Stan Druckenmiller, the Chairman and CEO of Duquesne Family Office, sat down with Bloomberg Television’s Stephanie Ruhle to discuss China’s economy and stock market, Greece possibly exiting the euro and the concern over a contagion in the region.
On an interest rate increase, Druckenmiller said: “My fear is we’re not going to see anything for a year-and-a-half because they set up metrics eight or nine months ago…I have no confidence whatsoever that you’re going to see rate hikes in September or December or whenever because when they lay out metrics and then they change, and then they change again, and then they change again, who knows where — when they’re going to go.”
On Greece leaving the Euro Zone, Druckenmiller said: “Draghi has QE at his disposal. My guess is there won’t be contagion, but even if there is, he can contain it, and soon as market participants see that, you won’t get contagion.”
Qualivian Investment Partners performance update for the month ended July 31, 2022. Q2 2022 hedge fund letters, conferences and more Dear Friends of the Fund, Please find our July 2022 performance report below for your review. Qualivian reached its four year track record in December 2021. We are actively weighing investment proposals. Starting in November Read More
Druckenmiller would not comment on whether he would back Christie if he decided to run for president. On Hillary Clinton’s announcement he said: “I don’t know. I think old people like Hillary Clinton and I shouldn’t try and be cool with social networks, you know, maybe she should leave that stuff up to Chelsea.”
On why he loves millennials, Druckenmiller said: “They’re smart. They’re entrepreneurial. They have energy. I love being around kids. I couldn’t figure out why all these 70-year-olds wanted to hang out with me when I was 27. Now I understand, and I’m trying to steal their energy from them like they stole from me at the time.”
Stan Druckenmiller: Zero-Interest Rates Unnecessary Now
Stan Druckenmiller: Won’t Be Contagion with ‘Grexit’
Stan Druckenmiller: China Stock Gains Signal Economic Recovery
STEPHANIE RUHLE: Stan, you’re experiencing deja vu. You think it’s just like 2004. Why?
STAN DRUCKENMILLER: Not just like 2004, but it certainly rhymes. Back in late 2003, I remember we had nine percent nominal growth, seven percent real growth. The economy was very, very strong, but we had one percent interest rates, and we also had a tag on them that they were going to remain there for a considerable period, and I just felt at the time that fed policy was unnecessarily easy. They wanted to ensure that the economic recovery got enough momentum. I was more fearful because, historically, I’ve done a lot of work analyzing central banks and subsequent activity, and we’ve had problems in the past when monetary policy was too easy, and I just thought it was unnecessary. I was worried that some trouble might be brewing, but I didn’t — I couldn’t put my finger on what it was. I just knew that we were running an unnecessarily lose monetary policy, and it may have consequences down the road, and that’s kind of how I feel now. I think we’re taking a terrible risk reward in terms of zero rates. Everyone keeps asking me, well, how is this going to manifest itself? I don’t even know whether it is going to manifest itself. I just know that the rates are unnecessary, and, again, it’s sort of the same language, oh, the risk of going to early is greater than going too late. We need to ensure the recovery, and I’m more worried about things down the road than looking in the near term, and I think a lot of the dialog about this is far too myopic, rather than trying to look at things in a longer -term perspective.
RUHLE: So are you saying whether they raise in June or September, isn’t the issue, it’s a fact that rates have been so low for so long, that’s the real problem?
STAN DRUCKENMILLER: I don’t want to describe this as a real problem. What I’d like to describe is a situation where we went through a financial crisis. Immediately, as that financial crisis unfolded, the fed took dramatic and aggressive steps, which were hindsight or about as close to perfection as you could achieve. I say that because we were in the initial stages of a balance sheet recession, and we had one in the 30’s that turned into a depression, so the fed took aggressive measures to rebuild the consumer and, frankly, the whole country’s balance sheet, so the reward was tremendous if you could get asset prices back up and not have the meltdown in economic activity you had in the 30’s, and there was very little risk, so it was sort of a no-brainer. Today, if you look at the situation, stock prices, household net worth per capita, are at record highs. By the way, they went to record highs in 2013, and they’ve been going up for two straight years, so I’m not sure exactly what the fed is trying to achieve in terms of the reward here; particularly, since if you look at what is going on, we’ve had a tremendous amount of debt growth; particularly, in the corporate sector, and, unfortunately, the productivity of that debt, if it was measurable, I would opine to say is at an all-time low. Why did I say that? Because there’s good debt growth, and there’s bad debt growth. Good debt growth is when you borrow money, and it goes into the real economy. You do capital spending. You build businesses. But by most calculations, almost 98 percent of the current debt growth has gone into M &A, cooperate buy-backs, by the way, at record prices, leveraged buy-outs, so where it’s going is into financial engineering, and I can’t prove it, but I would pretty much feel very confident that a trillion dollars in buy-backs, and dividends in the last year and four trillion is the forecast this year for M & A, is a job reducer, an economic reducer, so I don’t exactly what they think they’re getting out of the zero percent rates.
