Stanley Druckenmiller & Paul Tudor Jones Interview - Robin Hood Conference
Transcript
Jones: Good morning and welcome everyone. I have the great honor and privilege of interviewing my close friend Stan Druckenmiller today. What a spectacular 30 minutes this is going to be. It’s actually such an easy interview with such a cheery, light-hearted, good-natured, easygoing person who I know will be very kind to me during this whole process.
It’s made even easier today because Stan just had a knee replacement two weeks ago, was in a nerve trap last night, and was going to cancel because he was in so much pain he couldn’t make it. But because it’s Robin Hood Nation, because it’s Robin Hood, and he was one of our former transformative chairs that took us to a new level, he’s here today. He’s going to be jumping up and down because he is in some pain.
Jones: Okay, here we go. Yesterday I was interviewing Tony Robbins. Now I’m interviewing you. It’s like going from crack to quaaludes. But we’re both short. Just one last thing — yesterday when I introduced Tony, I talked about domain experience and expertise. If there was in the macro world the living embodiment of a refutation of the efficient market hypothesis, he’s sitting here next to me right now. I know you’ve had a great year, and again in a year when most macro struggled, certainly into the last week or so. Would you care to share with us how you’re doing?
Druckenmiller: It wasn’t a great year. I had a very good January and February and then, in a very frustrating manner, treaded water until the election, and did some good things election night. I’ll blame it on the pain — I didn’t do enough of them. They were directionally correct, but I violated my own rule, which is size, size, size when you believe something. I’d been preparing in case Trump won a game plan for weeks, and Moore got out of the way that night. Did a lot. And then the market had figured out pretty much everything 24 hours later. So I’m doing all right. I’m having a decent year. Certainly not a great year.
Jones: You’re up double digits — in the teens.
Druckenmiller: In the low teens. Yes.
Jones: Okay, that’s great to hear. It’s so funny — I remember, I think it was Friday morning, he called me and said, “All right, goddamn it, you wimp. This is the time. This is the time. I don’t know what you’ve been doing, but don’t wimp out here. You know exactly what’s out there. Don’t wimp out here.” All right, step up, man up. Let’s do it.
And it was actually a very great call, which I appreciate, because it’s such a contrast to what Ray Dalio said here yesterday. Ray Dalio, largest hedge fund manager in the world — I think he astounded all of us when he said, “What I’m trying to do is find 15 equal uncorrelated bets.” Here’s the guy with the best research group on all of Wall Street saying, even if I had perfect research, I’d still want to have 15 bets. Your thoughts on that?
Druckenmiller: Yeah, there’s a number of ways to skin a cat in the investment business. I think as long as you’re disciplined and you stick to it, you make money. I have the polar opposite investment philosophy. Mark Twain: put all your eggs in one basket and watch the basket carefully.
Sometimes you have major inflection points where you can anticipate change, and I found the best thing that works for me — it may not work for others — is to really pile in with size. In those particular trades, I can remember I had a 350% long equivalent in 10-year bonds in late 2000. In the bond market, I’ve had two to 300% of my NAV in one currency. And by and large, my track record in those is much better than others. I tend to only do stuff that radical in very liquid markets that trade 24 hours a day. It’s interesting because election night, all the real opportunity was only in those markets, because individual stocks didn’t open till 9:30 and by then the markets had pretty much figured it out. The night before was the entry in all that stuff.
Jones: You know, let’s talk about that night. So when Trump won, what was your P&L? Curious — your P&L at 10:30 p.m. from the close that day. Were you up or down on Trump’s victory?
Druckenmiller: I was literally in so much pain I don’t know. It was five days after knee surgery. And my three daughters — well, two of my daughters and my wife — were there saying they wanted to move to Canada.
Jones: I’ve got three daughters. I know the feeling.
Druckenmiller: I’m not a Trumpster and I didn’t vote for him. I didn’t vote for either of them. But it seemed pretty simple to me that much lower regulation and much lower taxes — I didn’t quite understand why that was bearish for risk. I imagine I had a pretty violent swing in my P&L. I was set up for a Hillary victory, but not the way others were. I was short the market and I was going to short more if it rallied on Hillary, because I just thought we’re in this horrible trap with no upside out of this monetary experiment we’ve been in for eight years.
