Sohn 2023 - Kiril Sokoloff in conversation with Stanley Druckenmiller

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Transcript

Moderator: For those that missed it earlier, this year’s Sohn corporate sponsor Tegus has come up with a fun idea for Sohn attendees — they’ve offered to source a custom expert call for anyone in this Sohn audience, which you can do at tegus.com/sohn. Hopefully some of those calls will be used to investigate the ideas that have been presented so far today. We move now to an incredibly interesting interview. Stan Druckenmiller is the founder, CEO, and chairman of the Duquesne Family Office. He’s one of the most successful and legendary investors of all time with an incredible investing track record across decades and through a variety of market environments. He’s also a student of history, and I’m sure that his ideas today will be sobering, informative, and balanced. Sam Altman said earlier that he tries not to make macro predictions, but Stan is in that business, so I expect some macro thoughts that will leave us all thinking. Stan is being interviewed by Kiril Sokoloff, the founder of 13D Research and Strategy. Kiril too is a student of markets and history and brings decades of perspective, making him the perfect person to steer the conversation and get into the most important topics with Stan. Gentlemen, over to you.

Sokoloff: It’s always such a great pleasure to be with you — I can’t think of anyone in the world I’d rather talk to right now. Last year you told me you thought the U.S. recession would arrive in the last half of ‘23 or early ‘24, but you recently told me that you’ve brought your recession forecast forward. You’re hearing lots of anecdotal information from the CEOs you talk to — problems in trucking, problems in retail, obviously credit contraction issues — and you believe that the consensus of a soft landing is very unlikely, and you rate the probabilities of a hard landing as high. After all, how could we not have a hard landing after 11 years of the greatest monetary stimulus in U.S. history, a 500 basis point increase in short rates over the past year, the developing real estate crisis in commercial real estate — regional banks have 33% of their allocation in that sector — and the bursting of the everything bubble? Could you please elaborate on this?

Druckenmiller: Thank you, Kiril — always good to see you. You conveniently left out part of the punch line, which was when we talked, I told you that I’ve been doing this for 45 years and I have to make economic forecasts for a living, and this is easily the most challenging period to have a confident forecast I’ve had in my career. You’ve just articulated some of the reasons — the extreme monetary policy and then the abrupt change. But COVID figures kind of mess everything up. I’m trying to figure out what the momentum coming out of COVID is — is it just that, and is it real? Is it sustainable or not? Then you go through the Ukraine war, then you’ve got the whole China reopening. So I want to qualify anything I say in terms of confidence — it’s not as much as I would usually have, not that economic forecasting is an exact science anyway.

But we do know a few things. Thanks to you — it was your recommendation — I read Edward Chancellor’s The Price of Time. As you know, I’ve been saying for years that the worst economic outcomes tended to follow asset bubbles. I was only looking at the past hundred years or so, and Edward Chancellor’s book in a real tour de force describes how this has been going on for over 500 years — and basically every time you’ve had interest rates below 2% going back 500 years, it’s generally been followed with difficult economic times. So if you look at the current menu — I think it was just a little over two years ago I went on national television and said we had monetary policy that was the most reckless and extreme relative to the economic circumstances I had ever seen. At that time, inflation was 2.5%, you had a booming economy, you were coming out of COVID, and it was clear from both the vaccine and everything else that we were on our way to maybe the most rapid recovery I had seen in my lifetime. I was not surprised about a year later that inflation reached 9%. I was not surprised that SPACs went crazy, Bitcoin went crazy, Dogecoin went crazy, equities went crazy.

What I was surprised by was that for the next year while all that happened, Jerome Powell’s Fed continued to have their foot on the gas. They continued to buy $120 billion in bonds a month while rates were zero. This obviously led to everything I described. Then, realizing they had probably made the biggest mistake in the history of the Fed, they slammed on the brakes — they’ve raised rates 500 basis points in the last year. We know historically two things which you’ve already articulated: number one, the worst economic outcomes tend to follow too-easily-engineered asset bubbles, and number two — the biggest maxim in my business — don’t fight the Fed. So I’m sitting here staring in the face at the biggest and probably the broadest asset bubble I’ve ever seen, that I’ve ever studied. It went on for 10 or 11 years, and then it’s the grand finale — the government spent $5 trillion on COVID, the Fed financed 60% of it, and as I just described, now we have a big hike in interest rates. It’s hard to look at that constellation of factors, know that we’ve only had a few soft landings since 1950 — all of them preceded by what I would call proactive rather than reactive Fed policy — and believe we’re going to have a soft landing. One never knows, but if you’re just looking at the odds, they’re very tough.