RUHLE: Well, these are CEO’s who are worried, who know that they have to answer to demanding shareholders, possibly activist investors. Larry Fink has come out and said these companies do need to reinvest, need to grow, and it’s not what they’re doing.
STAN DRUCKENMILLER: Yeah. Well, we live in a culture where you go through various periods of something being in fashion and something being out of fashion.
RUHLE: Activism is in fashion?
STAN DRUCKENMILLER: And right now, listening to activists is in fashion, but I would say if you’re the fed, you have to take that into account, and if what you’re getting for zero rates is just a bunch of financial engineering rather than demand — and, by the way, you’re getting a releveraging of our economy that never really deleveraged the last time. You’re setting up the possibility, the possibility, of another asset bubble investment bust. Now, I want to be very clear; I’m not forecasting an asset bubble investment bust two or three down — years down the road. What I’m saying is, if you’re a policy maker, the risk reward is so skewed right now because the zero rates aren’t getting you anything substantial, in my opinion, in terms of economic growth, as opposed to the reward when they went into this stuff five or six years ago, but the debt growth is accelerating, so, to me, it’s not so much that I’m predicting some catastrophe in three or four years. I’m not. I’m just saying as someone who lives risk reward every day, the risk reward of going too early, to me, is much more favorable than going too late, and I don’t hear anybody saying that. All I hear is the opposite. The risk of going too early is much greater than going too late. Well, if the risk of going too early is, oh, my God, another taper tantrum, or, God forbid, a ten percent correction stock prices or maybe a slow down in GDP growth, and you have the potential — and I only say the potential — for a deflationary and then something even more serious down the road, it seems to me a no-brainer. By the way, 25 basis points, really? Twenty-five basis points. We’d still have negative real rates. Do they actually think 25 basis points is going to bring on the next depression?
RUHLE: Well, in Ben Bernanke’s recent bloggings, he’s basically saying, it’s not the fed who created this situation. The fed responded to slack in the economic, to overall conditions, so he’s not saying it’s the fed. He’s saying, they’re just trying to help hold up the economy.
STAN DRUCKENMILLER: Well, why does the economy need holding up now? I mean, retail sales at an all-time high. Everything is booming except for capital investment, and I just told you why I thought that is. I don’t know why it needs extraordinary help here. Should we maybe have negative real rates? Yeah. But, by the way, one percent fed funds would be negative real rates. These guys, in 2009, came up with a knew investigation of the Taylor Rule.
RUHLE: Who’s these guys?
STAN DRUCKENMILLER: The fed, the academics. I believe Mr. Bernanke, Chairman Bernanke, actually cited it, that said, if they could, they’d like rates at minus four percent, and because they couldn’t do that, they did QE. Do you know where that version of the Taylor Rule they were using says fed funds should be today?
STAN DRUCKENMILLER: Three-and-a-half percent. Now if you use the traditional Taylor Rule, which said at the time rates should be minus one percent, that says we should be at 175. There is no traditional theory that say rates should be at zero at this stage of a cycle.
RUHLE: Then are you puzzled by the academics right now? When I read Alan Blinder who’s saying he likes a patient fed, are you saying, what are these guys thinking?