And it was like, oh my god, this may or may not work, but I can see why it can work. So with Trump — particularly with Ryan and Pence — I saw tremendous upside. Whereas going into it, I saw no upside. Is there risk? Of course there’s risk. But with Hillary, I saw no upside and some risk. With Trump, I saw tremendous upside and some risk.
Jones: Yeah. And the reason I was asking about that is because I think most everyone in the macro world kind of thought Hillary was going to win. Everyone was probably looking at negative P&L that was moving against them initially, and of course that was — as you say — the time to strike. And again, your big differentiator is size.
If I think about the trading process and you break it down into: analysis — Trump wins, Clinton wins — and then instrument selection, how am I going to express my view? And then sizing, how big am I going to be? And then execution, how do we actually execute? And then finally, risk management. Of those five, in your history, is there any one that’s been more important to you? Are they all equally weighted? What is it that sets you apart from everyone else who goes through those same five steps?
Druckenmiller: Well, I’ve always thought it’s sizing, but with a caveat. If you’re going to bet big, you have to be ruthlessly objective about your position. I put on positions I was 100% sure I’d have for two or three years, and ten days later, in my opinion, the facts changed and I’m out of them. But if you’re going to go the route of making concentrated bets, you also have to go the route of being completely open-minded when the facts change — of being wrong. You can’t sit in there and double down if things don’t start to work out. You have to exit that position.
I’ve never used a stop loss in 40 years, but I have exited a lot of positions not because the price was down, but because the reason I bought them was starting to change. A classic example is gold. As many of you know — because for some reason it got all over the press with my ETF — I bought a lot of gold two or three years ago. And I started to worry, with Teresa May and the war between Draghi and the Germans and even Kuroda, that this whole monetary experiment — people were starting to get that the risk-reward had changed. I felt trapped in a decent gold position. I was saying, what the hell am I going to do?
Well, election night, somebody decided — I don’t know who — it was up $35. And I said, “Well, I’ll start selling and see if it handles it.” I could not believe it. I sold my whole position up $35, which I was inclined to do anyway, but it was just a gift, because all the reasons I had owned gold changed in three hours. The whole belief that monetary was the only answer and we were never going to change monetary regimes — all evaporated in a couple of hours.
Jones: Now what was surprising — it was only there for five hours. You had five hours to operate. In the old days we would have had two or three days, but people are a lot quicker now than they used to be.
Just going back to the sizing issue — if I had to say the one thing that differentiates you from everyone else, the one thing that’s become clear to me in the macro world is you can take macro and split it into beta and alpha. And when I say beta, most macro traders are some type of intermediate trend followers. So when you’ve got a high-volatility period, it’s a great time to have traders who can warehouse risk — women or men who can come in and go 150 or 200 or 250% in a particular instrument. I would call that beta. All you wanted to do in the ’80s and the ’90s when you had great trends was have beta.
Then you get into a period like the last two years — or let’s say after the first quarter of ‘15 — where everything moves sideways, and then the alpha becomes so critical. And what you’ve been able to do is, again brilliantly, distinguish between environmentally when it’s time to go big and not. How do you have that aha moment when you go, “Okay, it’s time for 250%“? And then when you’re running those outsized positions, how do you deal with that emotionally and physically?
Druckenmiller: Well, let’s be clear — I’m not making 30% a year anymore since I retired, and I’m not running the size I used to. And I do feel like I left so much on the table election night. But I don’t know — there have just been a number of instances over my career where it was very clear to me that the world had changed. The world changed on 9/11. The world changed when the wall came down in Germany. The world changed the night Donald Trump was elected. And these set in place usually two- to four-year trends of concentric circles you can play. And I’ve always felt comfortable — again, I’m not the man I used to be — of jumping in big with a thesis and, if it’s working, staying with it.
Jones: The man you used to be — when you and George were teamed up. I remember you had nine minus-one-billion-dollar days.
Druckenmiller: Four. But thanks for reminding me.
