The effervescent corporate credit market is going to get investors into trouble, Paul Tudor Jones said, confirming fears of a large global debt bubble.
“We’re going to stress test our whole corporate credit market for the first time,” he said today at the Greenwich Economic Forum in Connecticut. “There will be some scary instances in corporate credit.”
Jones, who is the founder of Tudor Investment Corporation, said the impact will be felt across four major asset classes – stocks, bonds, credit and real estate – all of which are trading high relative to valuation.
“Go across the landscape, you have levels of leverage that are not sustainable,” he said. “The end of this 10-year run is going to be a really challenging time for policy makers going forward.”
Jones said the fallout will be exacerbated by certain geopolitical threats facing the global financial system, such as the rise of populism and nationalism.
“We’ve always assumed we’re going to have global multilateral cooperation. That whole global circle of trust, the whole way of doing business is for the first time challenged, and has begun to be dismantled,” he said. “All of a sudden, the very foundations that got us where we are today are cracking.”
Jones speculated that the current administration’s tax reform could push the market over the edge as extensive corporate tax cuts have bolstered US growth, stiffening the Federal Reserve’s resolve to increase interest rates.
On the subject of rates, Jones predicted one more hike in December before the Fed starts thinking about a pause. Other investors said the market is only pricing in about half of the Fed’s five intended rate hikes.
“The Fed is saying we’re going to hike five times and the market is saying no way,” Pablo Calderini, chief investment officer at Graham Capital Management, said at the Greenwich conference. “There is 80% probability of a hike in December and not even two hikes predicted next year.”
Concerns over rising interest rates have mounted with solid job growth data sparking fears that the Fed may have to hike even faster than anticipated to stave off inflation. Aggressive remarks made by Fed Chairman Jerome Powell in October triggered a stock market selloff that caused severe casualties among long/short equity hedge funds.
Tudor Jones warns of a corporate credit bubble and changing world order on Absolute Return.