The top hedge fund manager sees parallels between US Fed’s actions in 1999 and 2010, which may create a massive liquidity-driven momentum in select assets, like dotocom stocks in 1999. Among his choices is India’s Nifty
Famous hedge fund manager Paul Tudor Jones sees that the Fed's response to a structural deficiency of the US economy via quantitative easing reminds him of 1999. And so, he feels, we should be ready for a momentum trade in assets which worked in 2010. According to Tudor Jones, "With the Federal Reserve Board about to embark upon an LSAP program of over $1 trillion, it is certainly important to understand exactly where much of this liquidity will roost. And the similarities between 1999 and today bear heeding."
His prescription? Using the 1999 template, his conclusion is simple - buy what has worked thus far in 2010 and short what hasn't worked.
Interestingly, among his top buys is India's Nifty index.
Tudor Jones argues: "Using the above methodology (buying what worked in Q1-Q3 1999 and selling what didn't work in Q1-Q3 1999) as a roadmap for how to trade the coming liquidity avalanche, we've listed the ten best and ten worst performing assets year-to-date. My personal favorite for potential price appreciation well into 2011 would be a portfolio comprised of India's Nifty Fifty, an emerging markets consumer stock basket, gold, copper, grains, and US 10-year notes."
In 1998, the Fed bailed out Long Term Capital Management and flooded the system with liquidity in anticipation of the Y2K meltdown which led to a huge bubble, especially in tech stocks. If Jones is right, a bubble is currently building in emerging markets and some commodities he has identified.
Jones says that the current economic malaise is being caused by the manipulation of the yuan and the loss of US labour to China. This currency imbalance has resulted in a much weaker US economy over the last 15 years. "The root cause of the unemployment woes is quite obvious. In the United States alone, in the last two decades, nearly six million jobs in manufacturing have been lost overseas. This equates to nearly four percentage points of the current 9.7% US unemployment rate. As importantly, the migration of these jobs contributed to the most unsustainable economic imbalance in the world today-China's persistent bilateral trade surplus with the United States.
"During the last decade, China accumulated almost $1.4 trillion of US debt and at least $2.3 trillion in global assets. These figures could grow to $3.8 trillion and $7 trillion, respectively, over the next decade if the current renminbi/US dollar (RMB/USD) exchange rate continues to be artificially suppressed from appreciating."
He goes on to add, "Our current situation is highly reminiscent of 1999, when the fear of a Y2K computer meltdown led central banks to deliver global liquidity pulses in an effort to cushion any possible negative fallout from the failure of systems and the Internet.
"Once again, policy leaders symptomatically attacked a structural deficiency. Most of that excess liquidity ended up in a very narrow list of approximately 100 NASDAQ stocks, as $20 billion a month poured into margin accounts to purchase technology stocks. Between October 1999 and March 2000, the NASDAQ nearly doubled."
If Tudor Jones is right we may see a huge rally in all risk assets including in the Nifty.
Be warned however, that the macro views of top traders like Tudor Jones and George Soros, are notoriously fickle. They make outrageous forecasts, which they are quick to abandon with a change in the direction of the market. They make their money turning around on a dime. Paul Tudor Jones, estimates Forbes magazine, is worth about $3.2 billion, a fortune he has made in over three decades of trading. One of the top traders featured in Market Wizards of Jack Schwager, Tudor Jones started as a broker for EF Hutton in 1976, learned his ropes in the New York Cotton Exchange and launched his hedge fund Tudor Corporation in 1980. One of his legendary wins was creating a short position before the 1987 crash.
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