Jones: Good. Billionaire, billionaire. Who cares? What was that like? I can’t even imagine what that was like.
Druckenmiller: It wasn’t fun. It was gut-wrenching. And I’m not going to sit here and tell you, “Oh, I had great conviction, let’s double down.” I was doing — you know what — in my pants. But again, since the facts hadn’t changed, my thesis hadn’t changed, I stuck with it. There have been other periods where I put on a bet like that and the thesis changed — I just took my medicine. Interestingly, none of those $4 billion days was one of those.
But I famously got trapped. I bought the NASDAQ beautifully in ‘99, sold it in early 2000, bought the exact top. I knew I was trapped there. I blew that out. That probably cost me 15% by the time I cleaned that mess up that I’d made on the floor. But no, it’s a terrible emotional experience. It’s also fun winning — I’m a bit of a junkie for adrenaline.
Jones: Do you think — I know George is still trading in his late 80s — you think you’ll trade to your late 80s?
Druckenmiller: I hope so. My mother-in-law said I’m an idiot savant, and she’s right. I don’t know what else I would do. I don’t have another skill set.
Jones: TV talk show host. I’ll let you do that. You’re excellent. Let’s talk about Trump. So you just said the world has changed. Why don’t we take it asset class by asset class? Many of you may have noticed — anybody know what the theme song Stan chose for us to walk out was?
[Audience: “When Doves Cry”]
Jones: “When Doves Cry.” So that was his big attempt at giving one of these to our current Federal Reserve policy. You want to talk to us about interest rates and what you think the implications of Trump are?
Druckenmiller: Well, it’s a fluid situation. I’m not a big fan of Donald Trump — let me just put that out there. But I am a huge fan of Paul Ryan, and Paul Ryan and Mike Pence grew up in the House together and they’re like this. And because of his inexperience in a lot of matters, I think Trump is going to have to delegate in certain areas, and I think there’s a very high probability that one of those areas will be tax reform and regulation policy. I think he’ll be very involved in infrastructure because, as he said, “I build things. This is what I do.”
But conveniently, Ryan and the Republicans were worried about Trump a year ago. So they’ve come up with a program — I don’t know why it has not gotten more publicity — called “A Better Way.” It’s similar to the Contract for America back in the ’90s. And it is an in-place program, ready to hit the ground running, that calls for major cuts in individual taxes, more importantly major cuts in corporate taxes with corporate tax reform, a VAT on imported goods that’s not taxed on exported goods, non-deductibility of interest expense — we’ll see how Mr. Builder goes for that one — and a one-year complete write-off of any business investment. So it’s all pushing us toward business investment and capital spending, and away from financial engineering.
How much Trump will get through — I’m pretty confident he’s prepared to delegate a lot of this. My problem will be with the Senate. You can just see the special interests carving this stuff up when you get there. But if half of this stuff gets done, it’s huge.
The only economist I know who is good at predicting the economy — most of them write obscure papers and get Nobel Prizes, and the IMF is 0 for 220 in predicting the last 220 economic inflection points — is my former classmate Larry Lindsey. He predicted the ‘90 recession, the upturn in the ’90s, the 2000 recession, and the financial crisis. Putting all this together, he’s using 6% nominal GDP in 2018. Because we’ve borrowed so much from the future with monetary policy, I don’t think we’ll get to 6% nominal growth. But when things aren’t being rigged — and I think we’re moving away from that — 10-year yields tend to trade on top of nominal GDP. So the math is not complicated: if you don’t think we get short-circuited because we borrowed so much from the future through interest rates, it would call for a 6% ten-year yield in a year and a half.
It’s not too complicated. I’ve seen these kind of moves before. They’re big trends. As you know, we got lucky with the euro at 1.35 / 1.40. I think everybody hated the euro from 1.35 / 1.40, but everybody overtraded their position — that’s what you tend to do when something’s going like this. And I think the 10-year is something — and again you’ve got to keep an open mind and see how things unfold, this is a very fluid situation — but this is not something you want to overtrade. This could be a massive change in trend, sort of the mirror of when I started Duquesne in 1981.
