This is a rare interview Stan Druckenmiller gave to Barron’s, published on March 28 1988 in the Barron’s National Business and Financial Weekly publication (H/T UPSbanker). The interview was given around the time Stan was poached by George Soros for Soros Fund Management.
Entitled, “Money Manager Stan Druckenmiller Is Still Bearish” the interview discusses Stan’s bearish stance, why he believed that the market was due for a correction, and what he was doing to protect investors’ cash.
The whole interview isn’t available online. Below are some excerpts from the issue of Barron’s along with some added analysis in between.
Stan Druckenmiller – Buy low and sell high
The interviewer began by asking Stan Druckenmiller if he was planning to average up, or increase his exposure as the market pulled out of its 1987 trough.
Growing up in mid-America, I was always taught–I’m not saying I always do it–to buy low and sell high. Out participation in the derivative markets–and we’re not claiming to be world savers, but we tend to trade against whatever the daily trend of the market might be, rather than with it…when prices are plunging, rather than sell, we prefer to buy, and vice versa
Then Stan Druckenmiller went on to discuss his hedging strategy against market turbulence.
Q: Is trading index futures a large part of what you do?
A: No, not really…The funds are unlike conventional funds because, if we don’t like the market, we don’t just go to 20% cash; we might actually go net short. And the derivatives just happen to, at certain times, be a convenient way of doing that quickly. But where you really are going to make, or lose, money for shareholders is with the decision to be in or out of the market. That’s the big decision, not trading in derivatives…
Q: So are you in, or out of, the market today
A: Let’s put it this way. The Aggressive fund is net short. Investing is about 10% net long….
Stan Druckenmiller – Defensive position
At the time of the interview, Stan Druckenmiller was taking a defensive posture, despite the fact that the market crash of 1987, or “Black Monday” — the largest one-day market crash in history — had only occurred a few months beforehand. Stan Druckenmiller laid out the reasons for his bearish stance.
Q: Okay, Stan. But why are you defensive now?
A: Well, we look at the market in three different ways–and each of them is flashing warning signals. First of all, we look at valuations. We use them to determine, really, the market’s risk level, as opposed to its direction.
Q: Because overvalued stocks can get more overvalued–and vice versa?
A: Exactly…on the other hand, valuation is something you have to keep in mind in terms of the market’s risk level…when catalysts come in to change the market’s direction…the decline could be very major if you’re coming from the kinds of overvaluation levels witnessed in ‘29 and the fourth quarter of last year. So valuation is something we keep in the back of our minds.”
Q: What do you keep in the front of your mind?
A: I guess the major thing we look at is liquidity, meaning as a combination of an economic overview…Contrary to what a lot of the financial press has stated, looking at the great bull markets of this century, the best environment for stock is a very dull, slow economy that the Federal Reserve is trying to get going…Once an economy reaches a certain level of acceleration…[the] Fed [is] no longer with you…The Fed, instead of trying to get the economy moving, reverts to acting like the central bankers they are and starts worrying about inflation and things getting too hot. So it tries to cool things off…shrinking liquidity…Then corporations start having to build inventory, which again takes money out of financial assets…finally, if things get really heated, companies start engaging in capital spending…All three of those things, tend to shrink the overall money available for investing in stocks and stock prices go down…
End of part one. Stay tuned for part two.