STAN DRUCKENMILLER: No. I think I know the article you’re referring to. I just think they’re very myopic, and, by the way, it’s hard. We haven’t pulled the trigger in many, many, years, and I’m not saying it’s easy to be the one to stand up there and get us off the juice we’ve been on for six to eight years. I’m just saying the time has come. I thought the time came six months ago. The risk reward is skewed toward early, and watch and see what’s developed because when you asked about June, September, every month that goes by, we have more and more financial engineering, and easy monetary policy, I think every academic would agree, borrows from the future. It’s a temporary demand stimulus to borrow from the future. It makes sense to borrow from future generations and from future people when unemployment was ten percent. Why does it make sense to borrow from the future generations when unemployment is five-and-a-half percent? I don’t get that.
RUHLE: So is Janet Yellen is in a no-win situation? Given where rates have been for so long, it sounds like you’re saying June or September isn’t even relevant. What can she do?
STAN DRUCKENMILLER: Oh, I think it’s relevant. I’d much rather see June. My fear is we’re not going to see anything for a year-and-a-half because they set up metrics eight or nine months ago. They were met three or four months ago, so then they changed the metrics, and I have no confidence whatsoever that you’re going to see rate hikes in September or December or whenever because, you know, when they lay out metrics and then they change, and then they change again, and then they change again, who knows where — when they’re going to go. And by then, how far will the financial engineer going [sic] and how far will the debt go? This is all pay me now or pay me later. I agree, if you go a quarter, it might do a few things to markets and so forth, but if you wait and you go a year later or two year [sic] later, it’s going to do much, much more.
RUHLE: Is that why you’re so much more concerned today? Because you’ve been warning about fed policy for over a year. Why today are you ringing the bell so loud? Because we’ve been ignoring it. You were — it seemed — you seemed to be positive on Janet Yellen a few months ago.
STAN DRUCKENMILLER: I’m not really ringing it so loud. I gave a private speech to my private community in Florida in January where there would be no press.
RUHLE: Shame on you. Welcome to the world of social media.
STAN DRUCKENMILLER: Come on. I guess someone had a cell phone there. There’s a transcript of it with a bunch of unintelligibles on it.
RUHLE: You thought just someone in an exclusive community might have a cell phone. Yeah, they do.
STAN DRUCKENMILLER: So in response to that, as you know, it’s gone viral, and there’s all sorts of headlines, I’m predicting a crash. I’m predicting doom. I’m not. I’m merely saying that someone who practices risk reward for a living, the risk reward of going early is a much better bet than waiting going late. Why am I saying this? Why am I coming out on this? Mainly, because every article I read says just the opposite.
RUHLE: Ray Dalio says 1937 is happening all over again.
STAN DRUCKENMILLER: I have trouble with the 1937 analogy.
RUHLE: He is up 14 percent this year.
STAN DRUCKENMILLER: So.
RUHLE: All right. So why do you have trouble with 1937?
STAN DRUCKENMILLER: I just think the two periods are quite different. Number one, I already talked to you about the effects of a balance sheet recession. In 1937, the stock market and household net worth were still 20 percent below where they were in 1929, eight years later. As I’ve already stated, our stock prices and household net worth are at new highs, so the balance sheet is not in the state it was back in, in 1937. Number two, from 1930 — 1929 to 1937, we had cumulative 18 percent deflation in this country. From 2007 until now, we’ve had cumulative 16 percent inflation, and the fed’s favor measure of inflation has never been below one percent in any of those years, and, finally, in 1937, unemployment was still over 14 percent. It’s currently five-and-a-half percent, so I have a lot of respect for Mr. Dalio, but, you know, I guess that’s what makes markets. I see things differently.
RUHLE: Stan, we hear from a lot of people talk about deleveraging. You don’t see this?
STAN DRUCKENMILLER: No. We’ve had — we’ve releveraged from an already high level six years ago. That’s how we get into this is. We had too much debt, but the facts are world debt, according to McKinsey, the last six years, has grown 57 trillion dollars. That’s with a T, 57 trillion. In 19 — in 2000, debt — world debt to GDP was 246 percent. In 2007, which everyone thought was a high level, it was 269 percent. It’s currently 290 percent, so there has actually been not only not a deleveraging from the high levels of 2007. We’re doubling down on increasing the debt.
RUHLE: But who’s the we? Because in terms of corporates, people are thrilled about corporate balance sheets. They say they’re reducing debt. Are they wrong?
