Investment legend tells his own story: Why I am bullish on gold and Bitcoin and bearish on stocks

Investing legend Paul Tudor Jones has revealed that he is bearish on stocks and bullish on gold and Bitcoin.

The two main reasons he cited were the potential escalation of the conflict between Israel and Hamas and the poor fiscal condition of the U.S. While Jones did not mention the inverted yield curve in his comments, it is another important factor for investors to consider.

Geopolitical conflicts exacerbate macro uncertainty

The major U.S. stock indexes rose in the first two trading days of the week despite the potential for a near-term escalation in geopolitical tensions. If Jones is right, the rally could be short-lived.

Dow Jones Industrial Average, QQQ and SPY 5-day chart. Source: TradingView

The yield curve remains severely inverted

One of the most important predictors of recessions historically has been the yield curve. Every recession since 1955 has been preceded by an inversion.

In July, the 2/10 Treasury yield curve hit a low of 109.5 basis points (BPS). This level has not been seen since 1981. While the inversion has become steeper since then, it is still bad from the perspective of short-term Treasury bonds.

Currently, the 1-month and 3-month Treasury yields are close to 5.5%, while the 2-year Treasury yields are close to 4.96%. The 10-year Treasury yield is 4.65%, which means that the 2s/10s curve has inverted by 31 basis points.

A flat yield curve compresses banks' profit margins because it limits their ability to borrow cash at lower rates and lend it at higher rates, which can limit lending activity and lead to an economic slowdown. It also means investors are less optimistic about the economy's short-term future as they sell shorter-dated debt, causing yields to rise.

The Federal Reserve’s attempts to fight inflation by raising interest rates at the fastest pace in modern history have also played a role. Higher interest rates have put additional pressure on the banking system, with three of the four largest bank failures in U.S. history occurring this year alone, including Signature Bank, First Republic Bank and Silicon Valley Bank.

Some market observers have speculated that the Fed would have to start cutting rates as early as early 2024 to prevent further economic fallout, even if inflation has not yet fallen to where the Fed wants it to be.

Looser monetary policy and its corresponding increase in liquidity tend to be positive for crypto markets. If interest rates do fall heading into the 2024 Bitcoin halving cycle, the market could see significant volatility.

2s/10s chart, 1983 to present. Source: Markets.businessinsider.com

Bitcoin and gold remain the safe havens of choice

Amid all this chaos, gold and Bitcoin remain resilient.

BTC is down 2% in the past two trading days and flat in the past five days, while gold is up 2% in the same period.

Jones summarized his stance on gold and BTC by saying:

“I don’t like stocks,” he said, “but I like Bitcoin and gold.”

The billionaire has publicly stated that he maintains a 5% allocation to Bitcoin and believes that gold and Bitcoin are safe-haven buys in uncertain times. Jones first announced in May 2020 that he had a 1% allocation to BTC.

Gold and Bitcoin 5-day chart. Source: TradingView.

All things considered, Paul Tudor Jones is probably right. Time will tell if his bearish call on stocks materializes, or if risk-on sentiment somehow prevails despite recent events.