The Breakdown - Paul Tudor Jones: 'It's Hard Not to Want to Be Long Crypto Because of the Intellectual Capital'

Starting point is 00:00:00 The great monetary inflation thesis, which has been so wrapped up with Bitcoin and Tudor Jones coming to Bitcoin, was predicated on what was validated to be a pretty dead on assessment of a coming secular shift in the macroeconomic landscape and the potential challenges of the Fed's response to it. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io. near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, May 3rd, and today we are checking in on our old friend

Starting point is 00:00:41 Paul Tudor Jones. Before that, a couple housekeeping notes. There are two ways to listen to the breakdown. You can listen on the CoinDesk Crypto Podcast Network feed, which features the breakdown as well as other great shows, or you can listen on the breakdown-only feed. The Coin-desk feed comes out in the afternoon, and the breakdown-only feed comes out in the evening. Wherever you listen, if you're enjoying it, chuck a subscription our way, leave a rating, leave a review. And of course, if you want to get into the conversation in a deeper way, come join us on the Breakers Discord.

Starting point is 00:01:15 You can find a link in the show notes. Lastly, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. So this is sort of our Fed meeting preview show today, but we're going to come at it through the lens of Paul Tudor Jones. For those of you who aren't familiar, PtJ is from a crop of hedge funders of the era of Julian Robertson and Tiger that we talked about the other day. He started the hedge fund that he's still investing out of in 1980. Where Jones really started to become known was for predicting 1987's Black Monday crash. Earlier that year, he had said, there will be some

Starting point is 00:01:53 type of a decline without a question in the next 10 months, 20 months, and it will be earth-shaking. It will be saber-rattling. Basically, he and his team had spent a ton of time analyzing 1929 market crash data and got convinced that something big was coming. Now, a few weeks before Black Monday, the Tudor Corporation got aggressively short, trading way against the market. As we know, the market was kind of blindsided, and by the close of business on October 19th, the market had dropped 22% in a day. It was the largest percentage drop ever at the time, so big, in fact, that TV stations had to redraw their graphs to lower the limits. Tudor Jones pocketed approximately $100 million from the crash and got a reputation for being super savvy that would follow him.

Starting point is 00:02:40 Now, unlike many of his contemporaries from that era, he has actually stayed investing in the market. Interestingly, he didn't do the thing like Michael Burry where he just became a perma bear, even though he had made such a huge amount on that short trade. Tudor still manages billions of dollars, 44.6 billion to be exact. And to stay that relevant in finance for a long time is something of an accomplishment. So where Paul Tudor Jones intersects with our story is, of course, exactly two years ago. The world had shut down due to COVID. Big investors were all incredibly bearish. But Robin Hood type traders were already getting in there and starting to reverse the trend. Their bet, of course, was that the Fed and central banks around the world would do anything it took to write the market.

Starting point is 00:03:25 In that context, Paul Truder-Jones came out with what they called the Great Monetary Inflation thesis. It started, COVID-19 is a one-of-a-kind virus that has triggered a one-of-a-kind policy response globally. The depth and magnitude of the economic drop-off took modern monetary theory or the direct monetization of massive fiscal spending from the theoretical to practice without any debate. It has happened globally with such speed that even a market veteran like myself was left speechless. Just since February, a global total of 3.9 trillion, 6% of global GDP, has been magically created through quantitative easing. We are witnessing the great monetary inflation, an unprecedented expansion in every form of money, unlike anything the developed world has ever

Starting point is 00:04:07 seen. Now, part of why this write-up was influential is that it was something of a clarion warning about future inflation. Remember, there had been a lot of inflation prognosticators after the global financial crisis hit. And when that didn't come to bear, at least not in the ways that they expected in consumer price inflation, there were many who took the lesson from that to be that we were unlikely to see inflation

Starting point is 00:04:32 in the wake of this round of quantitative easing either. Tudor Jones was not among that group. He wrote, Context matters, and the post-pandemic recovery may be different from the GFC aftermath. First, an austerity movement similar to the one that swept the Tea Party to prominence in the 2010 U.S. midterm elections

Starting point is 00:04:49 is very unlikely to emerge. The opposite forces are at play today as growing income inequality breeds populism. Second, the bank-centric GFC induced a one-time paradigm shift in banks' preference for liquidity, later enforced through regulatory changes. As a result, only a small share of the Fed's massive injection of high-powered money was relent in the banking system. M2 never grew by more than 10% a year, even after subsequent rounds of large-scale asset purchases by the Fed. Effectively, banks' preference for liquidity in the need to rebuild their capital cushions quash the money multiplier. While the multiplier has recently started to fall, in a crisis, banks are wary to lend to potentially insolvent borrowers, and, in fact, start building provisions for loan losses. This time, banks