So favorite interest rate trade? Going to be short in the US — probably short tens or fives, I don’t really care. If she continues to fight it, tens and 30s. But even she’ll catch on in six months if this stuff unfolds the way I think it will.
Germany — it’s unbelievable to me that Mario Draghi has been whining about Janet Yellen for a year and he’s sitting there at minus 40 basis points, debating whether to put €80 billion a month or €60 billion on top of that. Ridiculous. The European economy is doing fine. They don’t have deflation. So I’m short a lot of that stuff. I’m short gilts. Probably looking at 4 or 5% nominal GDP growth there, and yields at 1.30 or 1.40 or wherever they are — it doesn’t make any sense to me.
Jones: So what I think is so interesting about the interest rate trade is you’ve actually got three things going on. You’ve got obviously the change in fiscal policy. You have, I guess, the end of a three-and-a-half-decade bull market in interest rates, which just by itself, on some normal mean reversion, would give you a huge move. But then you’ve got the kicker — he’s going to appoint a new Fed chairperson. Have you heard anything on that? The kind of person you think he’ll appoint and what impact that’ll have on rates.
Druckenmiller: Well, I heard him say he’s a low interest rate guy, but all the people I’ve heard, and the philosophy within his crowd, is very much that monetary policy has killed the forgotten man. It’s made people like me and you richer. It’s killed the guy in Kansas City who saved his whole life and he’s getting zero on it. It’s moved money away from the real economy to financial engineering. So the names that are floating around all suggest a more normal, neutral kind of monetary person running the Fed.
I mean, honestly, the only people that think like this are at Harvard, Princeton, and the Federal Reserve. If you go anywhere in the United States, they all ask me, “What’s the matter with you people?” — “with these crazy interest rates, you Wall Street people?” I said, “Well, don’t count me in.” But intuitively, the American public understands that there’s just something wrong about borrowing money at a hard rate of zero.
Jones: So the Fed chairperson — the difference between a new, normal Fed chairperson and Janet Yellen is worth how many basis points across the curve?
Druckenmiller: Well, if you use the normal Taylor Rule measures, we should be at 3% now. Obviously, if you get there violently, you won’t get there. That’s the tragedy of what she’s done — she’s had at least two years to sneak four or five rate hikes in, including six or seven months of 300,000 payrolls. She’s had so many opportunities and she’s blown it.
The risk here is that monetary policy doesn’t do anything except drag demand forward from the future. So somewhere between here and normal, you get short-circuited because you start to pay back what they’ve been stealing from future demand the last eight years.
Jones: All right. So let’s say your interest rate forecast is right. I’m gonna challenge you on it — because my guess is, since the stock market’s a long-duration asset too, and because our stock market-to-GDP is 130% and the wealth effect is well documented, the stock market probably won’t tolerate that. How much can rates rise before you think it would trip a 10% correction in the S&P 500?
Druckenmiller: I don’t know the answer to that question, but I would think 3% would certainly be a problem on 10-years. But the stock market to me is more about mix than direction right now. The companies that could make a lot doing very well in a zero-growth environment were worth a lot more 13 days ago than they are now. The companies that are geared toward world growth may have the earnings to overcome that. So it’s more of a mix change.
But look, it’s not rocket science. Rates will go up enough. This market has been fed risk parity, blah blah blah — that will all get short-circuited long before you get to 6% on a 10-year.
Jones: Okay. So right now, stock market — you’re running a beta-neutral portfolio, a balanced portfolio. Your risk is in short rates. The short side of the stock market’s not that exciting to you right now.
Druckenmiller: No, not at all. And I like Japan because it’s a value play. They had the most stupid policy in history. I mean, leave it to the Japanese — three or four months ago, if rates start going and things start to get better, they have to ease, and if things start to go deflationary, they have to tighten. You literally can’t make it up.
So this decline in — and what’s going on — could be self-feeding. Which leads me to the other way to play all this, which is obviously the dollar. It’s not just a rate trade — it’s a dollar play. With Draghi fighting, kicking and screaming, he will lose. He will get mugged by the data and the Germans eventually. But as long as he’s fighting, and Japan is sticking to this policy — and again, being open-minded that Ryan and Pence get a big portion of this without the Senate nuking it all — it looks like a big trend trade.
