(This guest post originally appeared at the author’s blog)
Paul Tudor Jones appears to have shifted from the bear market rally camp to the bull market camp. As of our last update he was firmly in the position that the market had rallied too much and was due for a downturn. Late last summer Tudor Jones stated his desire not to chase the 45% rally in stocks and rather, buy into an autumn downturn in anticipation for a year end rally:
While 45% is nothing to ignore, one should take into account that the S&P through July 31 is still down more than 20% on a price basis year-over-year. The bottom line is that we are not inclined to aggressively chase the market here. Rather, we eye a better opportunity to be long equities into year-end on a potential autumnal pullback.
He has changed his tune a bit now and believes the economy has the potential to remain quite robust into Q2 of 2010 as Fed policy remains accommodative, the dollar remains weak and inventory de-stocking continues:
The forceful policy response to avert depression tail risks posed by the financial crisis has likely unleashed a wave of liquidity which is probably greater than that of 2001-2003. Our job is to identify the best performing assets of this “Great Liquidity Race.” At present, it appears those assets are gold, emerging market equities denominated in local currencies, and commodity related stocks.
Liquidity is making its way into bond purchases by banks, into equity markets, into capital flows to emerging markets and into international reserve accumulation and related diversification away from the dollar. This will be the trend over the next quarter—or two—even before discussing potential portfolio shifts within it.
Due to this easy money approach he is becoming heavily invested in gold and other precious metals as he expects metals to win the “great liquidity race”:
“precious metals exposure has been increasing and is currently the largest commodity exposure. As a result we have included, for this quarter, a separate discussion on gold as an appendix. I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.”
In the bond market he likes Curve Flatteners as inflation is likely to pick-up in the coming quarters. Although Julian Robertson does not have the same gold outlook he does like the same bond trade.
“Curve flatteners also provide tail risk insurance against long gold, short dollar and long equity positions and, as such, marry well with other market views presented here.”
In terms of currencies he sees the dollar falling further on the back of the Fed’s easy monetary approach. He likes the Brazilian Real and the Australian Dollar. He also likes the Korean Won and Yuan, but believes their appreciation against the dollar will be slower. He does not find the Euro intriguing.
He continues to like equities into year-end. Let’s just hope he didn’t just buy at the top:
“the stage should be set for another run of meaningful size into year-end. Ensuing developments lead us to think that run could continue well into the first quarter of next year.
As for our regional preferences, we continue to favour emerging markets in general, and countries like Brazil and Taiwan, in particular.”