Paul Tudor Jones: “Fed Is Really Caught Between A Rock And A Hard Place”

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Following are excerpts from the unofficial transcript of a CNBC exclusive interview with Tudor Investment Corporation Founder & CIO Paul Tudor Jones on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Monday, October 10, 2022. Following is a link to video on CNBC.com:

Paul Tudor Jones: We Are Getting Ready To Deploy Our Recession Playbook

Jones On Fighting Inflation And Recession

PAUL TUDOR JONES: And if you think about where we are right now, the Federal Reserve Board is fighting something it hasn’t seen really in almost four decades, which is inflation. And inflation is it’s a bit like toothpaste.

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Once you get it out of the tube, it's it's hard to get back in, right? And so the Fed is, the Fed is furiously right now trying to wash that taste out of their mouth and they're doing it by raising interest rates and of course, there's a big calibration question here.

Just how much are they going to raise them? How much do they have to raise them and what's the consequence of that? And typically, for when you have an extreme event like inflation we have right now, the only way to to get it back in the tube is to raise interest rates to a level.

Powell’s already talked about pain I take that as a metaphor for a recession. And if we go into a recession, that has really negative consequences for a variety of assets.

Jones On The Fed Being In A Hard Place

JONES: Well, the Fed is really caught between a rock and a hard place. You've got wage inflation at five and a half percent that has to come down to three and a half percent for us to get inflation back to two percent, right?

There's that one, one to one and a half percent productivity above the normal two percent inflation, which means that again, inflation is gotta get back to three and I mean, excuse me wage inflation has to get back to three and a half percent.

And that's really, really hard to do. Right. If I just think about the coal increases we have for Social Security last year.

You know, at our company, we're just kind of beginning to talk about what are going to be our wage increases for next year and so for that compensation level that most Americans are in or certainly that tier, everyone is kind of expecting us to play catch up for what they suffered this year, and they weren't compensated for at the beginning of last year in salary.

So we're looking at wage rises of five to ten percent in that kind of average American comp level. So, it's really challenging for the Fed if they're truly going to hit the two percent target and I think they should. There’s so many long term—

ANDREW ROSS SORKIN: So you think he should continue to, keep going, 75 basis points makes sense to you? You think he should lighten up? What's your—

JONES: Well it’s pay me now or pay me later. So, if they, if they don't keep going and we have high and permanent inflation, it just creates, I think more issues down the road.

We went through the greatest period of global prosperity, the greatest period of reduction poverty rates globally when we had two percent inflation on average in most of the developed world, and it was a real struggle to get there.

Jones On Two Precent Inflation

JONES: I'm saying that more likely than not. If we're going to have long term prosperity, you have to have a stable currency and a stable, in a stable way to value it.

And so yes, you have to have something two percent and under inflation in the very long run to have a stable society. So, there's going to be short term pain associated with long term gain, yes.

Jones On Recession Playbook And Massive Rally

JONES: We're probably getting ready to go through the, the recession playbook, more likely than not. Sometime, I don't know whether it started now or whether it started two months ago, you always find out and you're always surprised about when recession officially starts. But I'm assuming we're going to go into one. There's a specific playbook around that. And—

SORKIN: What is that playbook?

JONES: Well, so that playbook is most recessions last about 300 days from the commencement of it. The stock markets down say ten percent. The first thing that will happen will be short rates will stop going up and will start going down before the stock market actually bottoms.

So that's why you could argue that two-year rates here may have some value, or somewhere through here. And term premium gets put back into variety of assets into bond markets, into stock markets and that's obviously what's happening.

So, you're seeing multiples compressing the stock market as they should, and you're starting to see bond market sell off because again, term premiums being put back into them. So, I would say when we get into that recession, there will be a point when the Fed stops hiking.

There will be a point when it starts to either slow down or even at some point it'll reverse those cuts and when that happens, you'll have just, you'll probably have a massive rally in a variety of beaten down inflation trades.