Paul Tudor Jones, Founder of Tudor Investment Corp., joined hosts Stephanie Ruhle and David Westin for the debut of Bloomberg TV's new flagship morning program, Bloomberg <GO>. He discussed how the Federal Reserve is approaching monetary policy, his Just Capital initiative, income inequality, and the need for humanity in capitalism.
On a major macro shift in the market, Jones said: "I think for the first time since Volcker, probably, you see the Fed managing, in my mind, they're managing for the balance sheet to take out the tail risk associated, and associated with expanding debt virtually globally, and not to mention our federal debt. I think it points to a choppier market."
On the problem of losing the humanity in capitalism, Jones said: "I think clearly the topic of the day is income inequality. It it is something that is probably I think the biggest social challenge we have. I think it's something that can really harm this country if we don't deal with it. The question is, is how do you deal with that? And of course there's public sector solutions and there's private sector solutions."
The Social Challenge to Find Humanity in Capitalism:
Fed Managing Balance Sheet for Tail Risks: Jones:
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STEPHANIE RUHLE: Paul Tudor Jones has just launched JUST Capital, aiming to rank top U.S. companies based on what is important to the public. JUST is surveying Americans to see what matters most. Paul, talk to us about this initiative, and welcome.
PAUL TUDOR JONES: Well thank you so much for having me here. Let me first thank you for hosting the National Fish and Wildlife Foundation benefit ago for us. It was our biggest event ever, and your passion came through and you were spectacular.
RUHLE: Thank you, Paul. Well your passion is not just fish and wildlife. It's New York City's poorest and it's also to investing. So talk to us about what you're doing right now.
JONES: So JUST Capital is really, I think its larger mission is to try to find the right balance between all the various stakeholders and how we do business in the country today. So you have shareholders, which we talk about all the time, you certainly talk about all the time on Bloomberg News, but we also have employees, customers, local communities, the environment.
And I think what JUST Capital's mission is, and the JUST Index in particular, is to try to bring, again, dialogue and balance among all those competing interests. Right now probably we have so much of a focus on profits and shareholders' interests, sometimes to the detriment of other very important stakeholders. And this is really an effort to give everyone a voice.
RUHLE: But Paul --
DAVID WESTIN: So that makes perfect sense, but you've been pretty stark in your terms. You've said that we're losing the humanity in capitalism. And you say this as a capitalist. Exactly how bad is the problem?
JONES: Well I think clearly the topic of the day is income inequality. It's -- it is something that is probably I think the biggest social challenge we have. I think it's something that can really harm this country if we don't deal with it. The question is, is how do you deal with that? And of course there's public sector solutions and there's private sector solutions.
And when the idea of JUST Capital first surfaced, which was about three years ago really with a student in Deepak Chopra's class at Columbia, who said, what if we put together an index of those companies who are pursuing justness in the way they operate the most, and we had this great index that people could invest in. And as Deepak, and I and another gentlemen named Paul Ciala (PH) began to talk about it, it became clear that this really was a good idea.
I will be frank with you, I have been on Wall Street 40 years. I didn't even at the time know that there was $4 trillion socially responsible investing business already around that, which of course speaks to the fact that we really aren't too focused on profits, as opposed to the other things that are really important in business practice.
RUHLE: Okay. And if you didn't even know that that existed, and you are clearly someone who is ahead of the curve, how are we going to get people to care? When we talk about shareholders, they have got a much bigger megaphone than people going to Whole Foods saying they want to buy products that do good things.
JONES: Right. Well so, again, this is -- this whole development of this idea, I kind of liken it to when the internet was first created.
JONES: Well I'm just saying you had a professor at UCLA who first connected to Menlo Park. Little did he have any idea that the ARPANET at that point in time would morph into what it is today, right? So when Deepak and I began looking into this, when the whole team began looking into this, we thought this is an investment vehicle. But then we realized what we were really talking here about is harnessing the power of the private sector.
And the private sector is $14 trillion. So you don't need -- it's four times the size of the public sector. So addressing something like income inequality, yes, you can try public selector (PH) solutions. Yes, you can try the tax code.
RUHLE: (INAUDIBLE) already.
WESTIN: Well --
JONES: But the elephant in the room is moving the private sector, both on the consumption side, where employees work, what kind of products we make, how companies manage themselves in the boardroom. That's where you're really going to have substantive change.
WESTIN: Yes. Now there are different views on this, as you know. I mean there's a lot of people who are coming to your view there's a real problem in income inequality. Some people think like in earned tax credit could be a solution to it. When we talked to Warren Buffett recently, who is very concerned about income inequality, and who suggested earned come -- an earned income tax credit is the way to go. I think we have a bit of that.
WESTIN: He was talking about how rich the economy is, but he is very concerned it's not getting shared with everybody.
WESTIN: But again, he thinks an earned income tax credit is the way to go. You think this private sector approach would be more effective.
