Macro guru Tudor gives advice, will the "big and tragic" bill really come?

On June 11, Bloomberg interviewed Paul Tudor Jones, a master of macroeconomics. He proposed a "big and tragic bill" to address the current issues with U.S. Treasury bonds. From his sarcasm, one can see his thought process and framework for understanding the issues, and he pointed out that the market is currently pretending not to see the problems with U.S. debt. But one day, the market will react, forcing the government to balance the deficit, though no one knows when that day will come; perhaps by then he will no longer be around.

According to Tudor, if he were president, he would work closely with the Federal Reserve Chairman, with the president responsible for cutting spending and the Fed responsible for lowering interest rates, in order to reduce the deficit, as the enormous burden of compound interest is a primary source of the deficit. No wonder Trump is furious, claiming on television that Powell lacks intelligence and is engaging in politics. The public blames Trump for influencing the Fed's independence, while Trump is concerned about the massive interest expenses from rolling over U.S. debt. In short, Trump is indeed a frugal person.

Tudor said, from a historical perspective, the way to escape the debt trap is to keep real rates as low as possible, reduce the interest burden, and use overheating economic growth to pay off the debt. Perhaps the next Federal Reserve Chairman will do just that after taking office.

Paul Tudor Jones II: From Cotton Exchange to King of Macro Trading

I had AI write a brief introduction about Tudor. Paul Tudor Jones II was born in 1954 in Memphis, Tennessee. He comes from a middle-class background, with his father being a publisher of a commercial newspaper. Growing up in an environment rich in media and business, he displayed a keen perception of numbers, rhythm, and economic systems. While studying economics at the University of Virginia, Jones was not a bookish scholar; he was a boxer, a fraternity leader, and even gained admission to Harvard Business School, but ultimately chose to enter the workforce directly. He later recalled, "I didn't need an MBA; what I needed was the market."

After graduating from college, Jones secured a job as a floor trader assistant at the New York Cotton Exchange. Initially, his job was merely to help other traders with bookkeeping and passing notes, but this close-up view of market fluctuations became the starting point for developing his "market intuition." He later became an apprentice to the well-known commodity broker Eli Tullis but was fired due to a drunken absence. For many, this would mark the end of a career; for Jones, it was the true beginning of his destiny.

In 1980, at just 26 years old, Paul Tudor Jones founded his own hedge fund company—Tudor Investment Corporation. This fund focuses on global macro trading strategies, making directional bets based on the interconnected logic of global currencies, interest rates, politics, commodities, and stock market trends through futures, forex, and bond markets. Jones himself is not an investor who relies on deep fundamental analysis; he believes more in market technical patterns and emotional fluctuations. He often says, "Price is the ultimate truth." Tudor's rise to fame came in 1987. At that time, he and his team predicted a massive correction in the U.S. stock market by studying Elliott Wave Theory and market breadth indicators. He not only accurately anticipated the crash of "Black Monday," but also hedged by shorting index futures in advance and established short positions in the global macro market. Ultimately, he generated a 125% annual return for the fund that year, netting over $100 million during the stock market crash, which became one of the classic cases in hedge fund history.

In the early 1990s, Jones again correctly bet on the bursting of the Japanese asset bubble, generating an annual return of 87.4% for the fund, and was hailed as one of the "representatives of shorting the Japanese bubble." His macro trading style is known for its clear directional judgments, strict control over risk drawdowns, and keen grasp of cyclical rhythms. Under his management, Tudor consistently ranked among the best-performing hedge funds globally in the 1990s and 2000s.

In addition to his fame as an investor, Jones is also highly influential in the charitable sector. He founded the Robin Hood Foundation in 1988, focusing on alleviating poverty in New York City, and combined quantitative assessment methods to direct charitable resources to the most effective projects. He also established an education reform experiment for low-income communities in Brooklyn and founded Excellence Charter School, attempting to bridge the educational gap between races and classes.

What’s Next for U.S. Debt?

