Investment legend Paul Tudor Jones has revealed that he is bearish on stocks and bullish on gold and bitcoin (btc).
The two main reasons he cites are the possibility of an escalation of the conflict between Israel and Hamas and poor fiscal conditions in the United States. While Tudor’s comments did not include an inverted yield curve, it is another important factor for investors to consider.
Geopolitical conflicts exacerbate macro uncertainty
In a recent interview with stocks-given-geopolitical-risks-weak-us-fiscal-position.html?qsearchterm=paul%20tudor%20jones” target=”_blank” rel=”noopener nofollow” data-amp=”https://www-cnbc-com.cdn.ampproject.org/c/s/www.cnbc.com/amp/2023/10/10/paul-tudor-jones-says-its-hard-to-like-stocks-given-geopolitical-risks-weak-us-fiscal-position.html”>CNBCJones mentioned factors he is monitoring regarding the Israel-Palestine conflict before deciding that market uncertainty has reduced. His general thesis is that if things get even worse, a risk-averse sentiment could prevail in financial markets.
Despite the potential for geopolitical tensions to rise in the near term, all major US indices have posted gains over the first two trading days of this week. If Jones is right, this rally will likely be short-lived.
The yield curve remains deeply inverted
Historically, one of the biggest predictors of recession has been the yield curve. Every recession since 1955 has been preceded by a investment of the curve between the yields of 2- and 10-year Treasury Bonds.
In July, the 2s/10s yield curve for US Treasuries hit a low of 109.5 basis points (BPS). This level has not been seen since 1981. While this reversal has sharpened since then, things still look bad from the perspective of shorter duration Treasuries.
1- and 3-month U.S. Treasury bills currently yield about 5.5%, while 2-year notes yield about 4.96%. The 10-year bond yields 4.65%, which means that the 2/10 curve is inverted by 31 bp.
A flatter yield curve compresses banks’ margins because it limits their ability to borrow cash at lower rates while lending at higher rates, which can lead to restricted lending activity and a resulting economic slowdown. It also means investors are less optimistic about the near-term future of the economy as they sell shorter-duration debt, causing yields to rise.
See related: Binance freezes accounts linked to Hamas at Israeli request
The Federal Reserve’s attempt to combat inflation by raising rates at the fastest pace in modern history has also played a role. Higher rates create additional stress on the banking system, which this year alone has seen three of the four largest collapses in U.S. history, with the bankruptcies of Signature Bank, First Republic Bank and Silicon Valley Bank.
Some market observers speculate that the Federal Reserve will have to start lowering rates in early 2024 to avoid further economic fallout, even if inflation has not fallen to the level desired by the Fed.
Looser monetary policy and its corresponding increase in liquidity tend to be bullish for crypto markets. If rates fall heading into the 2024 bitcoin halving cycle, it could set the stage for significant market moves.
bitcoin and gold remain preferred safe havens
Amid all this chaos, gold and btc have remained resilient.
btc has fallen 2% in the last two trading days, remaining stable for the last 5 days, while gold has risen 2% during the same time.
Paul Tudor jones summed up his position on gold and btc, saying:
“I can’t love stocks,” he said, “but I love bitcoin and gold.”
The billionaire has officially said that he maintains a 5% allocation to btc and that he considers gold and btc to be safe haven offerings in times of uncertainty. Tudor first announced that it made a 1% allocation to btc in May 2020 during the COVID pandemic lockdowns.
After all, Paul Tudor Jones might be right. Time will tell if his bearish call for stocks holds true, or if risk-on sentiment somehow prevails despite recent events.
This article does not contain investment advice or recommendations. Every investment and trading move involves risks, and readers should conduct their own research when making a decision.
