Billionaire hedge fund manager Paul Tudor Jones, noteworthy for predicting the 1987 stock market crash, is becoming increasingly worried about the direction of the U.S. economy and stock market. "The next recession is really frightening because we don’t have any stabilizers," he said on June 18, as quoted by MarketWatch. “We’ll have monetary policy, which will exhaust really quickly, but we don’t have any fiscal stabilizers," he added. Jones was participating in a Talks at GS event, interviewed by Goldman Sachs CEO Lloyd Blankfein. Former Federal Reserve Board Chair Ben Bernanke also warns that the U.S. economy is likely to nosedive, once the massive dose of fiscal stimulus delivered by federal tax cuts and spending hikes wears off. (For more, see also: Ben Bernanke: Economy Is Headed 'Off The Cliff'.)
“The next recession is really frightening because we don’t have any stabilizers." Paul Tudor Jones
"If you look at any asset price, you have to be thinking this is a highly dubious, sustainable price," Jones remarked, in a video clip of his talk provided by Yahoo Finance. This inflation of asset prices has been driven by an interest rate policy from the Federal Reserve that he characterized as "crazy" and "unsustainable." In particular, Tudor Jones noted that quantitative easing put in motion by the Fed in response to the 2008 financial crisis has produced real interest rates that not only are far below long-term historic norms, but also actually negative.
Tudor Jones elaborated: "You look at prices of stocks, real estate, anything. We're going to have to mean revert to a normal real rate of interest with a normal term premium that's existed for 250 years. We're going to have to get back to that. We're going to have to get back to a sustainable fiscal policy and that probably means the price of assets goes down in the very long run."
Looking back at history, he noted that "zero real rates in the '60s set us up for the '70s," which were marked by economic stagnation and rampant inflation, a scenario that came to be known as stagflation. In other recent interviews, Jones has issued similar warnings about asset bubbles and ill-timed fiscal stimulus. Despite his longer-term bearishness, Tudor Jones expects both stock prices and interest rates to rise through the end of 2018. (For more, see also: Tudor Jones: Stocks, Rates Will Rise in 'Crazy' Market.)
The 9-year bull market faces a "day of reckoning." David Spika
'Day of Reckoning'
David Spika, chief strategic investment officer at GuideStone Capital Management, told CNBC that the stock market faces a "day of reckoning." He noted: "We've gone through a nine-year period where gains were largely predicated on liquidity produced by the central bank, both here in the U.S. and central banks overseas. We've never seen this before. We've never seen this long a period of central bank stimulus." The inevitable result, in his view: "Just as central bank stimulus was positive on stocks on the way up, we think central bank tightening will have a negative impact as we go over the top there."
"The risk is that it actually ends up [turning] into a generalized trade war between the United States and the rest of the world." Nouriel Roubini
'Moment of Fragility'
Spika also cites the rising specter of a trade war as a reason for worry, given that it could "drive up inflation, [and] impact economic growth negatively." Mainstream economics holds that trade restrictions inevitably hamper economic growth, and may produce a recessionary trigger in the current environment. As Nouriel Roubini, professor of economics and international business at New York University's Stern School of Business told CNBC: "The risk is that it actually ends up [turning] into a generalized trade war between the United States and the rest of the world," Roubini said. "But the problem is not that trade practices of the rest of the world are causing these trade deficits. The economic policies of the United States are behind it."
Roubini observed that growth is slowing in the euro zone, the U.K., Japan and in emerging markets. Meanwhile, he added, "The two key elements of global growth have remained the U.S. and China, and now the U.S. and China are on the verge of a trade war." Toss in the fact that "the Fed keeps on tightening," and this leads him to conclude that "this is a moment of some degree of fragility."
Jacob Frenkel, chair of JPMorgan Chase International, has called escalating trade spats between the U.S. and China "the greatest danger today to the world economy." Robert Shiller of Yale University, a Nobel Laureate in Economics, has issued a dire warning that a trade war risks producing worldwide economic "chaos." (For more, see also: Stocks On 'Collision Course With Disaster,' Face 40% Drop.)