PTJ & the Parallel's to 2018.

Macro Perspectives: Wed 16 Jun 2021

The conclusion of a big Fed meeting comes today afternoon.

Billionaire Paul Tudor Jones, one of the great global macro traders of all-time, called it the most important Fed meeting in Jay Powell's career.

Why? Because the Fed has been ignoring economic data and ignoring market signals. So, for an institution that is supposed to be data-dependent, instead of responding to the data (clearly high growth and inflationary data), the Fed seems to be anticipating an alternative outcome - and making policy based on that anticipation.

The last time the Fed did something like this was in December of 2018. Paul Tudor Jones drew the parallel between this 2018 meeting and today’s Fed decision.

With that, we talked about this December 2018 meeting quite a bit in my notes. Let's revisit what took place…

Going into that meeting the Fed had hiked rates three times that year, and they had systematically hiked seven times since the 2016 election. This was all despite tame inflation, and despite a slow moving economic recovery (an economy still mired by the effects of the Great Financial Crisis). Both stocks and oil prices had already been in a sharp decline, signalling fear in the markets that the Fed had already gone too far (i.e. was choking-off economic momentum). The Fed ignored the signals and mechanically raised rates again.

The bottom fell out in stocks.

By December 26th, the S&P 500 was down 18% for the month of December. That led to a response from the U.S. Treasury (i.e. intervention), Mnuchin (Treasury Secretary) called out to major banks and the President's Working Group on Financial Markets (which includes the Fed) to "coordinate efforts to assure normal market operations."

That became the turning point that put a bottom in stocks - within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed's rate path - signaling a pause.

We have the opposite environment this time - we have signals of complete madness and speculation in markets, runaway prices in some markets, and yet the Fed has assured us that they are holding the line (that the price madness is all temporary).

As Paul Tudor Jones said, they seem to be valuing their perceived consistency and predictability over making the right policy moves. With that, we should expect them to keep singing the same tune, which should only pour gasoline on the fire of asset prices.

What will the ultimate outcome be? It seems very likely that the Fed will ultimately have to chase prices higher, with a very aggressive tightening campaign that will crush the economy (at some point).