In terms of the timing, I have much less certainty on that than I do on whether we’re going to have a hard landing or a soft landing. The timing is difficult. But I will say — in our shop we tend to use anecdotal information a lot. It’s somewhat mixed. Housing, which has tended to lead historically, is actually fairly robust. Travel, restaurants, stuff like that is fairly robust. But other stuff — trucking, which has been a guiding light for my firm in terms of economic forecasting with a six-to-eight-month lead time — is extremely weak. We’re hearing bad anecdotes from retail, and then of course there’s the banking problem.

We always knew, given what I’ve already described, there are going to be bodies out there. When you have free money, people do stupid things. When you have free money for 11 years, people do really stupid things. So there’s stuff under the hood that’s starting to emerge — obviously the regional banks recently, we had Bed Bath & Beyond — but I would assume there are a lot more bodies coming. The median regional bank has 43% of their loans in commercial real estate, about 40% of that is office. As you know, we’ve had this huge change in lifestyle due to COVID — the Great Resignation, but also people not going to the office. We actually have a higher vacancy rate than we had in 2008. So I put all that together, and I look also at the inverted yield curve. The timing has always pointed to the third to probably fourth quarter of this year through the first quarter of ‘24 — but given the recent anecdotes and the banking problems, I wouldn’t be surprised if the bean counters a year from now, as they tend to do looking backward, find that the thing started sometime in the second quarter. I don’t know that, but I do this for a living, so I’ve got to have a forecast.

Sokoloff: Well, thank you for that. Given all the uncertainties and the difficulty of having a confident forecast, what does a hard landing look like, and where are the greatest risks? How do you best mitigate those things? Who prevails — the stagflationistas or the deflationistas, or a combination of the two? We spoke about this a year ago. I argued that $18 trillion in sovereign credit with negative yields and interest rates at 5,000-year lows was a really deflationary extreme. On the other hand, for years you’ve argued that the surest way to create deflation is to build an asset bubble and then burst it — and we’re the fourth great super-bubble of the last 100 years. So how does this end, and what are the implications of another round of massive monetary stimulus?

Druckenmiller: Well, the easy answer to your question — and the most truthful one — is I don’t know. But I’ll give it a shot. First of all, when I talk about a hard landing, I’m talking about something that, albeit starting from near-record margins, probably encompasses a 20%-plus decline in corporate profits — with an emphasis on the plus — unemployment probably going up from 3.4% right now to something above 5%, and a number of increases in bankruptcies, which as you know, Kiril, are astonishingly low given that we’ve been in one of the most disruptive economic periods since the 1880s. Until recently there have been basically no bankruptcies, and they’re nowhere near where they were in 2008.

In terms of inflation or deflation — wow, that is really hard. Two years ago I was pretty confident inflation was going to go up and go up materially. Now it’s funny — we had a staff meeting last week and I said, “I could make a case in three years for inflation being at 8%, or I can make a case for deflation.” That’s kind of a wide range in terms of giving an answer. But the hardest thing, looking at all this, is the money supply. Ed Hyman — for whom I have unbelievable respect — has pointed out that we have the most rapid shrinkage in the money supply we’ve ever had. But it’s not that simple, because the money supply grew in the high 30s — around 40% — a few years ago. So if you look at the stock of money, it’s still extremely high. If you make this big mountain and you just come down a little — yes, the year-over-year change in the money supply is like minus 6%, but there’s still a lot of liquidity out there. I think Jamie Dimon said a year and a half ago there was like $2.5 trillion in excess deposits and savings. We’ve worked probably a trillion to a trillion and a half of that out, but there’s still a stock out there.

So trying to time this is difficult. Putting it all together — given the anecdotes, given the fact that we are well into the long and variable lags, already a year in — I would guess inflation will probably come down into the 3–3.5% range in the next six to nine months, and that’s when it gets really hard. Because then you’re asking me to predict what the Fed will do, and I just told you I was astonished at the Fed’s response in 2021 and even in early 2022. In case no one knows, next year is an election year. If they act like Arthur Burns — when inflation goes down to 3 or 3.5% and you haven’t had enough time where inflation is down and they haven’t slayed the dragon — that’s where I could see, a few years out, a stagflationary environment, with an emphasis on the “stag” part.

