Stanley Druckenmiller - Fed robbing poor to pay rich
Transcript
Joe: He knows he’s forgotten more about this than I know.
Druckenmiller: Well, I was surprised to hear Steve not mention the term “financial conditions,” because Bernanke didn’t specifically open with interest rates — he opened with financial conditions. And it’s my understanding, last time I checked, the stock market’s at an all-time high and it’s up — I don’t know — 200 percent, whatever the amount it’s up over a number of years. And the way the Fed calculates financial conditions — I read a piece this morning, it’s probably accurate, it fits my intuition — financial conditions are actually slightly tighter, according to the Fed, now than they were in June. I don’t know whether that’s true or not; someone else wrote it. But certainly a stock market at an all-time high would suggest that we don’t have a problem with financial conditions.
I was surprised. Look, I don’t really care about surveys — those people are betting with their real money. The big money was betting that they were going to taper; otherwise gold doesn’t go up $50, the dollar doesn’t get killed, stocks don’t go crazy. I agree with Paul G.’s article this morning. I think they lost their nerve. And I think the tragedy here is I think they had a freebie — they had telegraphed tapering, it was in the market. They could have started the process, gotten us off the dope, it wouldn’t cost them anything because it was in the market. And to me, they blew it.
The problem here is: when you look at what happened in June to the financial markets, this is going to make it so much harder for the next chairman to start the process than had we not been through this fiasco the last three or four months. So to the extent that one of the tools in the toolbox is communication, and this whole transparency argument — I think it’s been a mistake.
Druckenmiller: Oh, I don’t believe in transparency, Jimmy. Jimmy and I were talking earlier. I was at Pittsburgh National Bank in 1979 — pre-Greenspan, pre-CNBC, all this stuff. I wake up one Sunday morning and the Fed has raised rates 200 basis points the night before, on a Saturday night. Paul Volcker — to me the greatest Fed chairman in history — broke the back of inflation, set up a period of long-term growth. Transparency has led to more volatility and more confusion. Look at what just happened with this forward guidance stuff — they were trapped by their own dots. They wanted to be transparent on forward guidance, but then, oh my God, if you take what their own forecasts spit out, Fed Funds are supposed to be 3% in 2016. So now what do we do? I’m with Volcker: what you do is just stop all the talking and do your job like he used to.
Joe: What you watch… but I’ve been saying over and over, like this — this narrative that we’ve heard from the Fed: “We’re gonna slowly start to taper, and then unemployment will be at this point down to 7, and then it’ll be heading to 6.5%, GDP by then should be 3 to 3.5%,” and it’s this beautiful little story. But we’ve had a five-year recovery already. There’s no way they know the future about whether it’s gonna go as planned, which is going to allow them to exit. And my biggest fear was that the economy doesn’t cooperate — because it hasn’t. You saw the previous forecasts are nowhere near where GDP is supposed to be. So how do they ever get out if the economy — what if it doesn’t? What if we get an uptick in unemployment? What if they can never justify getting out based on the economic fundamentals? Do we need $85 billion a month forever?
Druckenmiller: Look, my concerns with QE are probably more well-documented in the press than I would like — I had a little press two or four months ago for other reasons and made some comments about the Fed. Let me just sort of crystallize what my concerns with QE are.
First of all, I’d like to say that QE1, when we had dysfunctional markets and were facing a meltdown — I thought Chairman Bernanke, what he did was creative, what he did was courageous, one of the boldest, most effective moves in the history of the Fed. I can’t think, given the intellectual capacity, where he came from — I can’t think of a better man and a better American to do the job he did with QE1. So let me first say: I think Chairman Bernanke has been a great public servant, and what he did with QE1 was just phenomenal.
Having said that, I believe QE is an extraordinary measure that should be used in extraordinary times — dysfunctional markets, potential meltdown. I didn’t even agree with QE2. But as you pointed out, Joe, we are five years into a recovery. The stock market has gone up and up and up. We’re not talking about zero interest rates here — we’re talking about $85 billion a month.
And I don’t think the academics at the Fed understand the unintended consequences of the potential exit. Yesterday the Chairman was asked about whether this would complicate the exit, and incredibly to me he suggested it wouldn’t. Can you possibly say — what went on in June, where they hinted that maybe if the economy is strong for three months, maybe we might do a little taper? You saw what that created. Can they possibly think that by adding $85 billion a month to their balance sheet — and frankly to investors’ balance sheets — the exit is not going to be harder?