Reporter:

From the performance of the bond market over the past few weeks and months, concerns about the fiscal deficit have already been reflected. But it seems to be an old issue, nothing new. First, what are your feelings about the current deficit, and what investments will you make around this theme?

Paul Tudor Jones:

"The big beautiful bill" is truly a genius piece of brand marketing. But we must return to first principles to think about how to balance the budget; if we really want to balance the budget, we need a "big beastly bill."

If we really want to balance the budget, what would the actual budget look like? In other words, what should be the counterfactual of the big beautiful bill? If we really must balance the budget, it might not be a big beautiful bill, but rather a big beastly bill.

And at some point in the future, who knows if it will be next year, the next government, or ten years from now, there will come a day when the bond market will say "enough" to this game of "playing chicken" between the government and the market [PTJ means that the government bond market will not collapse, but the bond market will eventually collapse.]

The monstrous and tragic bill that must come will include lowering (real) interest rates, raising taxes, and cutting the federal budget, which the market definitely cannot bear. How to balance the deficit, Tudor gives his first principle answer.

Step 1: Wear the same pants as the Federal Reserve Chairman.

Paul Tudor Jones:

For example, if we need to balance the budget today—let's assume I am the president, the first thing I would do is appoint the most dovish central bank governor to lower interest expenses.

So let's assume I can reach some kind of agreement with my Federal Reserve Chairman, I plan to implement an austerity package to achieve budget balance, but I need you to significantly lower interest rates to, say, 2.5%. If you can lower the interest rate to 2.5%, and the ten-year Treasury yield goes down by 50 basis points, or even 100 basis points, that would save me about $175 billion. The current budget gap is $900 billion. This saves $175 billion, so I still need to raise the remaining $725 billion through tax increases and spending cuts. [I wonder where this $900 billion comes from? Last year's deficit was $1.9 trillion. $175 billion is the cost saved from a $35 billion debt reduction of 50bps.]

Step 2: Cut government spending by 6%.

Paul Tudor Jones:

Assuming we want to solve this problem fairly, we let the highest-income individuals bear the tax increases, as they have benefited the most over the past 30-40 years; then we make equivalent cuts in spending: 50% from tax increases, 50% from spending cuts. What would that look like?

In terms of spending, for simplicity, we could uniformly reduce all items by 6%, whether it's Social Security, Medicaid, defense spending, all spending items would be uniformly cut by 6%. This could raise about $360 billion, which is about half of $725 billion. Although pushing such a policy through Congress is very difficult. But one day the market will force you to do this. No one knows when that day will come, maybe it will happen within my lifetime.

[Here it may be assumed that U.S. fiscal spending is $6 trillion, and 6% would be $360 billion; last year it was actually $6.75 trillion, and it is expected to be $7 trillion in a few years. Here PTJ anticipates that the mess will eventually have to be paid back, and when it comes to a point of no return, taxes will have to be raised and spending cut, but the timing is unpredictable; perhaps he can keep pushing this small cart without falling over during his lifetime. Another macro veteran, Bob Citrion of Discovery Capital, predicts that if something really happens, it will be a disaster below the level of 2008.]

Step 3: Tax Increase

Paul Tudor Jones:

To raise $363 billion in tax revenue, you need to increase the top personal income tax rate to 49%; you need to implement a 1% annual wealth tax, and you also need to raise the capital gains tax rate to 40%.

How did we reach this level of debt, and why is everyone so at ease?

Paul Tudor Jones:

If we really want to stabilize the debt-to-GDP ratio, then this is what we referred to earlier as the "big beastly bill" — it may have to come true one day in the future. But again, no one knows when that day will be.

Look at Italy, France, and Japan; according to current forecasts, their fiscal situations will be worse than ours, yet they seem to be doing just fine.

That's why we've always been in a kind of wrestling match "kayfabe," we know it's a performance, but we still love watching the show. We all know that a 6% fiscal deficit is unsustainable in the long run, but right now it seems fine. In the short term, it's "okay," and it feels good to borrow like this.