Or — and I am haunted by this — given this massive asset bubble, if you burst it, there’s a possibility they can’t put Humpty Dumpty back together again. If there’s one thing about the consensus that I’d say I’m on the other side of — and I want to be careful with my words here — it’s this constant refrain that this looks nothing like 2008 or 2007. First of all, those saying it — I don’t remember them predicting in 2007 what was ahead of them, and I don’t remember people saying the banking system was that weak going in. I am not predicting something worse than 2008 — so I don’t want to see headlines tomorrow that I said something worse than 2008 is coming — but I think it’s naïve to not be open-minded to some possibility that the banks have got themselves into a balance sheet problem before the loan losses have even started. Because of the mismatch of liabilities and assets — with treasuries on their balance sheet yielding 2–2.5% while their cost of funds is 5% — before we even get into an economic contraction, many of the banks already have impaired balance sheets. If you pile on losses in commercial real estate, credit card losses — the stuff that normally happens in recessions — and you take the fact that we just had the most rapid increase in interest rates from the bottom in history, I think it’s just naïve not to be open-minded to something really, really bad happening. Again, it is not my forecast, but as a risk manager it has to be part of my matrix.

Sokoloff: Absolutely. Well, let’s go down that train of thought. In a hard landing, what asset classes would perform best? Of course, during the nifty-fifty era — as that bubble burst in ‘72–‘74 — the so-called basic industry stocks went flat, and once the Fed started cutting in ‘75 they absolutely soared. Likewise, during the early 2000s when the internet bubble burst, commodities and commodity equities — especially oil — held up well and were of course the leaders in the ensuing decade. So the natural inclination is to reduce exposure to commodities if a hard landing were coming, but history shows that doesn’t always work. As you do your thinking, how do you evaluate how much exposure to have in these sectors, and what events or market action would make you want to take a very large position?

Druckenmiller: Well, you notice the period you went right to was the period I just also mentioned — the Arthur Burns era with the OPEC increase in 1973, when oil went up 400%, and then Burns taking his foot off the brakes too early. Chemicals, oils, stuff like that — it’s sort of a wonderful period. I don’t think this is all that different. Again, it’s going to depend a lot on government and policymakers’ response if we get a hard landing. But one would think, coming out of it, there are going to be some great commodities opportunities. Copper is in the tightest supply position I’ve frankly ever studied. I’m actually afraid to have a meaningful position in it at this point as we approach the hard landing — only because I know what happens to cyclical factors as a hard landing starts. But coming out of it, given the move toward EVs and the usefulness of copper in infrastructure spending — which I think a lot of government policies will try to encourage on their way out — it’s hard to believe copper won’t be a huge beneficiary. The question is when am I supposed to buy it, and how big is the exposure. A lot of how big I would get depends on the policymakers’ response, if we even get a hard landing. This isn’t a foregone conclusion.

The other interesting place is the U.S. housing industry. Housing has obviously gone down dramatically given the 500 basis point increase in interest rates. But unlike 2007–‘08, we actually have a structural shortage in single-family homes going into this. So if things got bad enough, I could actually see housing — which is about the last thing you would intuitively think of — being a big beneficiary on the way out. And then in growth — biotech has been a big underperformer in the last three to five years, and there are tremendous things going on in cancer and other areas. There’s an article in The Economist last weekend about new antiviral drugs using viruses to conquer bacteria, so that would be a fruitful area.

And then of course there’s AI. I would hope that I haven’t been one to buy into fads historically — I played some Bitcoin at the bottom but never really got too worked up about blockchain, and I did buy the top in 2000 in an emotional moment during the tech bubble after having sold it. But I actually think AI is very, very real and could be every bit as impactful as the internet going forward. It could be a beautiful opportunity in a hard landing, just like 2001–‘02 were a beautiful opportunity — when the tech bubble burst, it created great entry points for companies that went on to benefit from the internet. AI could be there. It’s funny — my firm has only been able to participate in AI by owning Nvidia and Microsoft. And it’s not even clear to me — and this is kind of out there, Kiril — but it’s not even clear to me that if we had a really bad recession, Nvidia would even go down. It’s kind of a stupid statement given the multiple on it, but if investors bought staples historically in recessions, why wouldn’t they buy a company that’s obviously going to grow very rapidly?