Starting point is 00:05:31 entered the crisis in a stronger footing, and policy is more squarely aimed at putting liquidity directly in the hands of businesses and households shielding, to some extent, banks from losses. As such, the chance of a large fall in the multiplier as seen in the aftermath of the GSC is now smaller. What Tudor Jones is pointing out here is that the way the money supply actually increases functionally is by banks loaning more money out. Loans effectively put money into the system by allowing people to do more things with their credit. He's effectively saying that unlike last time around, banks came into this crisis in a much better state, meaning that they were unlikely to slow down lending as much, meaning that the mechanism of turning QE-type injections into

Starting point is 00:06:16 real money and real spending in the economy was likely to stay intact. He goes on, the issue is whether a large monetary overhang in the recovery phase will eventually stoke consumer price inflation. To answer this question, we need to ask how reasonable is it to expect that in the recovery phase, the Fed will be able to deliver an increase in interest rates of magnitude sufficient to suck back the money it's so easily printed during the down swing. As we'll see, a year later, the Fed wasn't really interested in doing that. Finally, there are other reinforcing considerations to fear a resurgence of inflation down the line. The pandemic has exposed the vulnerability inherent in global interdependence and stoke tensions between the U.S.

Starting point is 00:06:55 and China. There may come a tipping point when a breakdown in global supply chain spills over to goods prices, undoing two decades of disinflation attributable to globalization. The reason I point all of this out is that while we tend to deal with the Bitcoin dimension of these big picture power shifts on this show, the great monetary inflation thesis, which has been so wrapped up with Bitcoin and Tudor Jones coming to Bitcoin, was predicated on what was validated to be a pretty dead on assessment of a coming secular shift in the macroeconomic landscape and the potential challenges of the Fed's response to it.

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Starting point is 00:09:18 who make their careers out of yelling at the Fed, or just generally chicken littling. in the markets. In other words, it was set up to be more influential right away. And that's where the other part of this story comes in, which is that in his firm's assessment of what to do in this type of context, Paul Tudor Jones became a bitcoiner. He writes, one thing that piqued my interest from this list of assets and that one day might be brought to prominence by the great monetary inflation is Bitcoin. Truth in advertising, I am not a hard money nor a crypto nut. I'm not a millennial investing in cryptocurrency, but a baby boomer who wants to capture the opportunity set while protecting my capital in ever-changing environments. The great monetary inflation caused me to revisit Bitcoin as an

Starting point is 00:09:59 investable asset for the first time in two and a half years. It falls into the category of a store of value and it has the added bonus of being semi-transactional in nature. It must compete with other stores of value such as financial assets, gold, and fiat currencies, and less liquid ones such as art, precious stones, and land. The question facing every investor is, what will be the winner in 10 years time. At the end of the day, the best profit maximizing strategy is to own the fastest horse. Just own the best performer or not get wed to an intellectual side that might leave you weeping in the performance dust because you thought you were smarter than the market. If I am forced to forecast, my bet is it will be Bitcoin. I truly believe that this is what

Starting point is 00:10:38 set off the institutional phase that generated the bull market in the last quarter of 2020 and the beginning of 2021. But, as I said, we're mostly talking about the Fed setup today. So fast forward to one year ago at this time, Jerome Powell, the Fed chair, was still hardcore betting on that transitory language. The idea, of course, was that this inflation was transitory, because, one, there was still a supply demand mismatch. As the economy opened up and people got outside and they wanted to buy things again, there simply weren't as many things to buy because supply chains were still getting up and running, which, too, gets to the second part of this, which was, of course, supply chains, which just had to work themselves out. Well, Paul Tudor-Jones

Starting point is 00:11:18 was not buying it. In May, he said that he had 1 to 2% in Bitcoin, and in June, he expanded on this in the context of the Fed. Talking about an upcoming meeting then, he said, If the Fed treats economic indicators with nonchalance, I think it's just a green light to bet heavily on every inflation trade. If they say, we're on the path, things are good, then I just would go all in on the inflation trades. I'd probably buy commodities, buy crypto, buy gold. Going on, Jones said, the only thing that I know for certain is I want to have 5% in gold, 5% in Bitcoin, 5% in cash, 5% in commodities. Well, as we know now, the Fed did indeed say effectively were on the path, things are good, and it wouldn't be until later in the fall that they started

