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The New Yukon Gold Rush
Paul Tudor Jones, the founder and chief investment officer of Tudor Investment, issued a stern warning on Tuesday regarding the U.S. government and U.S. debt markets. He claimed that the U.S. is in a vicious cycle and expressed concerns about the potential for a Minsky Moment after the elections. Based on this assessment, the renowned billionaire hedge fund manager is bullish on gold, Bitcoin, commodities, and the Nasdaq.
A Minsky Moment typically refers to a sudden collapse in asset values and a financial market crisis, signaling a turning point from economic prosperity to decline.
The fiscal deficit of the U.S. government is not a new topic. It has grown during both the Trump and Biden administrations. Recent data shows that the U.S. federal deficit stands at $1.83 trillion, with interest costs continuously increasing, totaling about $882 billion annually, or approximately $2.4 billion per day.
Nevertheless, both presidential candidates, Trump and Harris, have promised to continue increasing spending. Harris has set goals for “low prices, low taxes, and high social security,” while Trump’s economic policies focus on the “America First” approach, including higher tariffs and tax cuts, which could lead to increased consumer prices and exacerbate the fiscal deficit.
Jones remarked, “We are going to be broke really quickly unless we get serious about dealing with our spending issues.”
Since mid-2020, the U.S. nominal GDP has grown by about $7 trillion, but total debt has increased by around $8.5 trillion. This indicates that the U.S. growth model is debt-driven, and its economic prosperity is founded on debt as well. However, one day, people will suddenly realize that this “game” is fiscally and financially unsustainable.
To address the deficit, the government needs to sell Treasury bonds. Yet, with U.S. federal debt exceeding $35.7 trillion, global investors are increasingly cautious, leading to reduced demand for Treasuries. This means that yields must rise to attract demand. However, rising interest rates only worsen the problem, as the government will be forced to sell even more Treasuries to pay the interest, thus expanding the deficit further.
Thus, Jones concluded that all roads lead to inflation.
Historically, every civilization has inflated away its debts. The Federal Reserve should continue to lower interest rates, keeping them below the inflation rate while nominal growth rates exceed inflation, thereby reducing the debt-to-GDP ratio. The New York Fed recently indicated that U.S. consumers expect an average inflation rate of about 3% over the next 12 months, significantly above the Fed’s target of 2%.
How to respond?
Jones is bullish on gold and Bitcoin, believing commodities are severely undervalued. He also sees the Nasdaq as a great hedge. He said he might hold a basket of gold, Bitcoin, commodities, and Nasdaq, but would not hold any fixed income assets.
Alongside Jones, billionaire investor Ray Dalio also favors these stores of value, although he prefers holding gold during times of economic instability. Dalio mentioned in an interview that if forced to choose one, he would pick gold. Nonetheless, Bitcoin acts like digital gold and can help diversify the investment portfolio.