We own gold and silver right now. They historically have not done well in hard landings, but given that the monetary and fiscal authorities look to me like they’re kind of at the end of their rope — and given the fact that other countries, particularly autocracies, have decided not to hold their reserves in dollars — I’m betting, for the time being, against the historical performance of gold in hard landings. I could be wrong. Don’t go out and buy gold — I could change my mind in a week or two, folks. But those are just some thoughts to a very hard question. The most important answer I can give is: keep an open mind and see how the authorities react over the next six to nine months, because they could produce very different outcomes.

Sokoloff: Be open-minded to this — given the boom-bust cycles that the Fed has created for decades, the free money of the last decade, the excessive post-COVID period, and now the risk of a hard landing — do you think the independence of the Fed is in jeopardy? And would it be a fatal blow to the institution?

Druckenmiller: You ask really hard questions, Kiril. I think the Fed’s independence will survive. I will say it’ll be at the greatest risk I will have seen in 50 years — so it’s not a slam dunk. I think there’s a 5–10% chance that if the hard landing got really bad and people looked back at the record of the Fed over the last five or ten years — you already hear people screaming about 500 basis points and the Fed having gone too far, and this is with unemployment at 3.4% and 2024 being an election year. If things get really bad and people look at the actual record — he blew 40 years of credibility in terms of a disinflationary mindset, and then like a reformed smoker, maybe if we have a hard landing people say he over-adjusted and was wrong again — the Fed’s independence will come under attack. I hope and believe their independence will survive, but it’s not an unreasonable question.

Sokoloff: Moving on to what the government will do in a recession in terms of stimulus — is it possible that we’ve seen literally the end of the credit cycle, with no more balance sheet left to deploy?

Druckenmiller: It’s possible, but these guys never cease to amaze me. I don’t think they’ll go down without a fight. We come into this with fiscal challenges completely unlike any time we’ve ever been in this situation before. I remember in ‘79 and ‘80 when Reagan rode in on his white horse — the market was at 8 times earnings, prices were depressed, and balance sheets, particularly the government’s, were nowhere near the situation they’re in now. So there’s not the room to maneuver on the monetary or fiscal front in a reasonable manner that there’s been going into other cycles. We basically wasted all our bullets, amazingly, in the last few years — during an economic expansion. But you know, the government can always print money and try. Look at what they did in Japan — they tried everything and it didn’t work. The question is: are we there? The answer is, I hope not.

Sokoloff: Going back to Edward Chancellor — you were kind enough to have Scott Bessent at my ranch in January, and you asked the question whether our current society is so addicted to government and central bank intervention that it’s impossible to work our way out of this. You asked Edward when he thought we had passed the point of no return, and he said he thought we had. What do you think?

Druckenmiller: I would never just categorically say we’ve passed the point of no return. But I was worried about our fiscal situation — so worried about it that 12 years ago I went out and tried to convince young people on a college tour of what lay ahead, worried about the 2025-to-2035 period because of the demographics and what might happen with interest expense. Frankly, the period since then has been worse than I ever imagined. So I don’t want to go quite as far as Edward went, but let me just say I’m concerned. It’s amazing how America has this culture that always seems to respond and come back — and maybe with a hard landing, a flush-out, a terrible recession, that brings back the values and culture we’ve had, and we come out on the other side. But it’s a scary cocktail that we’re being presented with.

Sokoloff: Looking at how you navigate these tricky markets — you’ve been saying for a year that being short is very dangerous because of these brutal bear market rallies — if you’re a standard long/short hedge fund, how do you position yourself?

Druckenmiller: Oh, Kiril, I like concentrated bets. I like fat pitches and then swinging big, and I also like — when you don’t see a fat pitch — standing there and letting the pitches go by. Two years ago, at 15 basis points with money supply growing at 40%, that was a fat pitch. Your risk/reward was: if you were dead wrong, the two-year yield goes from 15 basis points to 10 basis points. At the time I thought if I was right they would go to 200 basis points. I have to admit I didn’t think they were going to go to 500 in a year — I didn’t think the Fed had it in them.