STAN DRUCKENMILLER: Yes, they’re wrong. Corporate debt in 2007 here, cooperate credit, was three-and-a-half trillion. Where do you think it is now? Take a guess. That’s an elevated level, 2007.
RUHLE: I don’t know. Where are we now?
STAN DRUCKENMILLER: Seven trillion. It’s gone from three-and-a-half trillion to seven trillion. And, by the way, we’re not talking about quality stuff here.
RUHLE: What are we talking about?
STAN DRUCKENMILLER: High-yield loans, which were 800 billion then are trillion four now. Covenant light loans, which were a hundred billion then are five hundred billion now at a three hundred billion-dollar run rate. The debt back then was — 28 percent of it was B rated. It’s now 71 percent B rated. This is 2007 and I’m talking about, which I think the fed and everyone else now agrees was sort of a bubbly period.
RUHLE: Then why is that getting ignored? We see high-yield deals come to market every day, and the argument is, these companies have much stronger balance sheets. Is someone not reading the prospectus?
STAN DRUCKENMILLER: I haven’t heard they have much stronger balance sheets, but I have heard that there zero rates, and I have no other choice to do with my money, so four or five percent looks great if I’m going to get zero, or if I live in Europe, and I’m going to get minus 28 for a German two-year.
RUHLE: Okay. Well, then that takes us back to 2006, 2007. People played in the credit markets who shouldn’t have, and then when they froze up, they couldn’t get out. So you think we’re in a credit bubble?
STAN DRUCKENMILLER: I think the risk of a credit bubble is extremely high, and if it’s not addressed pretty soon, things could look difficult three or four years down the road.
RUHLE: And how does it need to get addressed?
STAN DRUCKENMILLER: Well, a good start would be raising rates all the way to 25 basis points.
STAN DRUCKENMILLER: No. That would be a big step. We had the credit growth from 2000, 2006/7 because we had negative real rates in there for three or four years. We have incredibly negative real rates right now, with, by the way, the unemployment rate where it was in 2004 and 1996 were considered boom times, but we have zero rates.
RUHLE: All right. Well, how about Larry Summers? Lar — you mentioned being too myopic. Larry is saying the thing to be concerned about is bond market liquidity. Isn’t that just one factor? There’s a whole lot of things to look at.
STAN DRUCKENMILLER: Well, I find it curious that Larry has now become a market listener, and he wants to listen to the bond market because the stock market and the currency market are sending completely different signals, so I wouldn’t be too concerned about bond markets sending a signal when the fed has just bludgeoned every participant in it that rates are never going up. They’re going to be low for long. They’re going to be shallow, and maybe German two-years at minus 28 basis points. Maybe that’s not a natural clearing rate, and that’s a — sort of a rigged price, and maybe, just maybe, some of those people don’t want to pay you 28 basis points to give you their money, and maybe some of that has leaked over into the treasury market.
RUHLE: Paul Krugman has said, you hear from guys like Stan. They’re talking their book. But what puzzles me about that, you’ve had a great year; even though you’re very negative. So what exactly — how really do you respond to that?
STAN DRUCKENMILLER: First of all, I’m not very negative. I’ve never said anything negative. I’ve just said —
RUHLE: You’ve said a lot of negative things.
STAN DRUCKENMILLER: No. I said policy has a certain risk reward aspect to it, and the risk of going too late, to me — because I think long-term, not in the near-term — are higher than the risks of going too early. In terms of talking my book, I would only say this. First of all, markets have been very accommodating to my style of investing the last several years, and, luckily, we’ve taken full advantage.
RUHLE: What does that mean, accommodating to your style of investing?
STAN DRUCKENMILLER: There have been major trends in macros. There’s been a bull market in a lot of equity markets, and it’s been very conducive to making money, and to some extent, it’s been rejuvenating because it’s felt like the old days. The other thing I would say, in terms of talking my book, as you said, I’ve been saying this for a while, and my style of investing, I can change my positions in 24 hours, so I don’t get why this is about talking my book if I’ve been saying it for a year, and I could have changed my portfolio within 24 hours.
RUHLE: You said the one thing that you learned, the most significant thing from George Soros, when you see it, bet big. Is there something clear that you see right now that would make sense? This is where you want to make a bet.
