Legendary Investor Stanley Druckenmiller On The Stock Market, Tax Reform, And His Stock Picks ｜ CNBC
Transcript
Kelly Evans: Mr. Druckenmiller, thank you for your time.
Stan Druckenmiller: Pleasure to be here.
Kelly Evans: Tomorrow we have the last Fed decision for 2017 — I guess they’re expected to raise interest rates again. What’s your expectation of what comes out of this event?
Stan Druckenmiller: Well, I think they’re going to raise rates a quarter, but I don’t think that’s news to anybody — or anybody in your audience. So that’s my expectation.
Kelly Evans: It’s the second-to-last meeting under Janet Yellen, and they’re going to now be led by Jerome Powell into next year. The market thinks they’re going to raise three, four, maybe five times. Does that mean normalization is underway?
Stan Druckenmiller: I hope so, but I don’t know. You’re talking about humans who I’m not that familiar with, and events could change over time. But it’s interesting you asked about normalization, because the conversation I hear in the media and the financial press seems to center around “tightening” — and I think the conversation should be, as you alluded to, “normalization.” The difference being: normalization means sort of reestablishing a hurdle rate for investment that’s been with us for probably 5,000 years. It’s just in this eight-year period we’ve decided to throw it out the window.
And it’s a little bizarre when you listen to the reasoning. Jim Grant had a piece out; the Bank of England did a study — I don’t know whether you know this — but over the last 700 years, inflation has averaged 1.08%, so effectively 1%. So what we’re going through right now — which Ben Bernanke has somehow put in the public’s head as some scary, horrible thing, that we were at the zero bound and couldn’t avoid deflation — if you take out the ’70s and ’80s, which is a period a lot of us grew up in, we’re actually in more normal times now. But not with five or six percent inflation rates.
Kelly Evans: So do you think they should even be shooting for 2% inflation, then?
Stan Druckenmiller: I think the 2% inflation target needs to go. If I was running the Fed — thank God, for the world, I’m not — it would probably not be in my top ten criteria. The 2% inflation target has sort of become a religion, initiated by the professors. There’s an interesting story on the front page of the Wall Street Journal today about how Amazon is making the Fed’s job more complicated. This belief that 2% is appropriate for all seasons and at all times — to me, it’s pretty absurd.
Take the last great innovation period, which is the late 1800s: we had deflation for 10 or 15 years, accompanied by very rapid real growth. In the ’50s, I think inflation was 1% — maybe a little lower — for a good part of that decade; Fed Funds were at four. We had rapid growth; there was no crisis.
Kelly Evans: So what you’re saying now is that if inflation is running — let’s call it 1% — that should be considered normal and fine, and they could still have interest rates up at even 4%?
Stan Druckenmiller: What I’m really saying is: yes. If you took the Taylor Rule — and I’m not a fan of rigid formulas — a normal interest rate given our economic circumstances would be 4%. Interestingly, where we’re at one, in Europe it would be two; they’re at minus 0.40. In Sweden it would be 3.75; they’re at minus 0.50. And that doesn’t even count the bond buying. But this is all in the name of this two percent inflation target.
And I’m just saying: if you look at the two percent inflation target, there’s a rigidity in there that doesn’t make any sense in terms of all seasons. So let’s take the Amazon story this morning: is it pernicious inflation if it’s because of innovation and productivity? Or let me give you another example — I did a lot of entitlement talks, as you know, and I kept pointing out that health care in the United States is 17 percent of government costs; the highest any other country is 11. If Amazon and other factors were to push that inflation rate for health care down — so we’re no longer at 17% and we move toward what other countries have — is that a bad thing? Should we then start doing QE because we’re not hitting this mythical target?
So maybe in the ’70s, when inflation was 9 or 10, a 5% inflation target might be appropriate — otherwise you’d be raising rates to 50 or 60. But in an innovative period like now, I think minus 1% might not be a horror show. Maybe 0% is fine, and in other periods 4% might be fine. We’re in an innovative period, and fixating on this 2% is causing a lot of other consequences.