I don’t see a pitch like that out there right now. I was also very negative on the stock market, and I’m not positive on the stock market, but we’ve come a long way. I’m afraid of the authorities. So my advice to a long/short hedge fund would be: keep your gross low. Be open-minded, and if we get a hard landing, there are going to be unbelievable opportunities. I don’t want to miss those opportunities by blowing my money now and having a 20–30% loss where my head is all screwed up when those opportunities present themselves. I’m happy with a portfolio right now that is not net short, not that long, and only about 60% gross.

It’s funny — the playbook I’ve always used if I expected a bad economic outcome is to own treasuries. Well, with the 10-year yielding 3.5% or wherever it is today and fed funds at 5%, that’s not exactly a fat pitch. What if you’re wrong? What if the Fed panics? Can you get an inflationary outcome? So that asset class is sort of off the table. I don’t have some massive short-dollar position — I may have been a little misinterpreted in an interview I did a week ago — but it is a position that will move the needle at my firm. For long/short guys out there: you’re going to have unbelievable opportunities in the next couple of years. There’s a lot of dispersion within industries — just make sure to preserve your capital until they present themselves.

Sokoloff: Let’s come back to a point you raised earlier and go into more detail on it — the U.S. fiscal situation. In the first quarter of this year we saw the third largest deficit in history, exceeded only by the COVID quarters. And what happens in a recession or hard landing can only make the deficit worse. Federal debt interest is running at a $600 billion annual rate. Even during 2018, when unemployment hit a 50-year low, the deficit never fell below 5% of GDP. And then in the post-COVID boom — which you referred to as something you’d never seen before — the U.S. government ran a deficit of over a trillion dollars. Never in history has a boom economy produced such a poor fiscal result. There’s a lot of talk about the debt ceiling, but your concern for years has been the inexorability of entitlement expense. By some estimates, the present value of unfunded government liabilities is as high as $200 trillion, and one CBO study shows that entitlements plus net interest will consume 100% of taxes by 2040. Please elaborate on your thinking on this, which you’ve been talking about for a long time.

Druckenmiller: First of all, the debt ceiling debate is really depressing. I hope we don’t have a technical default — I think it would be stupid, I think it would be a market event, I think it would be a problem. But it’s just amazing: all the catastrophic forecasts from government officials and others, and all the focus on the debt ceiling. I gave a speech at USC last week and I said all this talk about the debt ceiling is like sitting on the Santa Monica Pier — you’ve got a 30-foot wave coming in, and you’re worried about the pier being damaged — but 10 miles out is a 200-foot tsunami. That’s kind of the situation here. To some extent it’s discouraging that the Republicans have given the Biden administration the debt ceiling to even talk about, because it enables them to talk about responsibility. The real problem is not the debt ceiling — yes, a default would be a market event, it wouldn’t be pleasant, it would be stupid — but the other thing is an existential threat to American capitalism.

You just mentioned 2040 — that’s not that far away. Think back 17 years: 2006 doesn’t seem that long ago. That’s 2040. Using CBO estimates — which I think are ridiculously low on interest rates — entitlements plus interest expense become greater than taxes in 2052, just 30 years away. Using their projections, it’s 117% of taxes, and we have an 11% deficit assuming a 4% interest rate. If you have that situation, interest rates aren’t going to be 4%. The most annoying thing is probably the Republicans caving on the entitlements — which they probably needed to do to keep their jobs. Look, Jesse James — why do you rob banks? Because that’s where the money is. There’s no money except in entitlements. That’s where it is. We are absolutely going to cut entitlements in this country. It is a lie and a fantasy to say we don’t have to. The problem is we’re either going to cut them now or later, but if we cut them later, the interest expense — which is already set under CBO to go from 8% to 27% of GDP — will go much, much higher.

It’s a choice, and I don’t think it’s a hard one. They say, “How bad would it be for current seniors if we were to do something on entitlements?” Well, what about future seniors? Why should current seniors get 100% of the loaf and future seniors get zero? It makes no sense. Until we deal with this, it’s going to squeeze out everything else — government investment, private investment — and it’s going to have terrible economic consequences. It’s just extremely disheartening to watch.

Sokoloff: Well, Macron is trying to resolve France’s pension situation, and it’s been quite a harbinger.