STAN DRUCKENMILLER: Well, there was a while ago, and I’m still there.
STAN DRUCKENMILLER: Well, I think the divergence between the flipping and divergence of monetary policies between the United States and Europe in May of 2014, presented a textbook opportunity in currencies where we were tapering, ending QE. They were going to start QE. They had gone to a negative deposit rate. We are, frankly, at least, flirting with some day getting off the zero bound, and the Euro was over valued for a long, long time because they were shrinking their balance sheet while we were increasing ours, and I’ve never seen a major currency trend last less than two years, and it’s only been ten months, so it would be remarkable to me if the run on the Euro was over. It wouldn’t be remarkable if we paused for a while the way the Yen did in 2013 and went sideways, so that’s one big bet that hasn’t changed for quite a while. Another big bet is Japanese equities, European equities. Those are the only big bets, but I have some new ideas I’m flirting with.
STAN DRUCKENMILLER: Well, I’m pretty optimistic on crude prices.
STAN DRUCKENMILLER: I think they’re going to do better than the forward curve. Well, because as my protégé, Zach Schreiber, said a year ago, the cure for high prices is high prices. Well, he would also say now the cure for lower prices — low prices is low prices.
RUHLE: What does that mean?
STAN DRUCKENMILLER: What it means is, prices at $50 have caused a lot of behavior in terms of future production and exploration budgets that it should pretty much clear up the supply/demand outlook by early 2016, and I think that’s very different than the world’s thinking. I also think there’s one other wildcard. The Chinese stock market is up, I don’t know, 140 percent in six months after being in a downtrend for five to seven years, and it’s doing so on record volume with record breadth. If it was any other stock market or certainly any developed market, I would tell you, being a market observer, there’s a 98 percent chance China will be in a cyclical boom 6 to 12 months from now. Because it’s China, and we don’t know the nature of what we’re dealing with here relative to normal mature developed markets, I would downgrade that assessment from 95 percent, but I would still hold it over.
RUHLE: Because you don’t trust the data, Jim Chenos style?
STAN DRUCKENMILLER: No. It’s not the data. I’m watching the markets, and whenever I’ve seen a stock market explode on record volume and record breadth and move to that degree, like day follows night, 6 to 12 months down the road, you’re out of recession, and you’re into a full-blown recovery. The reason that happens, I think there’s enough of that, that it’s certainly greater than 50 percent China will be in 6 to 12 months, and just think of how differently the world is thinking about that. The fed had it in their minutes last month that one of the reasons to delay, or one of the things of concern was the Chinese economy. Christine Lagarde was on the cover of the Financial Times last Friday. Her biggest worry, the Chinese economy, so as someone who’s trying to think of what security prices might look at 6 to 12 months down the road, I’m very intrigued with, A, the possibility of a Chinese economic recovery, and how differently we all might be thinking if it’s actually unfolding later in the year.
RUHLE: No concerns that stocks listed in Shanghai and Shenzhen are overvalued?
STAN DRUCKENMILLER: Well, I’m not — first of all, no. Over valuation doesn’t concern me at all. I’m not even opining on the stock market. I’m opining on the transmission mechanism, the stock market to the economy, but I would point out that the H shares in Hong Kong representing China are 10.1 times earnings. I mean, I bought the NASDAQ at the high end, I mean, in 2000 when it was a 150 times earnings, so I’m not talking about valuation or even the Chinese stock market here. I’m talking about when you get this kind of thrust, when economic activity is weak, in a normal market, you get a big economic response 6 to 12 months down the road. Because it’s China, I think we’re talking about 70 percent, but the market is probably at 15 percent on that.
RUHLE: But what about the argument that so many Chinese have now invested in their own market as an alternative because the real estate market is so poor there?
STAN DRUCKENMILLER: What about it? My first boss asked me a question when I was 22 years old. Do you know happens to the money when the stock market goes down? I said, I don’t know. It goes into the bond market. He said, no. It evaporates. It evaporates. You know what happens when stock prices go up? Wealth goes up. Confidence goes up. Economic activity generally goes up, so the more, the merrier.
RUHLE: You think Greece is leaving the Euro Zone?
