With outgoing Goldman CEO Lloyd Blankfein clearly in a whimsical mood these days and happy to moonlight as a talk show host, in today’s “Talks at Goldman Sachs”, the hirsute CEO of the world’s biggest incubator of central bankers interviewed hedge fund investing legend Paul Tudor Jones.
After a brief conversation about the early days of Jones’ career, the conversation turned toward distortions in modern capital markets – of which there are plenty as Blankfein’s own top trader warned over the weekend – which Jones said will likely trigger the next recession and attendant market crash, a far more pessimistic assessment than his CNBC interview last week when he told Andrew Ross Sorkin to expect a melt-up spike in stocks before the end of the year.
As Jones unveiled his view of how derivatives markets are masking the true extent of the debt in present the financial system, his commentary sounded surprisingly similar to famous permabear Albert Edwards, as he leveled the blame squarely at central bankers for creating “dubious”, “unsustainable” asset prices.
Early in the discussion, both men joked about how they were turned down for jobs at Goldman early in their careers: “what is it with these Goldman guys? They’re so stuck up,” Blankfein joked, prompting a smattering of laughs in the audience.
Then Blankfein couldn’t help but ask: “Do you see a lot of excesses in the current market?” to which Jones answered in the affirmative, saying that compared with history, real interest rates are so unbelievably low, that clearly the current monetary policy regime is “just crazy.” In a way, history is repeating itself, as Jones compared the Fed’s interventionist policies to a period of “manipulation” in the 1950s and 1960s that made investors accustomed to low real rates…before the dawn of stagflation hammered markets and the US economy.
But this time around, much of the danger is balled up in the derivatives market, which Jones blamed for February’s “volocaust.”
“That one week in February that was derivative-inspired. Some of the greatest financial crises of the last 30 years…they all are derivative inspired because that’s where all the leverage is”, PTJ warned, echoing Warren Buffett’s famous “weapons of mass destruction” analogy.
“Right now, when you look at any asset price, you have to be thinking that this is a highly dubious sustainable price. First and foremost, I don’t think that the way monetary policy is conducted is sustainable over time. If you think of history, the normal real 10-year rate is 200 basis points and right now we’re probably negative 30 or 40…the normal real short-term rate is probably 120 basis points and we’re probably negative 40 right now…so interest rate policy is crazy right now…you know rates aren’t sustainable.”
When asked about his long-term view on asset prices, Jones was clear: prices are going down:
“We’re gong to be at 4% this year, add a half a percentage point every year, we’ll be at 7% in three years…you look at The prices of stocks, real estate everything…you know in the long run we’re going to need to mean revert to a real rate of interest with a normal term premium that’s existed for 250 years…and that probably means that the price of assets will go down in the very long run.”
There was better news for the “medium term” when PTJ says “we’re going to be pouring lighter fluid on a fire…we’re going to be jacked up and ready to go.”
This is what Jones previously called the “all roided up” market.
However, as Blankfein points out, there are two problems with that. One is, you need flares, and two is you don’t have any lighter fluid left when you really need it. Asked where PTJ thinks he will be when the next recession comes – PTJ had a very scary forecast:
“The next recession is really frightening because we won’t have any stabilizers. We’ll have monetary policy which we’ll exhaust really quickly, but we won’t have any fiscal stabilizers and in 2000, the last time we were at 3.8% unemployment we had a 2.5% budget surplus.”
At which point Blankfein butts in again, pointing out that “the hope is that the rate of growth grows to the point that it solves the problem” – at which time the two men shared a laugh: “You could’ve said that to me when Reagan was president.”
Of course, while the Kafkaesque state of markets is surely good for a laugh today, we are not so sure the two billionaires will be laughing when the “frightening recession” finally comes.
Watch the full interview below:
Paul Tudor Jones: The price of the market is ‘highly dubious’ right now… the next recession will be frightening https://t.co/AIsE8WKvAy
— Sam Ro (@bySamRo) June 18, 2018