Stan Druckenmiller on Fed Policy, Election, Bonds, Nvidia
Transcript
Basak: I want to welcome in our Bloomberg television and radio audiences to this special episode of Bloomberg Markets. Seated here with an exclusive interview with the chair and CEO of Duquesne Family Office, billionaire investor Stanley Druckenmiller. Now, Stan, in 2021 you had written an opinion piece in the Wall Street Journal that said the Fed is playing with fire. And a couple of weeks ago you wrote to me and said that you hope the Fed is not making the same mistake it made in 2021 — the mistake of being trapped by forward guidance. What’s at stake here? Why are you so concerned?
Druckenmiller: Thanks — it’s nice to be here. In 2021, I think the Fed did a great job when we were facing a black hole during COVID in 2020. They took some very aggressive actions, and one of those actions was forward guidance — where, to try and settle markets, they guided ahead to basically a zero interest rate policy. I think it was in force, frankly, for three years.
We were all fooled by COVID. I was too. When it first happened, we were wondering: are we sinking into a black hole? But it was pretty obvious — I’d say a month or two after vaccine confirmation, which was the fall of 2020 — that we weren’t going into a black hole. Unemployment, which I think had been around 14%, started to drop precipitously. The economy came back.
We wrote the article in the spring of 2021 because at that point we felt we were absolutely booming — and it was everywhere: in the economy, in the companies we talked to, in the unemployment rate everywhere. And the Fed wasn’t adjusting. They were buying, I think, $120 billion a month in securities — it might have been down to $95 billion a month by that time — and rates were still zero. I think had they had a clean slate, they would have never been buying bonds to that degree given what was going on in the economy. But they were trapped, in my opinion, by forward guidance.
It’s pretty incredible that from the point we wrote the article — when it was so obvious that we even wrote about it — it was 13 months from when inflation went through 2% to when they finally raised rates. They also bought $2 trillion in bonds during that period.
So the reason I draw the analogy today — and this situation is quite different — is that back then I had a lot of confidence they were wrong on inflation. The money supply was growing at 40%, the economy was booming. This one is much more nuanced. But just look at the asymmetry. Back then, you go 13 months with inflation through the target — it goes up to 8-9% — and you’re still going another 3 months keeping rates at zero and buying bonds like crazy. And when you finally move, you move 25 basis points. Your rationale is “we need to see the whites of inflation’s eyes,” and you’re saying this when inflation is 3, 4, or 5%.
Today, we’re still quite a bit above target — depending on which measure you use, somewhere between 2.5% and 3.25%. They’ve come up with this theory that monetary policy is restrictive because of real rates. But I don’t really go by theory. I’m a market animal. We’ve found over the years that markets are better predictors than professors. And when I look at the landscape — equities at a record high, gold at a record high, GDP above trend, credit spreads tight, bank earnings and forecasts looking good — we don’t see any restriction whatsoever. Crypto going crazy. You name it.
So all of a sudden, the crowd that said they wanted to see the whites of inflation’s eyes and be data-dependent rather than forward-looking are now cutting 50 basis points — not a quarter, which is what they started off with — and we’re not even to target yet. This is all on the theory that monetary policy is restrictive. I don’t have the conviction I had in 2021 that the Fed is going to be wrong, but on a risk/reward basis, it just doesn’t make any sense to lay out the cards they’ve laid out and commit themselves through forward guidance once again. What I was trying to say when I said it reminds me of 2021 is: I just hope that if the data doesn’t go with them — and it certainly hasn’t since they started this narrative — they adjust this time and aren’t trapped by forward guidance the way they were in 2021.
Basak: Does this mean you think the 50 basis point cut was an absolute mistake? And do you think there is a risk of an inflationary spike like we saw in the 1970s?
Druckenmiller: Yeah — do you have the chart we talked about earlier? Let’s see if we can pull that up. There’s certainly one that investors have been looking at. Even without the chart: in the 1970s, inflation came down from a remarkably similar level to where it was in 2021. I think the 2021 peak was 9%; I think it was 8% back in the ’70s. It came down to 3%. The Fed was easing because they had the 1975 recession. The Fed started easing, and inflation went right back up — I think it peaked at 12% when Volcker came in and smashed it.
I’m not predicting that. But when you’re easing into a melt-up in financial markets, and we have the fiscal policy we have going forward, it’s certainly a risk. I just think it’s a mistake not to take that risk into account. I don’t really understand the rush to 50 basis points. And markets have already priced in a 97% chance of a cut at the next meeting — all through Fed forward guidance.