Everyone focuses on the Fed’s balance sheet — $3 trillion dollars and the problems that creates. Don’t forget there’s another balance sheet, and that’s the balance sheet of us in the market, who sold them the bonds and were forced into the risk assets they’re so desperate to have us in. We have been forced into securities at subsidized prices, and when those subsidies are removed — whenever that is — those prices will adjust, as shown in June, and they will adjust immediately, and they will do it on no volume.
I had an old boss in Pittsburgh who used to say: stock manipulation takes hundreds of millions of dollars to prop a stock up. The minute the earnings report comes out, all that money is wasted because the market reprices. This wealth effect they’ve been using to prop this stuff up — once that’s removed, you go down on no volume, you reprice. And I will bet: from beginning to exit, the wealth effect of QE will have been negative, not positive.
Joe: I’m gonna explain this to me then — yesterday, and it looks like today, the market will be up. I don’t know if it’ll end up, but clearly up. Should bad news be bad news? If you think that the Fed — this is really bad news — is this just a short-term pop in the next week or two?
Druckenmiller: As a practitioner in markets, I love this stuff. This is fantastic. It’s fantastic for every rich person. This is the biggest redistribution of wealth from the middle class and the poor to the rich ever. Who owns assets? The rich. The billionaires. You think Warren Buffett hates this stuff? You think I hate this stuff? I had a very good day yesterday.
Okay, so anybody who thinks that — Friday we get Summers is out, then 20 minutes before the Fed meeting a White House official leaks it’s going to be Yellen, and then we learned 20 minutes later it’s going to be Yellen without tapering — anybody who thinks financial markets could possibly have adjusted to that equation in 72 hours is crazy. This is very bullish for markets — but it’s bullish for markets intermediate-term. And all this stuff I’m talking about is long-term and really un-actionable for a money market practitioner.
I mean, I think when I was on your show in March I said we were in the seventh inning of a four-year bull market. Now I thought we’d be about done by now. We’re going into extra innings. Maybe the punch bowl was running out — it was just about dry — and two waiters just came in and they’re carrying this new punch in a tub. We’re gonna really party now.
Joe: Yeah… the reality of it — it’s very good for guys like Stan, and to a much lesser degree somebody like me. But it’s bad for my children, his children, and the guys that caddy for Stan and me. That’s what it’s really bad for.
The economy is not where they would have hoped it would be. I mean, obviously Bernanke — I think it’s the worst thing for the long-term, because he’s saying this is much worse than we would have thought. He did have a free pass to do it. Now he’s supposed to be alone, by himself, not affected by anything when asked after all this. That would be good. But I just can’t imagine why they wouldn’t just start. The hangover is gonna be worse from this.
Druckenmiller: But they won’t cut entitlements. They won’t touch them. We’re going to continue to cut food stamps, we’re going to cut Head Start, we’re going to cut NIH grants. And it’s pretty amazing what’s going on here.
Joe: You had a really incredible statistic that I was reading through early this morning about what we’re paying seniors right now versus what we’re expecting the kids who are about to be born today.
Druckenmiller: Well, this is a number I’ve been looking for for about a year and a half. This organization that I’ve helped out a little, Can Kicks Back, commissioned Larry Kotlikoff — who I think I mentioned on your show back in March — he’s the number one generational accountant in the country, he’s a professor at BU. And basically the numbers are as follows: if you are an average 65-year-old, you will have benefited by receiving $327,000 more in benefits than you paid in.
Joe: Three hundred and twenty-seven thousand more?
Druckenmiller: Yeah. Now, there are assumptions here — so maybe it’s $300,000, maybe $350,000 — but this is the guy taking his best shot at it. But if you are unborn, you’re gonna pay — based on current benefits and tax schedules — you’re gonna pay $425,000 more than you get out. So current seniors are going to get $700,000 more than future seniors. And somehow people don’t have a problem with that?
I mean, we’re looking at the stuff we’re cutting, and these people are untouchable. And you know, everybody says, “Well, the seniors wouldn’t give that up.” I think if the seniors knew this number, I think they would give it up. I don’t think they want to do that to their grandchildren and their great-grandchildren — I really don’t.