In reality, expanding the debt scale is easy. Remember Trump's first term? He turned a 4% fiscal deficit into the "new normal." That was before the COVID pandemic. And now this administration has turned a 6% fiscal deficit into the "new normal."

That's our reality. So in this overall pricing structure built on unsustainable foundations, it's very difficult to make long-term investments. Because one day — it might be the bond market reacting first, or it might be the dollar having problems, who knows — when you have to face reality, and you are forced to implement the big beastly bill I just mentioned, you will know that stock valuation levels (multiples) will definitely not be like they are now.

The Most Obvious Long-Term Investment: Steepener

Reporter:

But are you sure the dollar will have problems first? You also mentioned that you are watching the yield curve.

Paul Tudor Jones:

From a long-term perspective, the easiest trade is this: you know the yield curve will eventually steepen, possibly reaching historical records. You know we will significantly lower short-term rates in the coming year. And you also know that because of this, the dollar is likely to weaken, even significantly depreciate.

Reporter:

By how much? It has already fallen 10% from its peak, or let's say 8%.

Paul Tudor Jones:

Yes, I would say that a year from now, starting today, is a reasonable expectation.

[Here the reporter interjected, PTJ was saying a 10% depreciation from now, consistent with what Bob Citrion said about an overall 20% depreciation.]

The new Treasury Secretary will be very dovish, Trump prefers loyalty + growth, Bessent is more suitable

Reporter:

You mentioned appointing the most dovish Federal Reserve chair. Jerome Powell's term will end in May 2026. We have also recently heard the president say that he will soon announce some candidates.

According to Bloomberg News reports in the past 24 hours, Scott Bessent is considered a strong candidate, and Kevin Warsh is also under consideration. If it were up to you, who do you think is most suitable to serve as the Federal Reserve chair?

Paul Tudor Jones:

Both nominations are excellent; they are both outstanding candidates. If I were the president, especially from President Trump's perspective, he is the type of person who is growth-oriented.

He values loyalty and growth. If you are loyal to him, then you are his choice; if you support growth, then you are his choice. I think he would choose a "growth-oriented" person.

From this perspective, Scott (Bessent) may fit better than Kevin (Warsh). By that time, they may have established a very close working relationship.

What does an effective portfolio look like?

Paul Tudor Jones:

We are currently constrained by finances and are in a debt trap. If you want to get out of this trap, you must implement negative real rates.

This is exactly what we did in the 1950s. If you remember, at that time the Treasury controlled various prices, and the inflation level was 5%-6%. What we implemented was negative real rates.

That is why, when you build a portfolio, you must seriously consider what kind of debt dilemma policymakers are currently facing. So, in this environment, what should an ideal portfolio look like? So far, which assets are effective?

So far, an effective portfolio may include: a portion of stocks, although if the bond market really goes wrong and affects the stock market, stocks may perform very poorly. But besides that, the portfolio should include volatility-adjusted gold, Bitcoin, stocks, etc.

This is probably the best portfolio to combat inflation. The so-called "volatility adjustment" is because Bitcoin's volatility is about 5 times that of gold. So the allocation method needs to be different.

The path out of the debt trap is clear: maintain higher inflation and lower interest rates, escape the debt trap through growth, let everyone bear the cost of inflation, but if inflation overheats, voters will force the government out of office

Paul Tudor Jones:

If I were a policymaker, I would maintain extremely low real rates, and I would keep inflation at a high level. Then, I would collect the debt tax from American consumers through "inflation tax," which means getting out of the debt dilemma by making everyone bear the cost of inflation This is exactly what Japan, the country with the most constrained finances globally, is doing right now. This strategy is effective in the short term, until you let inflation get too hot and are voted out by the electorate.

So you might enter a world where the inflation rate is between 3% and 3.5%, while the federal funds overnight rate is at 2.5%. You are deliberately trying to escape the debt trap by overheating the economy.