My friend Jim Grant — one of my favorite writers — said they’re not really data-dependent, they’re forward guidance-dependent. And that’s what they’re showing again. Look, he might be right, and I hope he is. But it’s a big risk. If they’re wrong and inflation takes off — because monetary policy is in fact not restrictive, and we have fiscal expansion going on — and they have to tighten again, I think it could be a nightmare for markets and maybe even for the independence of the Fed. You can’t make multiple mistakes like that. But I’m not predicting it. I’m just asking: why did they go 50? And why do they need this forward guidance?
Basak: I’m glad you brought up Fed independence. Are you concerned about it in the scenario of a Donald Trump win? In an interview just a day ago with Bloomberg editor-in-chief John Micklethwait, Trump said the job at the Fed is to show up in the office once a month and say “let’s flip a coin.” On the other hand, your longtime colleague Scott Bessent has been informally advising Trump and floated the idea of a shadow Fed chair. How compromised is Fed independence at this juncture?
Druckenmiller: Well, I think a shadow Fed — and that kind of talk — is a horrible idea and irresponsible. However, I think if Trump were elected, the institution would hold. I think a bigger threat to the Fed would be major mistakes by the Fed itself.
The Fed is obsessed with soft landings and fine-tuning. To me, that’s not the real job. The real job is to avoid the kind of problems we had with the Great Financial Crisis — which, in my opinion, happened because the Fed was too easy going in, creating a housing bubble. And then obviously after COVID: not the initial actions, but sticking with zero rates for a year and a half to two years, buying bonds with the money supply exploding.
They’ve got to stop the fine-tuning and start looking at the bigger picture. Committing yourself through forward guidance — and then if inflation starts going up again — could lead to a hard landing, not a soft landing.
Basak: Speaking of the future — another big uncertainty ahead, beyond Federal Reserve policy, is the November election. I’m wondering what the Druckenmiller playbook is around this election cycle, what you think the most likely scenario is, and how you’re set up for it.
Druckenmiller: Well, it’s an evolving situation. If you had asked me 12 days ago, I would have said I don’t have a clue — it’s a total toss-up. I still don’t have conviction on who’s going to win. But as I said earlier, I like market indicators. I like them for the economy, for assessing financial restrictiveness — and I also like them for elections. I remember how right the market was on Ronald Reagan in 1980, despite what the pundits were saying.
And I must say, in the last 12 days, the market — and the inside of the market — is very, very convinced Trump is going to win. You can see it in the bank stocks, you can see it in crypto, you can even see it in DJT, his social media company. Throughout the board, the industries that would benefit from deregulation are outperforming the others. So if you put a gun to my head — and thank God there’s not one — I would have to guess Trump is the favorite. But who knows what these polls even mean? No one even responds to them anymore.
The delta between the four outcomes — blue sweep, red sweep, Trump with a blue Congress, Harris with a red Congress — matters a lot. First of all, I think a blue sweep is extremely unlikely. Even if Harris wins the presidency, looking at state-by-state polls, it looks like the Republicans are going to win the Senate. If you do get a blue sweep, just the math of taxes, business confidence, lack of animal spirits, and no change on the regulatory front — you would have a rough time for equities, I think for 3 to 6 months. And I think this would translate into the economy, because equity ownership is now 25% of financial assets — an all-time high, up from 15% not that long ago. So that’s the blue sweep. But the good news — or bad news, depending on how you view life — is I think it’s highly unlikely, so that playbook is probably irrelevant.
What about a red sweep? A red sweep — which I think is more likely than a Trump presidency with a blue Congress, because I personally think anyone who votes for Trump is probably not going to split their ballot for a Democrat in Congress — gives you animal spirits in the business community, deregulation, and some potential uplift in business sentiment. The economy could be potentially stronger for 3 to 6 months. My fear would be that — for those reasons, and because I think bond yields already don’t reflect a proper economic outlook — you would probably get a bad response in fixed income markets, which could then snuff out the equity rally. At Duquesne Family Office, where we’re worried about bonds, we’re not playing it through the stock market — we’re playing it through the bond market. If you want to go after the cause rather than the symptom, there are still stocks and other things to do. I also think under a red sweep, the Fed — for the reasons I just alluded to, and maybe because of past relationships — would be much more hawkish than they would be under a Harris administration.
Under a Harris administration with a Republican Congress, there would probably not be a lot of change from the current landscape.
Basak: I want to remind our viewers — if you’re just tuning in, I’m with Stanley Druckenmiller for Bloomberg television and radio. He leads the Duquesne Family Office. You’ve been walking through each scenario, but what about your personal views? At a recent conference you mentioned you wouldn’t vote for either Kamala Harris or Donald Trump. Which concerns you more?
Druckenmiller: I like Bret Stephens’s line in the New York Times — “I haven’t decided who I’m going to vote against.” I can’t see myself voting for either one of them, so it really doesn’t matter. And I certainly will never support either one of them.