Joe: And we’re worried… I agree with you, but I think it’s so hard.
Druckenmiller: Yeah, I think — look, I agree with you 100% that if you look at the numbers rationally, it makes everything make sense. If everybody is ultimately so selfish, okay — short-term, this is very hard.
With the same guy that came up with the actual unfunded number — some people say $70 or $80 trillion. Think about it: everybody here pays a payroll tax, right? If you think about it, what that really is is the government borrowing the money from you and promising to pay it back later. So it’s an off-balance-sheet debt of the government. This guy took his best shot at it — if you brought that onto the balance sheet, so if you took the future revenue stream according to scheduled taxes and scheduled benefits and you netted out the present value, the current debt of the country is not $16 trillion as advertised — it’s $200 trillion.
Joe: Two hundred?
Druckenmiller: Yeah. Now I don’t know — again, there are assumptions in there, maybe it’s $180 trillion, maybe it’s $220 trillion. It’s a heck of a lot more than $16 trillion.
Look at the way this shutdown is being portrayed in mainstream media — as if it’s just so unheard of to even talk about these things. Like no one wants to hear it at this point. And the people that want to deal with entitlements are losing the PR war. The reason they’re losing it is they’re focusing on the debt. I think we’ve got to focus on the unfairness of this statistic, Becky — that you may have seen, that I sent you earlier.
If you go back 30 or 40 years ago, the percent of federal outlays spent on children and on the elderly was about the same — about 20 percent each. That number over the last 30-40 years has gone to 50 percent for the elderly and 15 percent for children. I mean, think about that. And that’s where we are now. And if you look forward the next 10 years under the federal budget, according to the CBO, we’re going to grow $1 trillion — $875 billion goes to Medicare, Medicaid, and Social Security; $6 billion goes to children. Six.
Joe: You were saying that we’re in the seventh inning of a bull market — what do you think now? You said extra innings.
Druckenmiller: Yeah, I think again what happened in the last four days is extraordinary — I think it’s gonna extend things. You’ve got a lot to like here. I mean, when you look at a potential Yellen Fed and what just happened, with the inability — in my opinion — to ever instigate any serious tapering unless there’s something really extraordinary going on… I mean, maybe this trickle-down monetary policy that gives money to billionaires and hopefully we go spend it is gonna work. But it hasn’t worked for five years. So I’m afraid of — you know, Joe’s implicit question earlier is: how do we get off the dope? We just had the greatest opportunity you could ever imagine to get off it and we didn’t pull the trigger.
Joe: Would you — if it had been Summers, and if they had done $20 billion on the taper, would it be positive for gold?
Druckenmiller: I would think that would have been a no — gold would have gone down, down to $1,200.
Joe: And in fact — did you change your mind? No, I know, because yesterday morning people said, “Nice call on gold!” It’s like — that wasn’t my call. That wasn’t my call. That was Goldman’s call. But all bets are off.
Druckenmiller: Well, look — everything I have said about my concerns about QE, that’s as a citizen and that’s a long-term thought. As a money manager, yeah, and as a wealthy person who deals in markets, this is great for me. I don’t think it’s great for America. But I’ll tell you what it is great for — it’s great for gold. And on an intermediate basis, it’s great for risk assets. At some point this will end. I don’t know when this will end. But I think the risk/reward is pretty good here for risk.
Joe: How long, though? I mean, you said it won’t—
Druckenmiller: That’s the game, right? The game is figuring out when. I don’t know. Luckily I’m not managing a huge hedge fund anymore — I’ll be able to change my mind.
Joe: When I decide that bubble can’t be as big as we already had — could it — at the housing bubble?
Druckenmiller: We’ve learned something here. I don’t know how far they’re willing to go. So we could replicate the same — since we weren’t buying $85 billion a month in the mid-2000s. So monetary policy was too loose, but we weren’t doing this stuff. Where’s the emergency? Where’s the crisis? Why are we spending $85 billion a month, adding to the eventual exit problem — and again, two balance sheets: the Fed’s balance sheet and the balance sheet of everything the public got sucked into.
Becky: Stan, thank you for being here. The SEC and you come back and call us when you do change your mind.