Jones: So in FX, your favorite short is the yen or the euro?
Druckenmiller: I like them both.
Jones: Equally weighted? Euro could go to where?
Druckenmiller: 82.
Jones: Oh wow. Intriguing. Well, you’re a chart guy. This is kind of funny — when it broke 1.20, measured, I said it counts to 82. And I said, “Yeah, but usually it goes sideways for a year and a half.” And of course it went to 1.05 and I forgot that it still counted to 82. And it goes sideways and I say, “How the hell could it ever get to 82?” I threw that thesis away about a year ago. And now I’m thinking, well, I could envision it getting to 82.
Druckenmiller: Yeah, I think 82 works. Maybe not on interest rate differentials, but it probably works if we actually had a threat of a Eurozone breakup. Then for sure it’s at 82.
Jones: Let’s get to commodities. Anything in the commodity space that captures your fancy right now?
Druckenmiller: No, I’m more watching commodities as an economic indicator than playing them. I’m very intrigued that all the base metals bottomed last May and they’ve looked very healthy throughout this, and of course they got what I would call a Trump boost. And if you looked at copper versus gold — which encapsulates everything we’re talking about, which is monetary radicalism and rigging versus the real economy — they’re all so far endorsing everything we’ve talked about.
Jones: Okay. A couple of higher-level macro questions. Eurozone — obviously the Brexit vote, the Trump vote, this move towards nationalism and insularity that we’re starting to see. Any thoughts on the Eurozone? What’s it going to look like five and ten years from now? Obviously, one of the short euro trade theses is that place won’t survive. It’s 27 shots on goal in terms of those countries — somebody’s going to ask for a referendum, and that’s going to create some type of global dislocation.
Druckenmiller: I believe the pound blew up in 1992 because once Germany reunited, it was a stupid idea to have the currencies of Britain and Germany locked, because their economic futures were so dependent on different measures. It just didn’t make any sense anymore.
The Eurozone doesn’t make any sense. Italy has not grown in nine years — nothing, zero. Spain and Germany are doing fine. It’s a stupid idea. It’s one of those things that was a great idea and it didn’t work. So it’s time to adjust. I assume at some point within five or ten years, for sure, the Eurozone will blow up because it doesn’t work anymore. These countries are not united.
Now, you’re going to say, “Well, they haven’t had a war in 70 years.” But come on — Japan was a warlord country for its entire life. They haven’t had a war since World War II. It’s not because of the Eurozone. It’s because you had a change in culture in Japan, which I would argue very strongly you’ve had a change in culture in Germany as well. And to say we’ve got to do this because we haven’t had a war — when people know now that if you got in a major war, you’re talking nuclear — there are all sorts of reasons we haven’t had a war in Europe. But to say it’s because of this stupid Eurozone idea just makes me crazy.
Jones: Another big macro question — Japan. Their debt-to-GDP clearly stands out as an outlier when you look at a scatter plot against any other country. We’ve now surpassed the level where Greece tipped up. Any forecast, any thoughts on what the ultimate resolution of their sovereign debt problem is — which of course right now doesn’t even exist in the markets, at least as far as the markets care?
Druckenmiller: Well, the ultimate solution is they monetize. But timing — you have to be open-minded. And I’m as open-minded as I’ve been in the whole time that it finally may have started. Which would be good for the equity market and could send the currency anywhere — I mean anywhere. But you have to be open-minded to a big move in the yen. You had the repatriation move pre-Trump and pre-Kuroda’s latest shenanigans — this thing goes to some crazy level. And I mean crazy. Am I predicting it? No. But I’m very open-minded to it, which I have not been for quite a while.
Jones: When’s the last time you traded JGBs?
Druckenmiller: Oh, they whipped my butt so many times. I’m just tired. I’m probably 0 for 17 in my last JGB trades. That will work. And the fact that I don’t have a penny of them — and I’m short every bond in the world but them — probably is a good sign. The whole Japan story is like a Rubik’s cube. You know it’s solvable, but just getting there.