Starting point is 00:12:00 to change their tune on inflation, as it became unignorable. And as the bet that they made on the language of transitory clearly proved to be the wrong one. Of course, this year has been an entirely new phase shift, and all eyes are on the Fed this week, with an anticipated 50-bases-point hike coming, the first of what people expect to be a number of such hikes. I think in many ways, the obsessive Fed watching that goes on in financial Twitter and podcasts like this, frankly, tends to put too much stock in what the small group of individual human beings can do. Is there something the Fed can do to surprise the market and get the soft landing they're going for? In other words, cooling inflation without causing a recession. Well, Paul Tudor Jones came back on CNBC this morning two years from his

Starting point is 00:12:42 great monetary inflation thesis and said, you can't think of a worse environment. than where we are now for financial assets. Clearly, you don't want to own bonds and stocks. He likened it to an ocean where the waves are coming from two sides at once. They've got inflation on the one hand, slowing growth on the other, and they're going to be clashing all the time. I think we're in one of those very difficult periods where simple capital preservation is the most important thing we can strive for. I don't know if it's going to be one of those periods where you're actually trying to make money. There is huge volatility straight ahead. inflation is much harder to tame than we think.

Starting point is 00:13:16 So that's a pretty bleak short-term prognosis from Tudor Jones, and certainly one that a lot of people are paying attention to. He also talked a lot about crypto. He said that he has a modest allocation and on top of that, a trading position that can go from fully invested to zero. That position, he said, was currently modestly invested. He said that the short term for crypto is going to be based largely on what the Fed does. We could easily be at 2.5% rates in September, he said, meaning, quote, the cost of owning crypto, gold, and other inflation hedges will be more significant.

Starting point is 00:13:48 But the more interesting thing was his long-term view of sort of the fundamentals of crypto. There are a couple of pieces of this, and the first is the larger trend of declobalization. Paul Tudor Jones said that he thinks that resistance from central banks and governments is the, quote, number one thing holding it back, because they're threatened by the borderless nature of the exchange of value in crypto. However, he also said that part of what makes crypto so attractive long term is its borderless nature in a world where globalization is rolling back. He said, in a world where we're starting to de-globalize, that ability to have the borderless internet, to have a store of value not denominated in rubles or yuan or dollars, it becomes very

Starting point is 00:14:28 attractive. Even more than that, though, he said that he saw a generational divide, that's his words, between older people and digital natives around crypto and Web 3. He joked to Squawk Boxes Joe Kernan that you and I are probably on the other side of it, but I think we're both scrambling as fast as we can to understand it. Still, he said that when he looked at young colleagues and his kids' friends, there was a common thread. Quote, if you look at the smartest and brightest minds that are coming out of colleges today, so many of them are going into crypto, so many of them are going into the Internet 3.0.

Starting point is 00:15:03 It's hard not to want to be long crypto because of the intellectual capital. Yesterday's show was about the tail of two markets, the short-term market and the long-term market. And in many ways, Paul Tudor Jones' discussion today about crypto was validating something very similar, that there is just a fundamental difference between the short-term, which is going to be based like everything else on the Fed's fight against inflation, and the long-term, which looks much brighter. So what are the actual possibilities for this Fed meeting? Alex Kruger says, quote, Max Hockishness is almost fully priced in.

Starting point is 00:15:36 The Fed can still surprise by delivering fast. or larger quantitative tightening. Dan Tapiero points out that global growth pessimism is at record lows now, validating that max hawkishness thesis. Harvard's Ken Rogoff says that he doesn't believe that the Fed can slow this by raising rates to just 2 or 3%. He said, quote, I think they're going to have to raise interest rates to 4 or 5% to bring inflation down to 2.5 or 3%. Sven Henrik and many others on Twitter meanwhile quoted this and said, has anyone done the math on what a 5% Fed funds rate would actually imply for the debt construct and the economy as a result? I think it's easy to throw out numbers, but the consequences need to be tied to some sort of reality as the entire system has been

Starting point is 00:16:16 financed by cheap money. So it seems Paul Tudor Jones' assessment that this is one of the most challenging periods for the Fed in its history is pretty dead on. I will, of course, be bringing you the updates on what happens at this week's meeting as it occurs, but for now I want to say thanks again to my sponsors, nexo.io, near and FDX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners. Come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3 and the

Starting point is 00:17:02 Metaverse and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.

The Breakdown - Paul Tudor Jones: 'It's Hard Not to Want to Be Long Crypto Because of the Intellectual Capital'

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