JONES: Well, look, Rome wasn't built in a day. And it wasn't built by one carpenter, right? There are going to be many tactics to address this. And certainly our idea of creating an index of the 1,000 largest companies in America and ranking them from one to 1,000 based on their justness, is but one tactic, but I think it's an important tactic. And I think the key feature of what we're doing in this ranking, because there are many indices out there, right? Americans --
RUHLE: I want to pull it up while you're talking. Let's pull this up. We have a graphic of it.
JONES: There are --
WESTIN: When are you going to have it up and running?
RUHLE: There we go.
JONES: I think, well so we -- it's a two-step process. And the key feature of why I think this can become transformative is the key feature is the rankings for our index, we've gone to the American public. We polled over 40,000 Americans this year.
WESTIN: So this is like crowdsourcing justice?
JONES: Exactly. Just think of -- exactly right. Just think of a very sophisticated, accelerated crowdsourcing for what the American public thinks is just. So we've gone to the American public. We've asked them what do you think constitutes just behavior? And if you'll from that graphing, --
JONES: -- the number one and two things are, first, what do I get paid, in particular am I making a living wage, and then secondly, how do companies treat me. It's what do I get paid and how am I treated? Am I accorded the self-respect that I deserve? Do my managers listen to me?
RUHLE: But how are the results of this survey going to affect actual changes, because what people say they like and what they do are two different things.
JONES: Yes. And I think that speaks to the reason why we're putting this index together. What we're going to do every year is poll the American public, ask them what constitutes just behavior. We're then going to take those attributes, and we're going to in a very accurate, honest and a very high integrity fashion take those attributes and then apply them to what the actual things companies are doing, and the way they react and the way they act.
RUHLE: And what can investors do with this information?
JONES: So we'll have -- so again, just we'll take every -- we'll every year we'll poll the American public, a perfectly, demographically representative sample of the American public. We'll take those attributes. We'll then score them in a transparent way on the Web. We'll have companies to feed back to us as we, just like you as a great reporter, try to do it in the most honest way with no bias. Our job is to be an honest broker and amplify what Americans think is just.
WESTIN: But as a practical matter, you as an investor must agree that the only way to really change behavior of CEOs and of boards is to have it be reflected in the stock price. At some point the market has to incorporate this, right, --
RUHLE: Ding, ding, ding, ding, ding.
WESTIN: -- and say we will not invest in your company unless you're a highly rated (INAUDIBLE).
JONES: So what we're going to do is we're going to take the 100 best companies. We're going to create the JUST 100. And we'll also take the companies in each sector and create something like the JUST One. And we'll have a logo which some great marketing person is going to help us develop over the course of the next year when we announce the top 1,000 a year from now. And we'll have this logo. And the dream, the vision is that logo will be ubiquitous like the Good Housekeeping Seal of Approval was. And when you go to buy a hammer, or a car or a box of cornflakes, and you see this logo, versus a company that doesn't have one, you'll go and buy that product.
WESTIN: Right. There's so much more to talk about here.
RUHLE: Uh oh, retail, consumer products. When Paul Tudor Jones has a vision, has a dream, it seems to come true. So, guess what, JUST Capital it's knocking on your door. Paul is staying with us.
WESTIN: Picking up with the discussion from the last block, you were telling us something in the break. And give -- walk me through this. A one percent shift in investment --
RUHLE: In consumer behavior.
WESTIN: A one percent shift in consumer spend is $140 billion a year. A one percent shift in corporate spend is another $120 - $130 billion a year. And a one percent shift in shareholder holdings of total U.S. assets is $350 billion a year. You add it all up. That's $600 billion a year. And this is annually, annually if we can just drive towards more just companies.
RUHLE: All right, Paul --
WESTIN: So again, to be clear, a three-year JUST campaign, --
WESTIN: If you could encourage that sort of one percent shift annually in its investment toward companies who are just, according to those criteria that are provided people, by regular people, then you could have a $600 billion shift.
JONES: That's correct. And this is hopefully going to be a competition for goodness.
WESTIN: And again, let's say I'm a company that's at the very low rank. Let's say I'm ranked 1,000. And the question is and let's say it's because I make a product that kills people, like cigarettes. If I'm ranked 1,000, I don't know what their rank will be, I knew as a board member I was signed up for that when I got there. It's okay. But if my competitor is ranked 750, I'm going to be asking myself why is it that we're so much below my competitor? Why is it that we're ranked here versus there? So we're going to create a competition for goodness. We're going to let consumers drive, and hopefully boardrooms will react.
WESTIN: It could make a real difference in the world.
RUHLE: Without a doubt. We're talking about how consumers are spending their money, how investors are going to invest.
JONES: And where employees will work.
JONES: Don't you want to work for a company that's doing good?
RUHLE: I do, but you what, I have a lot of job opportunities out there. What really sparked this for you was income inequality.
