Stan Druckenmiller is Chairman and Chief Executive Officer of Duquesne Family Office. He founded Duquesne Capital Management in 1981, which Stan Druckenmiller ran until he closed the firm in 2010. Previously, he was a Managing Director at Soros Fund Management, where he served as Lead Portfolio Manager of the Quantum Fund and Chief Investment Officer of Soros. He sat down with Hugo Scott-Gall of Goldman Sachs for an interview. Below is the full interview with Stan Druckenmiller and full document embedded in scribd.
H/T Zero Hedge
Interview with Stan Druckenmiller
Hugo Scott-Gall: What are the risks of investing in China that are not well understood in your view?
Stan Druckenmiller: The growth in credit at a time when GDP growth is slowing is a problem for China. And I think this is the 2009-11 stimulus coming back to bite. I understand that it had to be done to fund entrepreneurs and the private sector, but it’s easier said than done if you’re channelling funds through local government investment vehicles. I’m a believer in markets. A few men sitting around a table and deciding how to allocate capital goes against everything I’ve ever believed. Not only are they not great at capital allocation, such an exercise also needs to deal with a lack of property rights and corruption. In essence, the frantic stimulus China put together at the end of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments. And now, the system’s building enough leverage and misallocation of resources to warrant risks of a financial crisis, but the timing of that is still uncertain in my mind. What we’ve seen in China since 2009 is similar to what happened in the US in 2005, in terms of credit growth outpacing economic growth.
I think ageing demographics is a bigger issue in China than people think. And the problems it creates should be become evident as early as 2016.
Stan Druckenmiller: You also need to keep in mind that for China to grow and evolve further, it will need to compete with a more innovative Korea and now a more competitive Japan. I don’t think China can do that with where its exchange rate is today. I think productivity is a key concern too. And I think that could be one of the reasons why the US has been so supportive of Abenomics.
People mention lack of infrastructure as a constraint. But when I go over there, it looks like they have a lot of infrastructure. It seems ahead of the population, not behind. I see expensive apartments in empty cities that 300 mn rural Chinese are expected to migrate to. That looks very unbalanced to me. Nobody’s ever had investment to GDP at 47%. Japan and Korea peaked at 36%-38%, so as a result I think capacity is way ahead of demand in some areas in China.
Hugo Scott-Gall: If China slows its fixed asset investment, will that have a knock on effect for its commodities demand and thus commodity prices?
Stan Druckenmiller: When I started in 1976, I was taught by my mentor that when cash flow rises equities go up. But commodities are driven by the cost of extraction 90% of the time, and over the long run, technology makes extraction cheaper, pushing the cost curve down and with it commodity prices. But that hasn’t always worked, if I’d followed that advice over the past few decades, I’d be in trouble.
About five years ago, I bought into the peak oil thesis. But then, along comes shale oil and shale technology, reminding me of what my old mentor said 35 years ago. Now I’ve come to think that the oil price is not as vulnerable to China slowing down as it is to ongoing shale supply growth. I regard the ramp up in investment by China as a 10-year aberration, making the last two years more normal and more representative than the previous decade.
I do think China is serious about rebalancing, which means infrastructure investment is going to slow. And obviously, there’s been a huge ramp-up in supply around the world in response to the 2009-11 stimulus, which in my view is a massive misread by the suppliers of these commodities. So that’s not good for commodity prices. And then you have innovation. Can technology progress in iron ore and copper, the way it has with shale energy? My guess is it will.
If you look at food, there’s now technology that allows seeds to be drought-proof and disease proof. Yes, there is a demand-supply argument for food prices rising, but the impact of technology on food supply is greater than you think. On the other hand, we are using up more and more good arable land to build cities in China and there is a water problem in China too.
Hugo Scott-Gall: Do you think we underestimate the role of innovation in resolving these global constraints?
Stan Druckenmiller: Even with all the progress we have made in technology in the recent past, I think we are only scratching the surface in terms of innovation. We haven’t seen half of the practical applications of big new technologies yet. And the cost of these technologies will come down too, whether it’s robotics or driverless cars. That has to provide a productivity boost.
But there is a downside to technology-driven productivity surges too. There is improved efficiency, but at the cost of fewer jobs. I think the impact of technology on manufacturing jobs is easy to overlook because of the huge surge in services jobs. But we’re now at a point where the impact of technology is hitting the services sectors too. And not everyone understands this. I recently brought up the possibility of driverless auto technology resulting in zero jobs for truck drivers within the next 20 years and there were gasps of disbelief from the audience of investors. When I mentioned it to a high-tech company CEO from Silicon Valley a few days later, his response was exactly the opposite. The point is that the problem with a tech-driven productivity surge is that the benefits of that are going to accrue to a smaller, narrower group. Already, computer engineers have benefitted from computing and the internet a lot more than the broader population.
Stan Druckenmiller: You could draw similar conclusions on the impact of technology and automation on investing. I believe that good investors are successful not because of their IQ, but because they have an investing discipline. But, what is more disciplined than a machine? A well-researched machine can make many average investors redundant, leaving behind only the really good human investors with exceptional intuition and skill. And what happens when machines really take over investing? Do the markets get really efficient? Or will there be competing systems trying to outdo each other? All of