The reason the market isn't falling is that it knows the new Treasury Secretary will lower interest rates, but fiscal over-expansion is always a sword hanging over the stock market. Right now, whether globally or in the U.S., everyone is playing a game of delay, and currently, people feel that this "suspension of reality" is okay. But overall, if you know that a year from now, government bond yields will return to 3%, you should still be bullish on stocks.

Reporter:

Let's talk about equities again. You just mentioned that in the scenario you envision (big and beautiful), stocks would obviously perform poorly. But as of now, we see the S&P 500 index has returned to nearly 6000 points.

There has been slightly positive return year-to-date. After a strong performance in May, it seems everyone has fallen into a state of uncertainty again. If we imagine that inflation can continue to be controlled, the labor market remains relatively stable, and trade negotiations are ongoing, what is your current baseline judgment on the stock market?

Paul Tudor Jones:

To be honest, a year ago, I never thought the bond market would tolerate that "big beautiful bill." I didn't think it was possible. I thought the market would rebel. I thought the "bond vigilantes" would come out to fight back, but they didn't show up.

Several factors are at play.

First, we know that in 12 months, interest rates will drop significantly due to the Federal Reserve's changeover. Just last week, Trump saw— I forgot whether it was ADP or some other data— and he said he wanted to lower rates by 100 basis points. So we know his stance. We also have an idea of what kind of candidates he will appoint.

This also constitutes a tailwind for the bond market because, you know, the current short rates will definitely not be at this level a year from now [they will drop significantly]. So this is positive.

Furthermore, I have always believed that the biggest threat to the stock market is our extreme fiscal profligacy, like the big beautiful bill. Because such behavior will always threaten the safety and stability of the bond market, it depends on how long investors can accept this situation. [It depends on how long bond investors can endure.]

And now, whether globally or domestically in the U.S., everyone seems to accept this game of "kicking the can down the road." We are choosing to "suspend reality." So in this context, if I were to make a judgment on stocks and I believe that interest rates will return to 3% in the next 12 months, I would likely choose to go long.

The smartest money spent by the U.S. government is giving newborns money to invest in U.S. stocks ("Invest America" savings accounts), allowing children to become stakeholders in the capitalist system from a young age and understand all the elements that contribute to the success of capitalism.

Reporter:

Brad Gerstner proposed an idea, and yesterday Ted Cruz also discussed this topic on Bloomberg.

Their proposal is called "Invest America" — meaning giving every newborn child $1,000 and allowing parents or relatives to invest up to $5,000 per year for them. By the time the child turns 18, if the market continues to rise, they will have a substantial asset. Moreover, they will have "skin in the game" in the market.

Paul Tudor Jones:

I am the kind of budget hawk who opposes all extra spending and loves to complain. But I have to say, this will be the most cost-effective $4 billion fiscal expenditure in history. Because making children stakeholders in the capitalist system from a young age is incredibly important and truly wonderful.

Then allowing employers or relatives to continuously invest funds for them, so they can understand entrepreneurship, free markets, and individual incentives at a very young age, grasp how productivity works, and understand how we accomplish things through individual initiative. I think this is truly a brilliant idea and could be the most valuable $4 billion investment this government could make.

The rapid progress of AI could lead to a 20% unemployment rate in the U.S. within a year, posing a significant risk to social stability. The distribution of productivity gains brought by AI is a major issue. While capitalism is incredibly efficient in enhancing productivity, it is extremely inefficient, even failing, in how income is fairly distributed in society.

Reporter:

Let's talk about artificial intelligence (A.I.). You have previously expressed concerns about A.I. In May, I remember you saying that if you think seriously about its consequences, it could be very catastrophic. Do you accept it now?

Paul Tudor Jones:

Of course, I fully accept it. The progress of A.I. in the past four months has been truly incredible. These models will democratize quant modeling I have invested in the field of quantitative modeling for 30 years, trying various forms both internally and externally. The changes brought by these new models are enormous. If you understand the barriers to quantitative modeling, you will know that the threshold is very high—you need dozens of people. Look at those big companies, like Two Sigma or Jump Trading, which have hundreds or even thousands of employees.