STAN DRUCKENMILLER: Probably.
RUHLE: Do you care?
STAN DRUCKENMILLER: I’d care a lot more if I were Greek. I think if you mean, do I care as an investor.
RUHLE: Yes, not as a vacationer.
STAN DRUCKENMILLER: You know, the banks don’t own Greek debt anymore. Draghi has QE at his disposal. My guess is there won’t be contagion, but even if there is, he can contain it, and soon as market participants see that, you won’t get contagion. I don’t get this theory about how Greeks flushes themself [sic] down a toilet and puts themselves through misery, and all the Spanish and Italians go, oh, gee, we — let’s do that, too. I think a more rational response is for them to go to reform and become more embedded in Europe, not less, so I prefer to see Greece stay in the Euro Zone for a lot of economic market reasons and maybe humanitarian reasons, but as a market participant, I think it’s — it’s way over analyzed and way over rated.
RUHLE: Is the ECB falling into the same trap the fed did in loosening monetary policy?
STAN DRUCKENMILLER: I don’t know. Because it’s more like 2009 and 2010 here, and since I was an advocate of it there, I can’t certainly advocate against it. Since I was an advocate of it here, I can’t advocate against it there. Having said that, you know, minus 28 basis points on a two-year, and then there’s an article in the journal this morning about some woman borrowing money, and the bank has to pay her to borrow. I mean, it’s — it gets a little strange.
RUHLE: So when you say, for example, you like European equities, or there’s buying opportunities there, do you actually see economic recovery, or you just see, from an investor standpoint, some bargains out there you can make money on? Because those are two very different things.
STAN DRUCKENMILLER: No. I see economic recovery, and I see a lot of great companies. We just had a discussion about China. Analysts have been downgrading BMW and Volkswagen because of their Chinese exposure. What do you think happens with a weak Euro giving you an earnings tailwind if Chinese [sic] recovers — if China recovers? You got great companies like Airbus that now are much more competitive than they were against Boeing, but all our anecdotal evidence is Europe has actually turned. It looks pretty good.
RUHLE: Do you have a favorite company right now?
STAN DRUCKENMILLER: In Europe?
STAN DRUCKENMILLER: I like the tel-cos a lot, Altice Italian Telcom, but I like the ones I just mentioned, too. I don’t have a favorite. I have a portfolio.
RUHLE: In your private speech in Florida, you said you thought the Euro could go into the 80’s. What do you think now?
STAN DRUCKENMILLER: Well, I’ve had that forecast for 10 months and it remains unchanged. That would be — there are a number of things that point there. Number one, I — that would be about the average move in a currency when they get into a big trend. I can’t quite remember but I think it’s 55 or 60 percent, and that would target that. Number two, when people kind of look astounded when you say it could go to 80, it was at 82 in 2000. Just roll back in your mind where we were in 2000, perceptions of Europe versus the perception of the United States. Do you think the United States is stronger or weaker relative to the Euro than it was in 2000?
RUHLE: Stan, there’s been lot of commentary in the financial press, even comments from the fed on the effects the strong dollar could have on the US economy. What’s your take?
STAN DRUCKENMILLER: Stephanie, as you know, I’ve been analyzing currencies and their effect on the economy for the better part of 40 years. It’s a big piece of what I do for a living. And, honestly, I can find no correlation between the level and direction of the dollar and the economy, and, intuitively, it doesn’t make a lot of sense because what happens is, it’s definitely negative for corporate profits. That’s unequivocally true. But that’s a very small part of the economy relative to who it benefits which is the consumer, so the consumer, who is 70 percent of the economy, gets a big increase in purchasing power when the dollar goes up, so I’m kind of befuddled by it, and, you know, just looking back at the evidence, the dollar went from 80 to 160 by June of 2008. Under the dollar theory, shouldn’t we about to be going into a economic boom and some great inflation in 2008? My recollection is, that’s not what happened subsequently, or I remember when I was at Soros, the Yen went from 78 to 147 in a very rapid period of time. I think in about a year in 1995, 1996. Did Japan experience this great economic growth because their currency went down 50 or 60 percent? In fact, when I look back, a strong dollar has been associated with a strong economy. I’m not saying it causes it. It’s ki