“If you think about where we are right now, the Federal Reserve Board is fighting something it hasn’t really seen in nearly four decades, and that is inflation. Inflation is a bit like toothpaste: once you take it out of the tube, it’s hard to put it back in, isn’t it?”
Billionaire hedge fund investor Paul Tudor Jones, founder of Tudor Investment Corporation, said investors looking to time the bottom in stocks should watch short-term Treasury yields closely.
Speaking Monday during an interview with CNBC’s “Squawk Box,” Jones said he expects stocks and bonds to continue to sink as the U.S. economy slides into recession in the months coming.
But as retail investors book losses on both their stocks and bonds, the explosion of market volatility is creating plenty of opportunities for macro traders like Jones, who tend to outperform when markets get choppy. .
“These are spectacular times for macro, and great times for macro aren’t usually good times for general investing,” Jones said.
“The macro works when everything is a little broken. That’s when you have the volatility that really suits the type of trading that I do.
Volatility soared across asset classes and markets as the Federal Reserve began the process of shrinking the size of its balance sheet by nearly $9 trillion while raising interest rates at pace. the most aggressive since the 1980s. The Fed isn’t alone, of course — dozens of central banks around the world are also raising interest rates.
The ICE BofA MOVE index, which tracks fixed income volatility, hit its highest level since 2007 late last month when it hit 158.99 before easing somewhat.
The CBOE VIX Volatility Index,
otherwise known as the VIX, or Wall Street’s “fear gauge,” climbed to 33.07 on Monday as the S&P 500 fell. The Vix level is based on trading short-term options on the S&P 500.
Currency market volatility also increased as the US dollar, the world’s most popular reserve currency, strengthened at the fastest pace in years, thanks in part to the Fed.
The ICE US Dollar Index DXY,
a measure of the greenback’s strength against a basket of rivals, has climbed nearly 18% since Jan. 1. The index rose 0.3% on Monday to 113.15.
Asked how investors should navigate the markets during a recession, Jones said he had a “playbook” that had worked in the past.
According to this playbook, Jones expects “short-term rates to stop rising and start falling” before US stocks finally bottom.
Based on this theory, Jones said the 2-year Treasury bills BX:TMUBMUSD02Y
are starting to look attractive, with yields up more than 3.5 percentage points year-to-date. Bond prices fall as yields rise.
Market strategists have been saying for weeks that movements in short-term yields have driven stocks and the dollar up and down.
See: The stock market is booming as the US dollar retreats. It’s all about obligations.
Ultimately, Jones expects the turn in Treasury yields to help usher in a massive rally in assets that have fallen as inflation rose. Even cryptocurrencies like bitcoin BTCUSD
will likely benefit, he said.
“When we get into this recession, there will be a time when the Fed stops climbing and it will either start to slow down or even at some point it will reverse these cuts, and you will have a massive rally in a variety of beaten countries .inflation trades including crypto,” Jones said.
See: Why stock investors keep falling for Fed ‘pivot’ talk — and what it’ll take to put a bottom
Jones also said he is keeping a small allocation to crypto.
“We are going to have to make budget cuts. At a time when there is too much money, something like crypto, especially bitcoin and ethereum, will have value at some point,” he said.
Stocks were on track to fall for a fourth straight session on Monday, with the S&P 500 falling 0.9%, while the Dow Jones Industrial Average DJIA
lost 0.5% and the Nasdaq Composite COMP
led the market lower with a 1.3% drop in the early afternoon.