But with these new models, their edge is gone. The capabilities of these new models are incredible.

It is clear that this is undoubtedly the most disruptive technology in human history. If I could use an analogy to explain my view on A.I.—you might be too young to have seen it, but there was a classic episode of The Twilight Zone.

In that episode, aliens come to Earth and hand humanity a book titled To Serve Man. Everyone cheers, thinking it is a manual on how to help humanity, a humanitarian guide.

In the end, it turns out to be a cookbook.

The downside of A.I. is—we’ve already “been served.” You see, this February, Elon Musk—you may have different views on his moral compass, but he is undoubtedly the Thomas Edison of our time—said that A.I. has a 20% chance of exterminating humanity. Such safety risks should sound alarm bells worldwide, especially in our country, particularly in the eyes of the current government.

Also, last week, Dario from Anthropic expressed a similar view. In short, he (Dario) said that within one to five years, due to white-collar jobs being replaced by artificial intelligence (A.I.), our unemployment rate could rise to 10% to 20%. In other words, the U.S. could face a 20% unemployment rate in the next one to five years.

Then you will face a huge risk to social stability. You have issues of safety as well as social stability. And in the “big beautiful bill,” there is actually a moratorium clause on A.I. regulation, meaning there is no regulatory framework, no guardrails.

My goodness. It’s like we’ve already “been served,” but no one realizes it. And surprisingly, almost no one in the A.I. community has raised objections to this.

Because anyone who truly understands A.I. and sees its pace of progress knows that the efficiency of these models can improve by 100% to 500% every four months. They know that this risk is real. Reporter:

So Paul, how can we establish "guardrails"? Take the debt bomb for example, Gary Shilling says that there are "bond vigilantes" who will step in to prevent it from worsening. And what about the A.I. bomb that we are currently afraid of? No government is willing to address this issue because once they start regulating, they might lose to countries that do not regulate, right?

Paul Tudor Jones:

I have come to a realization over the past two years, which is that I believe libertarianism is as much a threat to our society as socialism. They are at opposite ends of the spectrum, both extreme in their own ways.

And our current government has been deeply influenced by libertarianism. Many of its major donors are staunch libertarians.

But our country is built on a system of laws and regulations, not merely on private property rights. We have laws against assault, robbery, and so on, which are the cornerstones of a civilized society.

So we must now sit down seriously and rationally to discuss one thing: how do we allow A.I. to develop in a "good direction" while ensuring safety and security? What responsibilities should the government take on? What responsibilities should businesses take on?

We are about to witness a productivity boom, that is for sure.

Capitalism is indeed incredibly efficient at enhancing productivity, but it is extremely inefficient, even failing, when it comes to how income is fairly distributed in society. We can look at one example:

Since the mid-1980s, if you look at the distribution of productivity growth in the United States, you will find that 85% of the incremental gains have gone to the wealthiest 10%, while only 15% has been allocated to the remaining 90%.

What is the result? It is the highly fractured social structure we face today.

We are in a crisis of trust. No one knows who to trust anymore. A hellish situation— in 2020, some Republican supporters even stormed the Capitol due to the election loss.

And the root cause of this social fragility is the imbalance in wealth distribution.

Now, A.I. is set to further amplify this imbalance—unless we seriously consider how to ensure that the upcoming productivity dividends are fairly distributed.

Dario suggested that every time a model is called in the future, a "token" should be levied, equivalent to a "usage tax." And Bill Gates suggested taxing robotics over six or seven years ago So we really need to sit down now and think carefully: how to redistribute the upcoming productivity gains in a way that makes people feel "happy," rather than making them more dissatisfied.

Overseas Hedge, original title: "Macro Guru Tudor Offers Advice, Will the 'Big and Tragic' Bill Really Come?"

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