I just think they’re actually unified on some things — like industrial policy. Both of them apparently think the government should have a major role in allocating capital, which I find frankly bizarre. When I think back 10 or 15 years, I’m a reader of Thomas Friedman — a quite good writer — and he was constantly pointing out how the Chinese model was potentially superior to the US model: talking about how nice their airports were and their roads, and how they could target certain industries. Well, my long-held capitalist suspicions have been confirmed. China has been, as we all know, a disaster with that model. But somehow both parties — Republicans and Democrats — have adopted industrial policy, throwing free-market Reagan capitalism aside. So on that front, I find their policies equally bad.
I find her policies much worse in terms of anti-bigness, anti-business regulation. But frankly, I grew up in America with a certain model of a president — George Washington, Thomas Jefferson. Ronald Reagan was one in my lifetime where there was a certain dignity and decorum in the office. I don’t judge anyone who wants to vote for Trump. But for me, it’s just a red line. So I’ll probably write in someone when I go to the polls.
Basak: When you think about the policies Donald Trump has put forward — a day ago he said to Bloomberg that “tariff” is the most beautiful word in the dictionary. He’s dismissed the idea that many economists believe tariffs could have punitive impacts on the American consumer. How do you see it?
Druckenmiller: Well, I don’t like tariffs. I’m a free-market capitalist. The only thing I’ll say about Trump is that he’s a bit of a blowhard, so I don’t know whether he’s actually negotiating — with our foreign adversaries and frankly with our foreign partners as well. I don’t think it’ll be the end of the world, but I am not in favor of tariffs. I don’t like them at all. It’s interesting, by the way — the Biden administration kept all of Trump’s tariffs, so it’s not like I’m a fan of their tariff policy either.
Basak: What about taxation? You’ve been very critical for many years about the US debt load and the fiscal situation. There are analyses suggesting both candidates would increase the federal debt load — the Committee for a Responsible Federal Budget says Trump more so than Harris. Can Congress get away with extending the Trump-era tax cuts? Or is there another way to close the gap?
Druckenmiller: In my world, the less taxes the better. But we live in a world that, I hope, still includes compromise. If there’s some sort of agreement on spending cuts, I could definitely tolerate tax increases to balance them.
I will say one thing: I don’t really like the media narrative that equates fiscal irresponsibility through tax cuts with fiscal irresponsibility through spending. And again — I’m a fiscal hawk. I’m more worried about this, and its effects four or five years out, than whether we have a soft landing and the economy grows at 1.2% or 2%. This is big stuff. But tax cuts are accompanied by an addition to the capital stock, whereas spending is a shrinking of the capital stock replaced by government spending. So of the two, tax cuts are the lesser evil.
That said, personally, if I were in government, you can’t just do tax cuts if you don’t get the spending cuts. And it was Trump who took entitlements off the table in 2016 — and that’s where the money is. So I give him an F on fiscal responsibility too.
Basak: I want to switch gears because we only have a little bit of time left. I want to talk about the market — specifically some wagers you’ve put on. We spoke about Nvidia, and you said it would be something you’d hold for years. Since then you held it for a while, but more recently you’ve been selling. How much do you have left? Why have you been selling? And can you see yourself getting back in?
Druckenmiller: I’ve made so many mistakes in my investment career. One of them was selling all my Nvidia — probably somewhere between $800 and $950. I think it’s around $1,300 now. I own none today — I’ve missed the last 400 points. It was a big mistake.
When I saw you at that conference 18 months ago, I fully expected to own it for years. I think it was $300-something then. And as I’ve said in other interviews, I’m not Warren Buffett. What changed is that it tripled in a year and I thought the valuation was rich.
We are long-term believers in AI, and there are still many ways we’re playing AI — particularly the infrastructure that’s been built out to support the power needed. And yes, I think Nvidia is a wonderful company. If the price comes down, we’ll get involved again. But right now I’m licking my wounds from a bad sale.
Basak: The other question I have to ask — we don’t have a lot of time — you were saying you express a lot of your views through the bond market. The 10-year hit 4.1% again recently. Do you think it goes much higher? Where do you think it ends next year? Would you go very short at this rate?
Druckenmiller: I don’t know what “very short” means. We shorted bonds the day the Fed cut 50 basis points, because we thought it was a mistake. We still have that position. It’s not so much that I have a view on where it’s going short term. What I do believe is this: if Powell ends up being wrong and inflation re-accelerates next year, bonds could go up a lot — hundreds of basis points — whereas if he’s right, you might lose 25 or 30 basis points on the short. The golden rule I’ve always had is that the 10-year should trade around where nominal GDP is — which is about 5.5%. So the risk/reward, to me, is being short bonds.