Fed has signaled it’s prepared to begin scaling back its monthly asset purchases before year-end, while policy makers have emphasized that rate increases won’t immediately follow.

The U.S. consumer-price index rose 5.4% year over year in September, compared with 5.3% the prior month, remaining at a 30-year high and more than double the Federal Reserve’s 2% average target.

Jones said a repeat of the Fed’s 2013 playbook, when it began scaling back asset purchases, wouldn’t be sufficient in the current environment. In 2013, unlike now, commodity prices were falling.

The S&P 500
SPX,
+0.38%

has rallied more than 20% in 2021, finishing Tuesday less than 0.4% away from its record close from Sept. 2, while the Dow Jones Industrial Average
DJIA,
+0.44%

is up more than 16% year to date. Treasury prices have fallen over the course of 2021, recently pushing the 10-year yield
TMUBMUSD10Y,
1.646%
,
which moves in the opposite direction of price, back above 1.6%. The yield traded shy of 1.8% earlier this year amid an earlier bout of inflation worries.

The inflation threat spells doom for traditional equity portfolios split 60% to equities and 40% to bonds, he said Wednesday. But equities may remain a decent bet if inflation proves persistent, he said. Jones said investors should look to hedge against inflation pressures, including through commodities and Treasury inflation-protected securities, or TIPS.

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