Kelly Evans: That’s what I was going to ask — so if they’re keeping rates in this country barely above zero, and other countries below zero, what do you think the consequences of all that are?
Stan Druckenmiller: Well, the consequences are huge, because we’ve distorted market signals and we’re causing all sorts of what I would call misallocation of resources.
Kelly Evans: Like Bitcoin? Or is that unrelated?
Stan Druckenmiller: No, it’s not unrelated at all. Bitcoin, art, wine, equities, credit — you name it. Everything is one way: up. And there are huge distortions taking place, and it’s all in the name of this 2% inflation target. And when you get a misallocation of resources, it really hinders growth over the longer term.
Let me give you an example. Last week there was a company called Steinhoff — that’s the parent of Mattress Firm in the US.
Kelly Evans: Right.
Stan Druckenmiller: This is a South African firm. I was lucky enough to be short from the start, because someone was kind enough to explain to me that these guys might be crooks — there was fraud at best. When you look at what was going on: it’s a huge roll-up. They buy this mattress company in the US for 100 percent over where it was trading. They’re borrowing money — big roll-up, big credit. And guess why they’re able to issue all this debt? Because the ECB is buying it. Of a company that half the Street knew was a fraud, and it’s going to go bankrupt. Now, Mario Draghi would tell you, “No problem — we’re making money overall in our portfolio; the fact that we lost $150–160 million on these bonds comes out in the wash.” The point isn’t whether the ECB is making money. The point is: they are keeping crooks and zombie companies alive. This is exactly what hinders long-term growth. Companies like this should not be walking around borrowing money. And that’s kind of where we are today.
Kelly Evans: You see what’s going on in Bitcoin. Do you own any cryptocurrencies?
Stan Druckenmiller: I don’t own any. Obviously, as a trader I should have — but I only trade when I know what I’m doing. What I do know is: it takes the same amount of energy to do one Bitcoin transaction that it takes to power nine homes in the US. By 2019, it’ll take up half the energy in the entire United States to run the Bitcoin network.
Kelly Evans: Sounds like the utility companies are a buy.
Stan Druckenmiller: Yeah — well, I find it interesting that most of the people in Bitcoin are climate people. They’re West Coast people. I don’t quite get the connection: we’ve got this rogue currency that we’re all going to support that is destroying the climate to some extent. But whatever.
Kelly Evans: So you’re not going to take a position on whether Bitcoin is going to go up to $100,000, or a million, or whatever — I mean, if we’re talking about bubbles, it must look to you like some of the greatest we’ve ever experienced.
Stan Druckenmiller: I don’t know whether it’s the greatest we’ve ever experienced. Look, Bitcoin is like anything else — it’s worth what people are willing to pay for it. And right now, people are willing to pay — I haven’t looked in the last five minutes, so it could have moved — let’s say they’re willing to pay $17,000. That’s what it’s worth. The tulips were worth what people were paying for them; gold is worth what it’s worth. What I do know about Bitcoin is: the concept that it could ever be a medium of exchange has been eliminated, because you can’t do transactions — and particularly retail transactions — with something with this kind of volatility. But if people think Bitcoin is worth $17,000, that’s what it’s worth today.
Kelly Evans: Last thing on this before we move on — there are people who want to hold Bitcoin because they’re critical of the Fed and other central banks, as you are. So if they agree with your philosophy that the central banks are screwing this up, then what would be a better way to express that than holding something like Bitcoin?
Stan Druckenmiller: That’s an excellent question. I think it’s: at some point, figure out when this is going to end, and then either get out or go short — because, by the way, when this ends — and it will; I’m talking about this monetary radicalism period we’re in — Bitcoin will probably go down with the rest of it.
Kelly Evans: So are you actively positioned for that now? I know you’ve been talking about these themes. How has it been, trading this, given that the market has been going against you time and again?
Stan Druckenmiller: What is the question exactly — on the macro front?