RUHLE: You have been ahead of income inequality crisis, okay? So let's talk about for just a moment what the Fed has done. Six years ago the Fed stepped in because the markets needed it. The economy needed it. Now here we are with the Fed keeping rates where they have at zero. What is that doing to people who are at the bottom of the scale, who don't have this high-class problem where they're saying Whole Foods or ShopRite? What has this really done to the American people?
JONES: Well we could be here for hours on that.
RUHLE: But we want you to be.
JONES: But I think the reality is it's clear low interest rates hurts savers and help borrowers. I think what the Fed is doing and the reason why they won't raise interest rates now, I think it's kind of acknowledging to me a much larger macro issue, which is if you think about the last 50, 60 years, there's is a perfect negative correlation between the interest income paid by the Federal government and interest rates. So the higher the share of GDP that's paid in interest income by the Federal government, typically that correlates high interest rates also. So what the Fed is doing is recognizing there is a tail risk with low interest rates. There's a tail risk with zero. We seem to run perpetual deficits at minus two, minus percent.
RUHLE: They don't seem to care.
JONES: And I think they're starting to recognize this tail risk that at some point in time we're creating a huge denominator of debt, and that that's going to have negative consequences, whether five, 10 years from now, whenever it is inflation returns.
WESTIN: So, Paul, let me get to a Twitter question, because this is what people wanted to ask you.
RUHLE: Right on (INAUDIBLE).
WESTIN: Exactly. "Do you think Yellen is going to raise rates this year, or is she more likely to introduce QE4?" That's what they wanted us to ask.
RUHLE: What's QE4 going to do?
JONES: Again, I think it's a really interesting time in the market. It's if you kind of just look at financial conditions index, if you look at where global growth is going, this is typically historically associated, been associated with the Fed lowering interest rates, some type of interest rate relief. And that's always typically been good for stock markets. And yet now we have a central bank that I think for the first time is actually -- is managing towards the credit side of the equation, as opposed to the economic side of the equation.
And by that I mean they're looking at the balance sheet. They're uncomfortable with the size of it. That's why they want to get rates away from zero. I think they're concerned about the expanding global debt-to-GDP. And I think they're trying to probably insert back into the equation the fact that interest rates can rise and that people need to manage their balance sheets accordingly, particularly the federal government.
RUHLE: Then does it puzzle you that they haven't raised rates already?
JONES: I think they had their opportunity last spring. They probably missed it. They're trying to catch up. And again, all you have got to do think about at zero rates it encourages this nonstop borrowing from the federal governments because of the fact that interest income as a percentage of GDP is at one of the lowest levels in the past 34 years because rates are at zero. It encourages bad behavior by a variety of different stakeholders, not the least of which is our federal government.
RUHLE: Paul, stay with us.
RUHLE: Paul, you were just talking about how there is a major macro shift in the market, one you haven't seen before.
JONES: Well, again, I think the Federal Reserve Board is managing for the balance sheet, as opposed to local economic conditions. Every time we've had this kind of set of macro variables, a huge bear market in commodities, slowing global growth, you have typically seen the Fed respond with an easing. I think of '98 in particular. And normally it would be a great time to own stocks.
Now I think for the first time since Volcker, probably, you see the Fed managing, in my mind, they're managing for the balance sheet to take out the tail risk associated, and associated with expanding debt virtually globally, and not to mention our federal debt. And I don't know if they necessarily say that avowedly, but to me it makes the most sense.
WESTIN: Does that point to and a bear market?
JONES: I think it points to a choppier market.
WESTIN: Yes. And Ray Dalio has been worrying about this for some time that if there is a downturn there isn't much ammunition left to use.
JONES: Again, the BOJ seems to be a reluctant easer, their balance sheet constrained, ECB, everyone expects them to go, but it will be an incremental step because I think they're, to a certain extent, balance sheet constrained and uncomfortable with it. So normally where you would be seeing a lot of interest rate relief globally, it's different this time. And I think that's one reason why the markets are going to be much choppier going forward.
RUHLE: Are our political leaders and regulators failing us? I mean we're heading into an election here.
WESTIN: This is a big question.
RUHLE: With a minute to go.
WESTIN: No. You've actually just 30 seconds, but --
JONES: I can't answer that.
WESTIN: A yes or no answer, Paul. That's all he says.
JONES: I think it's challenging times. There are a lot of crosscurrents. Again, it would be really easy to be super bullish on equities, given what the response function should be, but it's not going to happen.
RUHLE: I'm bullish on Paul Tudor Jones.
WESTIN: I'm there with you, okay, fund manager Paul Tudor Jones, Founder of JUST Capital we've just been talking about, Co-Founder of Robin Hood Foundation. Thank you very much for being here, Paul.
RUHLE: Thank you so, so much.
JONES: Thank you so much.