Druckenmiller: That’s quite interesting, and I learned something when I was preparing the speech for USC — because I knew we were in bad shape. Economists have something they call the “fiscal gap” — that’s the amount you would have to raise taxes today to maintain the generosity you’ve promised future seniors. In the United States, that’s 7.7% of GDP. What does that mean? It means if you wanted to fix this situation today without touching entitlements, you’d have to raise taxes 40% tomorrow morning and keep them there forever — or cut spending by 35% tomorrow morning and keep that forever. Although of course it’s worse than that, because that would cause the economy to go down and tax revenues to fall, and so on. What was astonishing to me is that our fiscal gap is 7.7%, while France — the poster child for social welfare — has a fiscal gap of 2.4%, less than a third of ours. And they’re addressing the problem. It’s just frankly amazing. A real lack of leadership.

Sokoloff: So this obviously leads us to ask about the dollar, which you referred to. The dollar could certainly fall 25% to reach equilibrium, but there are other factors that could make it worse. After the freezing of Russian foreign exchange reserves, there’s been a steady liquidation of foreign central bank holdings — even France has reduced its Treasury holdings by 25% since March last year. The weaponization of the U.S. dollar is having dramatic consequences. And now you have the possibility that China could continue to grow while the U.S. is in a hard landing. This brings me to one of your favorite themes — the curse of the reserve currency. Please give me your outlook for the dollar given everything we’ve been talking about, and explain what you mean by the curse of the reserve currency.

Druckenmiller: Well, I think most of the audience has heard of the resource curse. If you have oil or some great metal in the ground, the population doesn’t have to work very hard and there’s not a lot of innovation going on, so the economy never really innovates, grows dramatically, or does the right thing. The best way to explain the resource curse is probably to take the opposite — and that’s Israel. They have no resources, and they’ve dramatically outperformed the rest of the Middle East, which has all the resources.

The reserve currency is an unbelievable privilege, and unfortunately that privilege — while you have it — allows you, if you choose, to run very myopic policies that don’t address the long term. It allows you to behave recklessly because markets don’t check you — you’re being funded by outside sources. Everything we just described, the fiscal recklessness, the monetary recklessness — no other country could have pulled that off. And it’s fun and it’s great while it lasts. But it enables you to keep digging and digging and digging into a deeper hole until the consequences come to bear. And ironically, you do it enough and you lose the privilege — and then you only have the consequences. That’s why I call it the curse of the reserve currency. When Britain tried to do fiscal stimulus under Truss, the market immediately shut them down and they immediately went to a more responsible form of government. We have no such check on us. All this craziness went on in ‘21 and ‘22, and the dollar actually went up. In any other place, the market would have rejected it and we would have gotten our house in order immediately. When you’re the reserve currency, you can continue digging your own grave — piling on debt — until you’re under the soil.

The thing that disturbs me about the last decade is what I would call trying to solve the problem of debt with deflation — which was of course tried in the 1920s with very unsuccessful results. With free money there was a massive misallocation of resources, and I was very worried when I saw the pricing of borrowing for risky borrowers at ridiculously low rates that did not reflect risk.

Sokoloff: Going back to your comment about no bankruptcies — sooner or later this has to be resolved. Will the government end up supporting everything? Is there a limit? Some will survive and some won’t. How do you think that ends?

Druckenmiller: I don’t know. That is the existential question of our time. If we get a hard landing, are we finally going to allow creative destruction and capitalism to do its thing — with horrible near-term, one-to-three-year consequences? I think if we do, we’ll have a chance. People will go back to work, values will come back — even Gen Z will think maybe they’re supposed to work. Maybe we can clean all this out, and what’s made America great for 200 years could possibly revive. On the other hand, we can go the route we’ve been going for the last 20 or 30 years — try more monetary stimulus, more debt, sort of what Japan has done — and end up in a permanent malaise. We’re not nearly as well positioned to fight that battle as we were back then.

I will never forget — because it was right after I started Duquesne in 1982 — Volcker intentionally threw us into a recession. He raised rates to 20%. We had a horrible recession in ‘82, a big increase in unemployment. But you know what? Reagan won 49 states in 1984. We got 20 to 30 years of prosperity. We took the pain and we cleaned up our act. I’d never bet and say America is finished, and I would like to see us try that experiment again — which is not to manipulate things. But given our political history, given the divisiveness, given where we are, it’s hard to imagine any politician having the guts to do that.

