Billionaire hedge fund legend Paul Tudor Jones used a quote from Shakespeare to sound the alarm on a financial bubble

Billionaire hedge fund legend Paul Tudor Jones used a quote from Shakespeare to sound the alarm on a financial bubble

Paul Tudor Jones

REUTERS/Eduardo Munoz

Paul Tudor Jones, founder and chief investment officer of Tudor Investment Corporation, speaks at the Sohn Investment Conference in New York, May 5, 2014.

  • Paul Tudor Jones, the billionaire founder of hedge fund Tudor Investment Corporation, said he feels like he's in his 20s again.
  • In a letter to investors, he identified a number of concerns about the market. These include a mistaken central bank obsession with an inflation target of 2%, a growing deficit, and a stock market that's at a record size relative to the economy.
  • "'Cry 'Havoc!', and let slip the dogs of war' seems an apt description for this moment," he said.
  • Jones' hedge fund has struggled in recent years. His flagship fund fell by 2.2% last year.

The market chaos of late is enough to turn a veteran investor young again.

In a February 2 letter to investors, Paul Tudor Jones, the billionaire founder of $7 billion Tudor Investment Corp., said he feels like he's in his 20s again. That's after a difficult three years, where macro volatility has been almost non-existent, and his fund has struggled.


"Being first a commodities and then macro trader in the late 70s and early 80s was simply an incredible time to ply the craft," he said. "The opportunity set was so large as the marker was coming due for the previous misjudgments of errant central banking."

According to Jones, those days may be on the horizon again.

"2018 brings with it, in this writer's opinion, a new fact set and a field of dreams for macro," he said.


In his letter, he identified a central bank obsession with an inflation target of 2%, a target he said is misguided. Jones said that the long-term average of inflation in peacetime since 1790 is 1.3%, making the 2% target too high.

Jones said in the letter:

"This digression on inflation measurement is relevant because if targeting inflation becomes a central bank's sole focus, then by definition, when inflation is measured to be low, central banks must resort to unorthodox policies to create inflation by lowering real rates enough to stimulate the economy, as they have been doing globally for almost a decade now."


The comment on inflation is especially relevant, following a dive in global stock markets, kickstarted by a plunge in the Dow Jones Industrial Average on Friday. That was in part triggered by higher than expected wage growth, fueling fears of higher inflation and faster rate hikes with it.

In an interview with Business Insider's Pedro da Costa on Tuesday, Minneapolis Fed President Neel Kashkari said he wasn't reading too much into the wage growth numbers. Kaskari dissented against all three of the Fed's interest-rate hikes in 2017, in part because he wanted to see greater progress toward the 2% inflation target. He said:

"Was it a one-time repricing because of minimum-wage increases and some of these bonuses? Or is it something more sustained? And are inflation expectations in fact moving toward our target? Because the risk is that inflation expectations are anchored at something less than 2%, and that would be a challenge for us."


Jones also took issue with the deficit in the US, and its growth in light of President Trump's recent tax legislation. The federal government is planning to borrow nearly $1 trillion this year, almost double the amount of fiscal 2017, in part because of the tax cuts passed by the Trump administration, per The Washington Post.

"This is all simply breathtaking," Jones said in his letter. "It is incredible that at full employment we have passed a tax cut that will push our deficit to 5% of GDP. Can you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing."

He added:


"If I had a choice between holding a US Treasury bond or a hot burning coal in my hand, I would choose the coal. At least that way I would only lose my hand."

Treasury yields surged on Friday last week, hitting a four year high of 2.85%, before buying kicked in on Monday as stocks plummeted, with the Dow Jones Industrial Average dropping the most ever on a point basis. On Tuesday, the Treasury 10-year was at 2.71%, according to data from Markets Insider. Bond yields move inversely to price.

Jones closed his letter with a quote from William Shakespeare's Julius Caesar, where Mark Anthony said "Cry 'Havoc!', and let slip the dogs of war." At this point in the text, Anthony is predicting war in the aftermath of Caesar's murder.


"Whether it be the stock market's record size relative to our economy, the record level of US corporate leverage,
or soon-to-be-seen rapidly increasing inflation, this experiment of keeping real policy rates below zero with an economy that is expanding above potential-a more than three sigma event relative to history-will have consequences," Jones said.

"We are replaying an age-old storyline of financial bubbles that has been played many times before."

Tudor's flagship fund, which runs a macro strategy, gained 4.8% in January, according to a person close to the firm. More recent figures were not available. Last year, the flagship fund fell by 2.2%.