Kelly Evans: Yes. Let me ask it this way: how has the year been for you? Because — and it’s funny — you actually have what looks like the dream portfolio. You’ve got the FANG stocks, you’ve got the Chinese platforms, you’ve got the names that are up 70% in some cases. And yet, at the same time, you’ve been having some concerns about the macro climate. So how’s the year been?
Stan Druckenmiller: I would have to say it’s probably the worst year I’ve had relative to the set of opportunities out there. I can never recall — I mean, for me, 1997 was close; that was the Asian financial crisis — that was a pretty good one. I understand why you have this impression, because right after the election I was on your network and pretty much was very constructive. You’ve obviously been looking at the 13-F filings; it looks like I’m making a fortune in stocks. I have done well — very well in stocks. I’ve really, really mis-traded macro. If it was up to macro, I’d have my first down year. But stocks have bailed me out.
Kelly Evans: Wow. But you’re not up 30%?
Stan Druckenmiller: I’m not anywhere near 30 — and I’m not up double digits. I’m having — again, relative to opportunity — a terrible year. Barring a miracle, it’s going to be my first down year in currencies ever.
Kelly Evans: But what happened in currencies?
Stan Druckenmiller: I don’t know whether you’re a golfer, but I remember the great Seve Ballesteros. After he four-putted the sixteenth at Augusta, they asked him in the media tent what happened with the four-putt, and he said, “I miss, I miss, I miss, I make.” That’s how I traded currencies this year. Sure, Kelly — I had a lot of misses and a few major wins.
Kelly Evans: I’ve pointed out repeatedly the fact that the US dollar was so weak — would that be one example? Or are we talking about other things?
Stan Druckenmiller: No, it’s just me over-trading and being cold at the wrong time. And since it’s been my bread and butter for years, I’d say I was over-allocating exposure there relative to equities. Somebody on your network said a week ago, “All you had to do this year was roll out of bed and you’d be up 20 or 30%.” Apparently I got out of the wrong side.
Kelly Evans: How are you setting up for 2018?
Stan Druckenmiller: This is really an interesting puzzle, because I don’t buy the narrative on TV that this is all about earnings. Yes, earnings have been better in the last six to nine months — but they weren’t better the last five or six years; those years were maybe about multiple expansion. And if this was all about earnings, your favorite thing — Bitcoin, wine, art — wouldn’t all be up from the S&P. This is about, in my opinion, central bank radicalism. They’re buying at an annual rate of a trillion dollars a year in bonds, in a pretty robust economy. And on top of that, as I’m sure you know, a third of the world has negative interest rates. So this TINA — “there is no alternative” — or whatever’s happening, this money is obviously going into financial assets.
What’s interesting about the puzzle they’ve put in front of us is: if you believe the central bank schedules — and if you think the ECB is going to stop this nonsense next September — that trillion-dollar annual rate is going to go to minus $600 billion over that period of time. It’s a big swing.
The other way to look at it: every trading day, on average, the central banks are buying $3 billion worth of bonds. Whoever sold those bonds to them is getting zero, and a lot of that money is leaking into risk assets. So we have the potential that a year from now, that $3 billion a day in buying is going to be $2 billion a day in selling. In addition, if you look at the Fed dots — God knows where they’ll be — but let’s say you think Fed Funds next year are going to end at two or two and a quarter. It’s hard to believe that, with a delta of minus $1.6 trillion in the rate of change of bond buying versus letting them run off, financial asset prices will be sustained where they are now.
But our business is about timing, and I am very uncertain about when this is going to matter. If you look at traditional market indicators — like breadth and all that — they’re all still very positive. And it’s not shocking, because today the ECB bought about $3 billion. But in January that goes to a billion and a half or less, and then in June, net-net, with our balance sheet shrinkage, it goes to zero — and then it goes negative. That’s probably when it’s going to matter.
Kelly Evans: So are you going to hang on to Facebook, Amazon, Netflix, Alphabet — the FANG names — and just ride this out?
Stan Druckenmiller: I really, really like those names long term. And those 13-F filings don’t show what I have against them.