Sokoloff: What came to mind as you were talking is Andrew Mellon’s famous statement from the early ’30s: “Liquidate labor, liquidate capital, purge the rot from the system.” Of course he was vilified for that, given the way things unfolded. Do we have the courage to follow through?

Druckenmiller: He was vilified, and we got a depression — which would be a horrible price to pay. But again, I don’t want a depression and I hope we don’t pursue policies that throw us into one. It is funny to look back, though: America kind of did okay after the ’30s ended. There are going to be tough choices ahead, and I think we all have to be open-minded, watch, and see how they go. We don’t even know who the president will be in 2024 — and hopefully it’s not going to be Donald Trump or Joe Biden.

Sokoloff: You suggested that there’s a good chance the coming decade could be a lost decade for equity markets. We’re dealing in scenarios and building probabilities, but you’ve obviously navigated through such situations before. How can we protect our wealth?

Druckenmiller: Just because I said I expected the market to be in the same place it is now in 10 years doesn’t mean it’ll be a lost decade for investors. You could have made a lot of money in the 1968-to-1982 period being long the stock market and being long the right stocks at the right time. We had huge bull market rallies from ‘70 to ‘72. As you mentioned earlier, you could have made a fortune in oil and chemicals early on, then another huge rally from ‘75 up to ‘77. So even if we were flat for the next 10 years, there will be opportunities — I have no doubt. There will be applications built on top of the model builders in AI where you’ll have $100 billion companies emerge. And who knows — with all the dark talk we’ve had for the last 40 or 45 minutes — AI could be as impactful productivity-wise as the PC was. So much of the technology we’ve had has gone into social networks and other things that have not enhanced productivity. There are some hopes there.

But when I look at the market at 20 times earnings, when I look at margins as high as they are, when I look at the fiscal challenges I just pointed out and the squeezing of private investment — it’s hard for me to envision stocks being higher in 10 years. I think it was in response to a Washington TV show, and everybody said, “But I’m bullish for the long term!” I just don’t want people to go out and buy-and-hold, thinking they’re going to make 9% a year in the next 10 years. I’ve been wrong before — they might — but that’s not my expectation.

Sokoloff: You told me when we spoke a week or so ago that MBS is the most popular leader in the Middle East among the people — not among governments — and I have to confess that was a surprise to me. What do you think the significance of this is for the Middle East and geopolitics in general?

Druckenmiller: Well, I just think our administration has made a terrible mistake isolating this guy. He’s 37 years old, he’s wildly popular — not just in Saudi Arabia but in the Middle East. He’s a dynamic leader. And it appears to me — and this is more guesswork — that he’s trying to make himself a hegemon in the Middle East. I noticed he brought the president of Egypt in, met him at the airport, done a deal with Iran — he’s building this block within the Middle East, and I think he’s probably going to succeed. His discouragement is not so much toward the U.S. as toward the Biden administration, and if we get the right leader I think this can be repaired — underline “think” as opposed to “know.” Depending on who the president is in ‘24, I think we can get this back. But I think it’s imperative we do. This guy’s going to be in power for 40 or 50 years. Obviously, regardless of what you think about climate, there’s an energy transition with a bridge of at least 10 to 15 years. We don’t want him to be in bed with China and not with us. I just think it’s a disaster given the whole geopolitical outlook.

Sokoloff: Well, let’s move on to some personal questions to finish up. You and your wife managed to raise three extraordinary daughters despite enormous family wealth. How did you manage it, and what advice do you have for others? It’s not an easy thing — how do you best transfer wealth to the next generation without generating entitlement and the loss of the drive to succeed?

Druckenmiller: I managed it with ridiculous luck. I married someone who I was in love with — I knew she was very intelligent and had great values, but I had no idea what a great mother she would be. I’ve always told young people, in terms of parenting: forget quality time, it’s quantity time. All time with your children is quality time. It’s funny, because my wife and I had a very different view in terms of how to handle our wealth with the kids — she didn’t say no a whole lot, and I thought she was crazy. But in terms of the household, she was the boss. You’re right — we’ve ended up with three very happy, overachieving, grounded children. She gave up her job and made her job raising the children at home, put such effort into it, and spent so much time with them. I tried to spend the time I could with them. I think rather than preaching to them, they just observed our behavior and our values and ended up being great kids. But I’d say I had about 3% to do with that and Fiona had 97%. There was a lot of luck involved. But if you’re only as happy as your least happy child, I’m very, very lucky.

