Billionaire hedge fund manager Paul Tudor Jones believes the US economy is near or already in the midst of a recession as the Federal Reserve rushed to contain rising inflation with aggressive rate hikes.
“I don’t know if it started now or two months ago,” Jones said Monday on CNBC’s “Squawk Box” when asked about recession risks. “We always find out and we’re always surprised when the recession officially starts, but I assume we’re going into one.”
The National Bureau of Economic Research is the official arbiter of recessions and uses multiple factors in determining them. The NBER defines recession as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months”. However, the agency’s economists don’t even claim to use gross domestic product as the primary barometer.
GDP fell in both the first and second quarters and the first reading for the third quarter will be released on October 27.
The founder and chief investment officer of Tudor Investment said there is a specific recession playbook to follow for investors navigating the treacherous waters, and history shows that risky assets have more room to decline before bottoming.
“Most recessions last about 300 days from the start,” Jones said. “The stock market is down, let’s say 10%. The first thing that will happen is short-term interest rates stop going up and start falling before the stock market actually bottoms out.”
The famed investor said it is challenging for the Fed to bring inflation back to its 2% target, partly due to significant wage increases.
“Inflation is a bit like toothpaste. Once you take it out of the tube, it’s hard to get it back in,” Jones said. “The Fed is furiously trying to flush that taste out of their mouths… If we go into a recession, it really negatively impacts a variety of assets.”
To fight inflation, the Fed is tightening monetary policy at its most aggressive pace since the 1980s. The central bank raised interest rates by three-quarters of a percentage point for the third time in a row last month and promised more rate hikes would follow. Jones said the central bank must continue to tighten to avoid long-term pain for the economy.
“If they don’t go through and we have high and permanent inflation, that will only create more problems in the long run,” Jones said. “If we want to have long-term prosperity, you need to have a stable currency and a stable way to value it. So yes, you need to have something at 2% and below inflation in the very long run to have a stable society So there’s short-term pain associated with long-term gain.”
Jones rose to fame after predicting and profiting from the stock market crash of 1987. He is also the president of the nonprofit organization Just Capital, which ranks public U.S. companies based on social and environmental statistics.
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