Kelly Evans: What do you mean — “what you have against them”?
Stan Druckenmiller: Well, they’re called shorts. But there’s so much disruption going on in our economy and in the global economy, there are plenty of opportunities to find on the other side.
Kelly Evans: Like IBM, which you’ve traditionally shorted?
Stan Druckenmiller: Well, I don’t know whether IBM stock is a short right now — but that’s the kind of company which, to me, has been under-investing, buying back stock, paying dividends, while competitors are basically eating their lunch in cloud and AI and everything else that competitiveness is built on. Or like old-line retailers — I’m sure you know this — we have 24 square feet per person in the United States of retail space. China has 3; Germany has 2. I would call that being overstored.
Kelly Evans: So are you shorting sort of a basket of retail names?
Stan Druckenmiller: I have been short retail throughout the year — and depending on the time period, sometimes larger, sometimes smaller. And I would expect that to continue.
Kelly Evans: So you’re hanging on to Amazon even after the run that it’s been on?
Stan Druckenmiller: I love it. This company — which everyone keeps quoting the multiple on — is selling for less than three times sales. Well, who knows — I haven’t checked it in the last few months — but the S&P is selling for over two times sales. They’re dramatically under-earning. I don’t think looking at the price-earnings ratio is the right move here. You have to look at the long-term earnings power of the company. And they are intentionally under-earning — they’re investing. I think Bezos is incredible.
Kelly Evans: Do you like the Chinese consumer companies for the same reason — Baidu, Tencent, Alibaba? Those seem to be emulating Amazon’s strategy.
Stan Druckenmiller: Well, I don’t think I’d say they’re emulating — and I really like Tencent. I really like their position. They’re in payments; they’ve got their own version of Netflix; they’ve got their own version of cloud. WeChat is probably the best platform on the entire planet. And then they have a gaming business. You know, it’s funny: if you look at Amazon, AWS is basically funding all the investments they’re making in other areas. With Tencent, their games are funding everything else. So I own Tencent.
Kelly Evans: Right.
Stan Druckenmiller: Yes — like Amazon, Tencent is intentionally under-earning, and the long-term growth looks incredible. I think it’s 40 times earnings, and they’re going to grow at least 40 percent — so it’s one times the growth rate. I still like it.
Kelly Evans: This is a little bit different, but what about Tesla and Elon Musk? Do you see analogies between what he’s doing and what Amazon and Bezos are doing? Or is that actually for you a problematic valuation story? Have you ever owned it?
Stan Druckenmiller: No. I’ll tell you a funny story about Tesla. I had a guy who managed some money for me come in when the stock was $82 — I had given myself a Tesla for my 60th birthday. He had this incredibly effective analysis — like 20 pages of financials — about why Tesla was a short. At the end of this presentation, which was really well thought-out, I said, “Have you ever driven the car?” And he said no. I sent him his redemption notice the next week.
Kelly Evans: So you didn’t short it?
Stan Druckenmiller: I did not short it. And I don’t know why it never occurred to me at the end of that conversation. But no — I don’t put Tesla in the Amazon category. They have not proved to me that, as a financial model and economic model, it’s going to work. But I also don’t like to short great products — that’s not my deal.
Kelly Evans: What about Apple, in that case?
Stan Druckenmiller: Apple I don’t find nearly as exciting as, say, Amazon, Facebook, or Google. It’s a hardware company. They have an app platform. But you use their products — do you consider them great products? I do think they’re great products, but they’re probably no better than Samsung’s. They have a great brand, but I just don’t see the under-earning that I see in these other companies. If anything, they’re probably over-earning in terms of the margins they’re making. So I don’t own it — and haven’t shorted it either.
Kelly Evans: I know that you’ve had a position in Workday — I think you may have trimmed Comcast. Citigroup and Chubb — are any of those thematically interesting to you for 2018?
Stan Druckenmiller: Well, I love Workday because it fits into the new economy we’re talking about. Aneel Bhusri — who runs the company — is just an incredible CEO and co-founder; he was formerly at PeopleSoft and then co-founded Workday. He gets the whole thing in enterprise. The other names are not that interesting to me long-term.