Sokoloff: Well, people in our business tend to be very focused and driven, but I wouldn’t say many of them are happy. But you’re a happy man — you’ve got this balanced life, you’re one of the great philanthropists in America, you have a beautifully grounded wife who you love, three lovely daughters all successful — and yet you achieved this phenomenal investment performance. How do you do it?

Druckenmiller: I don’t know, Kiril — I’ve just been very fortunate. I’ve lived the American dream. My mother-in-law says I’m an idiot savant, and I agree with her. I don’t know why I just happen to be good at compounding money. I love the business — I love the intellectual stimulation of knowing that every event in the world changes some security price somewhere, and trying to figure out the puzzle. So if it works 60 or 70 hours a week and you love your job, there are so many hours right there. We’re somewhat anti-social, so we don’t spend a lot of time going out to dinners and society events and stuff like that, which leaves time to be with our family and do leisure. The philanthropy is just a source of great joy. I consider it a privilege that we have the money to do it — I don’t think it’s something we should be thanked for. I like to thank the grantees, because they’re giving us the joy of funding them. They’re the do-gooders out there changing the world. Given the life I’ve lived — living the American dream — if I wasn’t happy, that would be bizarre. I’ve just had an extremely lucky life.

Sokoloff: Wonderful to hear that, Stan. Last question — your philanthropy obviously has your fingers in many different pies. What are you most excited about and what’s most interesting in that space?

Druckenmiller: Well, as you know, there are a few things. I had the great fortune of meeting Jeff Canada back in the early ’90s, and he was basically the father of what I would call the “place matters” thesis — that Raj Chetty subsequently proved with statistics — that if you can change a neighborhood, you can clear out some of these pockets in America where kids don’t have a shot at the American dream. Because of the success of the Harlem Children’s Zone, and because we have a great young leader there now — and Jeff has actually come back to work after retiring to help roll this out nationally — through Blue Meridian Partners, there’s just tremendous new interest from new funders in the “place matters” space. George Floyd combined with COVID shined a light on the plight of disadvantaged neighborhoods. So that’s something I’m tremendously excited about — taking the Harlem Children’s Zone model, finding leaders in other challenged cities, and changing them. Economic mobility.

The other one is cancer. I’ve been on the board of Memorial Sloan Kettering for I think 27 or 28 years. The first 10 or 15 years we were poisoning people with chemotherapy and hoping it would kill the cancer before it killed the patient. Then about 14 years ago they sort of figured it out — mutations, personalized medicine. There wasn’t just one lung cancer, there were hundreds of them. Immunotherapy — they basically cracked the code. The cancer therapies are going like this, if you imagine an S-curve — we’re right here at the inflection. The lung cancer center we funded in 2014: the five-year survival outcomes were at 14%. They’re now 58%. That’s sort of just what’s going on throughout cancer.

I’m hoping for the same kind of results — though it hasn’t happened yet — in neuroscience and neurology. We’ve funded a lot of basic research there and we don’t have the results we have in cancer. I’m hoping we’re 10 or 15 years behind it. I do think the brain will sort of be the last frontier. You only get success through failures, and we’re finding out over and over again what doesn’t work — but I’m pretty sure they’ll figure it out.

And then the last thing is the environment — that’s a big bucket for us. There’s a lot of money going into climate and other things. I would just say there: I’ve been very disappointed that it’s sort of a top-down, command-and-control model. Why we’re not doing a carbon tax and forgetting all this government intervention, just letting the market handle it — it’s been a big disappointment. But those are our three big buckets: economic mobility, which is obviously really affected by education; health; and then the environment.

Sokoloff: That’s very inspirational, Stan. What a wonderful thing you continue to do for so many people. I’m very grateful for having had this conversation.

Druckenmiller: Well, I think that wraps it up for today. Thank you so much, Kiril — it’s always great to see you. I love talking to you, but your questions are a little too hard. It makes it more fun, though. Thanks a lot — have a good day.

Sokoloff: You too — thanks!