StockMarket.News@_Investinq
Paul Tudor Jones just said something the market really doesn't want to hear.
"We're clearly so leveraged in equities in this country. We're 252% of stock market cap to GDP. In 1929, we were at 65%. In 1987, about 85%. In 2000, we got to 170%. And now we're at 252."
Every number he listed, 1929, 1987, 2000 ended the same way.
"If you think about the periodicity of significant bear markets since 1970, we get a mean reversion about every ten years. That would be a 30 to 35% decline. Well, 35% on 250% of GDP is 89% of GDP. The reverse wealth effect, oh my gosh. 10% of our tax revenues are capital gains; they go to zero."
This isn't a perma bear making noise but Paul Tudor Jones called the 1987 crash before it happened and made 200% that year.
When he talks about mean reversion, he's speaking from a track record that almost nobody in finance can match and then he said this:
"If you buy the S&P at this current valuation, the 10-year forward returns are negative when you buy with the S&P P/E of 22. That's what history shows."
He's right, every major study on long-term equity returns shows that starting valuation is the single most predictive variable for 10-year forward performance.
At a P/E of 22, history doesn't give you a great answer.
"The real problem is, if you look at private equity in 2007 and 2008, that was about 7% of institutional portfolios. Now it's about 16%. Real estate's gone up. Infrastructure bets have gone up. We're so much more illiquid than we were in 2008."
In 2008, the crisis was bad because the system was leveraged.
Today the system is leveraged and illiquid, pension funds, endowments, and sovereign wealth funds can't hit a sell button on private equity.
They can't exit real estate in a week, when forced deleveraging starts in a system this illiquid, the exit doors are half the size they were last time.
Jones didn't say a crash is coming tomorrow.
He said the conditions that produce the worst outcomes in financial history are more present right now than at any prior peak he's seen in 50 years of trading.
He said buying the S&P at these levels and expecting the same returns as the past 100 years is math that doesn't work because those 100-year averages include decades when stocks were priced at 6 or 7 times earnings, not 22.
"Valuation matters a lot, and the stock market's really high, and it's going to be really hard to make money from here."
