(Bloomberg) -- Paul Tudor Jones said inflation is about to appear โwith a vengeanceโ and may force the new Federal Reserve chair to accelerate interest-rate hikes.
The hedge fund manager said policy has focused on a โlow inflation problemโ and years of near-zero rates amid economic expansion will have โpainfulโ consequences. Policy makers should have been more aggressive in tightening policy and โrejecting the fiscal impropriety associated with this most recent tax cut,โ he said.
โWe are replaying an age-old storyline of financial bubbles that has been played many times before,โ Jones, founder of Tudor Investment Corp., wrote in a Feb. 2 letter to clients. โThis market's current temperament feels so much like either Japan in 1989 or the U.S. in 1999. And the events that have transpired so far this January make me feel more convinced than ever of this repeating history.โ
Jerome Powell was sworn in Monday as chairman of the Fed, inheriting a U.S. economy in its third-longest expansion on record, with unemployment and inflation near historically low levels. U.S. stocks have tumbled amid concern that quickening inflation will force interest rates higher.
Jones, in the 10-page letter seen by Bloomberg, hinted at a parallel between Powell and former Bank of Japan Governor Yasushi Mieno, who took to the helm in December 1989 amid a boom driven by speculative investment in land and stocks. Within a week, he began raising interest rates.
Mieno โwas ultimately blamed for pricking a bubble over which he had no control,โ Jones said. โWhile the messenger always gets the blame, the real fault lies at the feet of the policymakers of the late 1980s who allowed systemic imbalances to build up in the Japanese stock and real estate markets.โ
Read More: Missing for a Decade, Inflation Fears Infect World Stock Markets
Ken Griffin, founder of Citadel, said on Feb. 2 that he's concerned about quickening inflation globally amid โgeneral complacencyโ around the risks of such a shock. He said his $27 billion hedge fund was โcarefully positioning for the possibility that inflation surprises to the upside.โ
Jones and Griffin's views on inflation run counter to those of most economists. Unemployment has dropped to 4.1 percent from 10 percent at the height of the last recession without provoking any significant jump in wages or overall prices. At the Fed, not a single policy maker is predicting inflation higher than 2.1 percent in 2018, or 2.3 percent in 2019.
When President Trump talked about tax reform during last week's State of the Union address, Jones said, he didn't mention that Treasury auctions will increase this year from the current projection of $583 billion to almost $1 trillion.
โIt is incredible that at full employment we have passed a tax cut that will push our deficit to 5 percent of GDP,โ Jones said. โCan you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing.โ
Jones founded Tudor in 1980 and became one of the famed macro managers trading everything from currencies to commodities. In recent years he has posted middling returns and saw clients pull billions of dollars from his hedge fund. Jones was among the macro managers who staged a comeback last month, with his main fund climbing 4.8 percent after losses last year.
Jones described central bank policies that led to low volatility as the โphoto negative of my career starting out and an archenemy of my style of trading.โ He said 2018 brings โa new fact set and a field of dreams for macroโ and cited the Bible: โTo everything there is a season and a time to every purpose.โ Jones said the passage was written for his trading style as the days of betting on rising markets may be numbered.
Patrick Clifford, a spokesman for Greenwich, Connecticut-based Tudor, declined to comment.
--With assistance from Christopher Condon
To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net.
To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Vincent Bielski
ยฉ2018 Bloomberg L.P.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories โ On NDTV Profit.
