At the top of the list was macro commentary by Stan Druckenmiller, delivered on CNBC this week in an interview with Joe Kernen. Among many things, Druckenmiller is perhaps most famous for shorting the British pound in 1992. What he saw was a low-risk, high-reward bet. He knew that if the British authorities didn’t devalue their currency within six months, he would lose 50 basis points, or half of 1%. If they did devalue, he would make 2000 basis points. It was a 40 to 1 risk-reward bet. And it made his fund $1 billion.
Flash forward to November 2022. In the interview, Druckenmiller said, “If you look at what the Fed did—the radical gamble they took to get inflation up 30 basis points from 1.7% to 2%—it’s, to me, sort of a risk-reward bet.” But it’s the exact opposite of the risk-reward odds he had when he bet the pound would crash 30 years ago. Instead of risking $1 to win $40, the Fed risked $40 to win $1. And they lost.
As Druckenmiller pointed out, though, it’s the poor people in the United States, who’ve been ravaged by inflation, who really lost. It’s the middle class. And the world, too, by the way. He believes that, because of the extent of the asset bubble (in terms of time, duration, and breadth), the U.S. economy will feel the impacts of this loss for years to come.
“The other thing I’ll say,” Druckenmiller added, “is I’ve been wrong a lot in my career, and when I’m wrong, I correct my mistake. What was particularly mind-boggling to me—two to three months later, inflation takes off, and it’s no longer a theory. It’s actually happening. We come up with this ridiculous theory of transitory [inflation]. We have $5 trillion in fiscal stimulus. We have $5 trillion in QE, [and] Janet Yellen is running down the TGA accounts.” (SB Here: The Treasury General Account is the U.S. government’s operating account, maintained by designated depositaries—primarily the Federal Reserve Banks and their branches—to handle daily public money transactions. Think of it like your savings account. If you spend some of your money to buy things, it goes out of your account and into the economy. In this case, Janet Yellen and her Fed put another trillion dollars in stimulus into the economy.)
More notable points from Druckenmiller:
“If you remember the monetary framework in the fall of 2020, they were no longer going to forecast; they were going to be data dependent and wait to see the whites of inflation’s eyes. So guess what? They saw the whites of their eyes, and what did they do? They forecast that it was going to be transitory.”
“When you make a mistake, you got to admit you’re wrong and move on. That nine or ten months that they just sat there and bought $120 billion in bonds (per month). I think the repercussions of that are going to be with us for a long, long time.”
Druckenmiller said there are a number of disinflationary things happening now, but the broader picture is about how inflation’s firmly setting in the system—as is particularly exemplified by what’s happening with wages. For example, in August, freight railroads agreed to a 24% wage increase over three years for union workers. When those costs go up, you lose purchasing power. “Of course, the customers of companies have to raise their wages, and the thing spirals,” he said. “And that’s the position the Feds got themselves in with basically a boom-bust policy. […] The fiscal stimulus was a huge part of this. But to be fair, they enabled it. The government can’t spend $5 trillion dollars if they don’t print it.”
“It’s conventional wisdom, which I agree with, that stocks go up over the long term. The problem is, we’ve become a little complacent about what does ‘long term’ mean. If you bought the Dow in 1929, you got back to even in 1954. [The] Dow was [at the same price level] in 1966 where it was in 1982.”
“Let’s just take a trip down memory lane,” he said:
“When I look back at the secular bull market that started in ‘82 […] we had a president who said the government was the problem, not the solution. We had a guy who fired all the air traffic controllers in the country when they wanted a big raise. We now have a president who is a union man who says he’s trying to beat inflation, who cheers the 24% over a three-year reward to the railroad unions. We have a president who thinks the government is the solution, not the problem.”
“When you look at valuations back then, the stock market was 50% of GDP. It’s now 150%, down from 225%. That’s because 5 years yielded 15% when I started Duquesne, so real rates were high. That’s why we were at 8x depressed earnings. We’re now at 18 to 19x inflated earnings. I have a very strong feeling we are going to be down next year.”
“Then you have the secular forces. The initial ramp-up of globalization [was] a fantastic thing. Building supply chains around the world increases efficiency, causes disinflation. That’s been a trend for 20 or 30 years. It’s going the other way now. We’re disentangling all that. That’s going to be inflationary.
“And then, finally, the last ten years of the bull market, you put it all in hyperdrive with $30 trillion of QE and zero rates.” ($30 trillion is the global total.)
“Now the consequences of that are born,” he said, “and all those factors that cause a bull market, they’re not only stopping, they’re reversing. Every one of them. We’re going from QE to QT.”
“So when I put all that together, the one thing I bristle a little about is when I hear people saying, ‘Well, I’m bearish, but I’m bullish for the long term.’ Look, you can have a priod of 15 or 20 years when the market doesn’t go anywhere. That doesn’t mean you can’t make money; you could have made plenty of money in the 70s. At various times, we had two 60% rallies.”
“I’m not saying, ‘Go get another job,’ and ‘You can’t do stocks.’ I’m just saying we’ve had a hurricane behind us for 30 or 40 years (SB here: declining interest, zero–interest rate policy, and massive monetary and fiscal stimulus), and it’s reversing. And I wouldn’t be surprised—in fact, it’s my central forecast: The Dow won’t be much higher in 10 years than it is today.”
“I will be stunned if we don’t have a recession in ’23. […] I will not be surprised if it’s not larger than the so-called ‘average garden variety.’”
Time out, pause, and breath.
not the safest area to visit honestly. Most of Los Angeles downtown and the nearby city appears to be in decline. I’ve seen a lot of homeless people, a couple of young people who appeared to be on drugs today and crumbling and/or never updated infrastructure and buildings. Just this morning I saw a local building owner in Little Tokyo using a high pressure sprayer to try and clean off graffiti. Also saw quite a few long time merchants saying adios and a thank you to their communities via a letter on the outside of their now “permanently closed” businesses which brings a certain sadness to witness.
