The billionaire hedge fund manager recently appeared on CNBC’s “Squawk Box” to discuss his views on inflation and the danger it poses to the U.S. economy and financial markets.
Jones believes that the stimulus payments that the government has been using as a crutch for the struggling, pandemic-laden economy will serve to exacerbate the inflationary cycle, creating an environment in which inflation ultimately climbs higher and for longer than it would have without intervention. Collectively, the government has spent $9 trillion total between its open-ended quantitative easing program and the fiscal stimulus checks.
“Inflation can be much worse than what we fear. We have the demand side of the equation… and that is $3.5 trillion greater than what it normally would have… just sitting in liquid deposits,” Jones said. “They can go into stocks, or crypto, or real state, or be consumed, so that’s a huge amount of dry powder just sitting waiting to be utilized at some point, which is why inflation is not going away.”
Supply chain issues brought on by the COVID-19 pandemic running headlong into high demand from economies working to reopen continue to drive inflation up; it hit a 30-year high in September. Jones anticipates continued rising price pressures going forward.
While he views fixed income as risky, equity markets could stand to perform decently in an environment of persisting inflation. “Equities are interesting. Certainly in an inflationary world, they are a much better bet than fixed income,” said Jones.
Facing a Future of Inflation, Diversification Can Reduce Risk
The KFA Mount Lucas Index Strategy ETF (KMLM) from KFAFunds, a KraneShares company, offers investment with managed futures. This investment type can be used to diversify a portfolio and help to mitigate volatility and hedge against risk within the bond, equity, and commodity markets themselves.
KMLM’s benchmark is the KFA MLM Index, and the fund invests in commodity currency as well as global fixed income futures contracts. The underlying index uses a trend-following methodology and is a modified version of the MLM Index, which measures a portfolio containing currency, commodity, and global fixed income futures.
The index weights the three different futures contracts types by their relative historical volatility, and within each type of futures contract, the underlying markets are equal dollar-weighted. Futures contracts will be rolled forward on a market-by-market basis as they near expiration.
Commodities include corn, crude oil, copper, gold, heating oil, cattle, natural gas, soybeans, sugar, wheat, and gasoline; currencies include the British pound, Canadian dollar, Australian dollar, Euro, Japanese Yen, and Swiss franc; global bond markets include the Canadian government bond, Euro bond, Japanese government bond, Long gilt, and 10-year Treasuries.
The index evaluates the trading signals of markets every day, rebalances on the first day of each month, invests in securities with maturities of up to 12 months, and expects to invest in ETFs to gain exposure to debt instruments.
KMLM uses a Cayman Islands subsidiary that is wholly owned and controlled by the fund and is advised by KraneShares. This allows for investors to avoid the K-1 tax and is a common practice.
The fund is non-diversified as it invests in futures contracts of 11 commodities, six currencies, and five global bond markets.
The fund’s sub-adviser is Mount Lucas Management, an asset management firm that was the first to create a passive index that measured returns to risk in the futures markets.
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