How two billionaire investing legends see the US election risks

Two billionaire investment legends have weighed in over the last week on the current state of play for the markets and especially how they are bracing for the US election, as well as what they see as the unsustainable trajectory of US debt. Who wins the US presidential election and whether the winning president’s party has control of both houses of Congress will dramatically enhance the impact of this election. Their musings make clear that the stakes in this US election are very high for all investors, regardless of election outcomes.  Below are a few key points from the two interviews that we should all consider as the market is clearly preparing itself here in late October for a Trump 2.0 outcome, which means both a Trump win and Republican control of both the Senate and the House of Representatives.

Stanley Druckenmiller

Election outcome and impact: he shares our view that a Democratic sweep would be extremely unlikely, but if it happened it would be quite negative for stocks because of new tax policy and the impact on investor sentiment and business confidence. A Harris win with a split Congress (Senate is almost sure to be under Republican control post-election) is more or less similar to status quo, so very difficult to predict outcomes. The market Is leaning heavily for a Republican sweep and he believes this would boost the economy for quarter or two and improve business sentiment on moves to deregulate. Important to note, he thought that it would also spike US bond yields, which could suffocate the equity market. He considers it unlikely to see Trump winning but the Republicans not getting control of the House.

Views on the Fed: Druckenmiller criticized the Fed for excessively easy policy during the pandemic, when he felt they were too slow to begin hiking rates. He also criticized the Fed for possibly making a mistake again in starting to cut rates too aggressively, which could risk a new inflationary spike if the economy remains strong and in general risk Fed independence.

Investment strategies: as US stocks have rushed to new all-time high levels in September and October, it is interesting to note that Druckenmiller is less interested in discussing the equity markets and is more focused on the risks to the bond market, which could impact stocks negatively. He specifically indicating that he is taking a strong position against US long-term treasury bonds, hoping to profit from a sharp further rise in US yields. (It should be noted that since the Fed cut rates 0.50% for the first time in the cycle back in late September, the 10-year US treasury yield has risen sharply by more than 0.50%.

Paul Tudor Jones

Yesterday we got a relatively rare appearance from investing legend Paul Tudor Jones, head of Tudor Investment Corporation, who weighed in during a much shorter interview with CNBC with a somewhat different take and some very pointed observations. Some key points:

On the election odds: Tudor Jones generally refused to call the election, but did say it was critical for markets, representing a kind of “Macro Super Bowl” in its implication. Interestingly, he dismissed the current strong tilt in the betting market odds in favour of a Trump 2.0 outcome, saying that big money bets from wealthy Republicans are likely tilting the odds and that it is an easy market to manipulate. But he did say he had moved his portfolio in the direction of a Trump win.

On the very ugly US deficit and overall debt trajectory: some very strong language from Tudor Jones here – a must watch for how he reduced the US debt situation to basic maths here: US deficit/debt situation is like someone with an income of USD 100,000 borrowing USD 700,000 and promising to add USD 40,000 in additional debt per year, so why would anyone lend the US government any longer?

Money quotes: The Paul Tudor Jones interview is littered with pearls of wisdom and a great metaphor:

“We may have that point of recognition where all of a sudden the markets have different ideas than what the candidates have been espousing.” He later clarifies that this means he believes that neither candidate’s promised tax cuts and spending proposals have a realistic chance of seeing the light of day, because the US treasury markets can’t absorb even larger US deficits. “The chances have zero chance of being enacted.”

“Financial crises percolate for years, but they blow up in weeks.” [His concern is that the maths noted above on the dynamics of US deficits and debt can suddenly become a Eureka moment after a “seminal event” like the US election.]

He finishes with a fantastic metaphor, comparing the current government debt situation with the phenomenon of “kayfabe” in professional wrestling, where the audience knows the wrestlers’ performance is an act, even if portrayed as reality. The governments, he says, whether it is the US, UK, France, Italy or Japan are the professional wrestlers here. And therefore we, the markets and society at large, are all running around pretending that they are going to make good on their debts when we all know that they can’t. Post-election, Tudor Jones says,  we risk a “Minsky moment” or point of recognition that the show is fake and what then are the implications.

How he is positioning: he dodged the question to a large degree here, but did say that [positioning for a Trump win] means “more inflation trades”. And he made clear at the tail end of interview, seemingly without reference to which candidate wins, that he will “clearly not own any fixed income [bonds]” and that he is outright selling long US treasury bonds (those of perhaps 10 years or greater maturities, most likely) because they are “completely the wrong prices”. This is the same trade that Stanley Druckenmiller touted in his interview.

What to do?

It’s important to both take the observations of legendary investors seriously. They are usually out in the media not in self-interest, but either to tout their charitable causes (Tudor Jones in particular) or to serve as a kind of moral authority for the investing world at large and even officialdom, if they care to listen.  The other point is that they can be extremely quick to change their mind if something dramatically new happens. On the latter, their analysis is likely impeccable, but new Fed policy could mean that their actual trades prove unprofitable.

Overall, the critical takeaway from the two interviews is that both legends are focused chiefly on the US bond market due to the unsustainable trajectory of large US deficits. It may be difficult for the average investor to consider the impact of bond yields when most focus is on stocks, particularly after such strong period for the global stock markets last year and this year. But these interviews should make clear that any further rise in long bond yields is a strong headwind for stock markets. And given the endless flood of debt that the US government continues to issue, if bond yields drop, it would likely only be due to either Fed intervention (possibly quite good for US equities, but risking a strong new inflationary surge or because the US economy is headed for a more dramatic economic slowdown than most anticipate.)

Important words from investing legends with about a century of investing experience between the two of them.