Legendary hedge fund manager Paul Tudor Jones is sounding one of his most urgent warnings yet about the state of the US equity market, noting that America’s dependence on firm stock prices has reached a level that dwarfs every previous market peak in modern history, including the crashes of 1929, 1987 and 2000.
In a new episode of the Invest Like the Best podcast, the billionaire warns that the US is betting heavily on equities at a level never seen in history.
“We’re clearly so leveraged in equities in this country. We’re so dependent upon firm equity prices at this point in time. We’re 252% of the stock market cap to GDP. In 1929, at the top, we were at 65%. In 1987, we got to about 85% or 90%. In 2000, we got to 170%. And now we’re at 252%.”
According to Jones, a historically normal mean reversion at this point would be catastrophic for the economy.
“Since 1970, we get a mean reversion about on average every 10 years. If we did that here, that would be a 30-35% decline. Well, 35% on 250% of GDP is 89% of GDP. The reverse wealth effect, oh my gosh. 10% of our tax revenues or capital gains, they go to zero. You can see the budget deficit blowing up. You can see the bond market getting smoked. You can see this kind of negative self-reinforcing effect. So it’s troubling.”
Jones says the problem is not just a stock market issue but a sovereign debt crisis in the making, one where falling equity prices trigger a cascade that extends far beyond portfolios and into the fiscal foundations of the US government itself.
“We’re clearly in a sovereign debt bubble. In the stock market, we’re over-equitized as a country. We have the highest individual equity weightings in the history of the country.”
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