Kelly Evans: One thing I wanted to circle back to — we were talking about earnings, and one of the things people get excited about still is tax reform and the prospect of boosting earnings next year and maybe a little bit beyond. And I know you didn’t vote for the president. Has he won you over yet? Do you like this tax plan? Do you think it will be good for corporate America and for the American economy?
Stan Druckenmiller: I addressed that quite carefully on your network the day after the election. I said I was very excited about the prospects for deregulation and tax reform — I thought there was a good chance they could boost the economy. I was particularly excited about the House’s program, “A Better Way.” I thought it was the first program I had seen in decades that would address our fundamental problem in the United States — which is: we over-consume and we under-invest. And literally all they had to do was sign it. But Secretary Mnuchin had other ideas. And to me, it’s just been a huge missed opportunity.
Kelly Evans: Do you think the current tax reform plan is sound?
Stan Druckenmiller: No. Having said that, there are some things that are helpful in it that go a little bit of the way “A Better Way” went. First of all, there’s expensing — that’s obviously pro-investment, like the Better Way, but again very muted and carved out for some of their buddies. There’s the non-deductibility of interest — I think we’ve got too much debt in this country and not enough equity. And the final thing is: you’ve really broadened the tax base, so a lot of individuals are getting tax cuts.
Kelly Evans: Do you get a tax cut under the plan?
Stan Druckenmiller: No — I’ll get a 600-basis-point increase.
Kelly Evans: Does the estate tax repeal help you? That must help you — is that going to be repealed, or are they just raising the ceiling?
Stan Druckenmiller: I guess maybe that won’t do too much. I’m hoping to end up pretty near zero in terms of my personal holdings, so I don’t really look at the estate tax. I don’t like the repeal of the estate tax. I do like this idea of $10 or $15 million — protecting somebody’s nest egg — but repealing it on $300 million? I don’t get that.
The other thing I should have mentioned is moving the tax system to a territorial base — not as good as the border adjustment tax, but at least in the right direction.
Kelly Evans: But you wanted the border adjustment tax.
Stan Druckenmiller: I was wildly in favor of the border adjustment tax. To me, it was again a very elegant solution to the problem: we over-consume and under-invest. Unfortunately, Secretary Mnuchin and all their lobbying buddies from retail companies — which are probably not even going to be in business in 10 or 15 years — succeeded in killing it. It’s pretty amazing.
Kelly Evans: Would it have hurt Amazon, though?
Stan Druckenmiller: No, I don’t really care if it hurts Amazon — I don’t think of things in those terms. Net-net, I think we needed it. It was sort of a value-added tax, and that’s partly why it kind of got killed. But I really liked it, and it obviously got nixed very early on by a brutal retail lobby.
Kelly Evans: So do you think, if the tax reform plan passes — and we don’t know the final details yet — what difference do you think it’ll make to the stock market and the economy right now?
Stan Druckenmiller: I don’t really think it’s going to matter much to the stock market. I think the stock market is basically a function of central bank policy, and any benefits to earnings I think will be offset by central banks adjusting to that. I would say on the economy it should have a very, very stimulative effect in ‘18 and some pro-growth effect a few years after that — and longer term, if anything, that’s a problem.
Kelly Evans: On ‘18 — you think it’ll be very stimulative, which is not what most people think. Is that because of the expensing?
Stan Druckenmiller: It’s not only the expensing. Ironically, the expensing is going to be more powerful even though it appears the tax cut for corporations is delayed a year — because if you’re a corporation, you have a huge incentive: you get bigger expensing under the higher tax rate in ‘18 than you would in ‘19. So I think it supercharges capital spending and investment.
My problem with this whole thing — and again, the House plan was tax reform; it was not net-net fiscal stimulus — is: here we are eight or nine years into an economic expansion. We’re going to need ammunition desperately down the road, and we’re increasing the deficit. The CBO scored it at a trillion to a trillion and a half, maybe more. When Bush took over, I think debt-to-GDP was under 50 percent. By the end of Obama — the two of them did their damage together — it was 77. This thing takes it to 95.
I spent two years of my life going around to colleges talking about entitlement reform. They say they want to maybe do welfare reform next year — I’ll sell you the Brooklyn Bridge. It would have been so elegant if they had used the fiscal stimulus — both on the corporate side and the individual side — and offset the trillion to trillion-and-a-half stimulus with entitlement reform. We have 11,000 people a day turning 65 for the next 20 years. This is a ticking time bomb that has to be dealt with. We’re stealing from our future, and we just aggravated the problem. To me, we could have used the stimulus and offset it with reform to Medicare and Social Security.
Kelly Evans: Last two questions. Putting that aside — or maybe that being part of it — do you support the president more now than you did back on the campaign trail?
Stan Druckenmiller: Well, I never supported him on the campaign trail. No. I think the tax plan is what it is — there are some good things and there are some bad things. But I am so offended by the carried interest provision, the fact that they’re keeping it in place. It’s outrageous. We have doctors and lawyers in blue states with tax rates going up dramatically — professionals — and you have these multi-billionaires with carve-outs. Now, let’s be clear: carried interest — you’re making money on somebody else’s capital. It’s not on your own. If that’s not income, I don’t know what is.
I want to repeat that: you’re doing it on other people’s capital. First of all, the billionaires lobbying congressmen for this ought to be ashamed of themselves, because we’re asking doctors and lawyers and other Americans in blue states to take tax increases so we can fund this kind of nonsense. And as for its economic benefits — half the companies these guys buy, they then strip and fire people. So the idea that they’re increasing employment is absurd. And the politicians listening to them, who claim to be holier-than-thou about reform and getting rid of loopholes — it’s an outrage.
Kelly Evans: Are you going to get into the business if it continues looking that good — if they’re just going to totally leave it alone? Carried interest must attract more people than ever after this.
Stan Druckenmiller: No, I’m not going into that kind of business — partly because I keep missing putts.
Kelly Evans: Last thing: we’ve talked about your concerns about the Fed. Would you have felt better if your colleague Kevin Warsh had been tapped to be Fed chair?
Stan Druckenmiller: I have very mixed emotions. He’s an incredible partner. I don’t know Jerome Powell — “J-Pal,” I guess — but he seems like a very intelligent, reasonable man. It’s not a question I’m that comfortable answering when I don’t really know the alternative personally.
Kelly Evans: So you wouldn’t necessarily think that Warsh as Fed chair, relative to Powell, would have made a dramatic difference in the concerns you have about Fed policy for the next few years?
Stan Druckenmiller: I don’t know about that. Warsh would have been an incredible Fed chair — he’s one of the smartest, most forward-looking people I’ve ever met. And I think that the way they think — going back to our two percent target — needs serious reform. They need to start using the kind of common sense that Rudi Dornbusch used to espouse out of MIT, instead of models with rules and all this stuff. And I think Kevin would have been incredible. I don’t know J-Pal — maybe he’ll be incredible. I don’t know the man.
Kelly Evans: Do you think they should raise rates?
Stan Druckenmiller: I think they should take every opportunity they can to normalize. As you know, I wanted them to do this two or three years ago — I think they missed an incredible opportunity. What I was worried about was corporate debt exploding if they didn’t, and as you know, it’s gone from $7 trillion to $8.5 trillion. And thanks to them — I want to repeat this — on $8.5 trillion of debt, we have less interest expense in our corporations than we did on $7 trillion. So to me: just sneak them in while you can. Normalize. For God’s sake, the world economy is robust. They’re now getting another opportunity because of what I would call the short-term stimulus of this plan. Yes, I would take the opportunity to normalize. I don’t like the word “tighten” — normalize. I think we need a hurdle rate on investment so people don’t do stupid things, which they tend to do with free money.
Kelly Evans: Stan Druckenmiller, thank you so much for your time.
Stan Druckenmiller: Thank you.