I keep thinking maybe Trump’s presidency, and the rise in US rates, and the contemporaneous depreciation of the yen, will actually create enough inflation where the BOJ has to ultimately move. And my guess is when they take that first step, it’s one that’s going to be — not off this platform, but off a cliff.
Jones: Any thoughts on that?
Druckenmiller: Yeah, I’m very open-minded to that scenario.
Jones: Any other idiosyncratic macro ideas that have got your fancy at the moment?
Druckenmiller: Not really. I mean, I think this is one of those “keep it simple” times. It’s a very compelling thesis. Let’s stay open-minded how it unfolds — because, you know, this is not Ronald Reagan we’re dealing with. This is a guy who tweets that he got cheated out of two million votes after he won the election. So I don’t quite know what we’re dealing with here. I’m assuming we’re dealing with a guy who wants to do a lot of foreign policy, fly around in the jet, work on the infrastructure and stuff.
And the secret, I think, is that these guys have been developing “A Better Way” for a year and a half or two. So that is ready to hit the ground running and could be done as early as July. And there is no way the market has priced it in if that happens. The big hiccups could be number one Trump and number two the Senate.
I keep thinking this could be the greatest period for finding some stuff and just taking the pain again. Like ‘94 in the bond market — it just kept going and going. The Fed could not keep up because the economy kept outperforming. This reminds me so much of that. We’ve got a whole generation that’s never seen a bear market in bonds. Trump is kind of the wild card because he’s so unpredictable. I would feel a lot better if I didn’t think he could do a 180 the next day. But still, I think we’ve got to stick with the Trump trade certainly all the way into the first quarter of next year.
Jones: Can I just say — in that vein, on what you just said — the last two times I’ve been up with you, I’ve said some unkind things about future hedge fund returns, and particularly macro. And I am really optimistic that this low-volatility, rigged period has ended.
Part of the problem with the last eight months before Trump was it’s hard for a rational money manager to buy something they know is way overvalued that’s being pushed by the authorities to become more overvalued. These people do have brains and it interferes with their trading. And I do think you will be astonished, if this stuff plays out the way I think, at some of the returns generated by managers in both the long-short area and in the macro area over the next three or four years. Because the rigging, the low volatility, and all these other things going on — to me, it’s ending. And this could be a very fruitful period for great money managers. Who they are, I have no idea, but I’m sure they’re out there.
Thank you.
Druckenmiller: Thank you.
Jones: So last question. You’ve had one incredible philanthropic career. You’ve done so much. When you were chair of Robin Hood, you helped us so much — Harlem Children’s Zone. You and Jeff single-handedly — not single-handedly, but obviously y’all spearheaded that phenomenal effort. What is it right now that’s got you really excited philanthropically?
Druckenmiller: Well, there’s a lot of interests I have that I’m excited about, but I am really excited about this new initiative that we’re a part of called Blue Meridian. It’s really, to some extent, the culmination of everything I’ve learned in philanthropic investing.
Robin Hood, when I was chair — and to a great extent today — was to identify new up-and-comers, embryonic do-gooders out there that were going to change a city and change the world. Thanks to you and other board members, that’s how I met Jeff Canada. But what I’ve noticed with Jeff Canada — because he was able to scale something that nobody said could be scaled — is that after these organizations are identified, and they tend to be proven and look scalable, a lot of the early funders drop out just when it’s getting really good. Because they want to be disruptors and they want to be the guy who invented it. It’s a perfect analogy to trend following — just when the thing gets really good, people forget about it.
What Blue Meridian is — I had the privilege of meeting Nancy Roob of Edna McConnell Clark, who was probably the number one toughest evaluator of Robin Hood and an incredible donor to Harlem Children’s Zone — and she’s come up with this idea to identify and find, say, six to eight organizations — not Harlem Children’s Zone, but like Harlem Children’s Zone — that we think can be scaled nationally and move the needle. It’s all at-risk youth stuff, and we’ve got a number of partners involved. We’ve raised about $800 million, and I think there’s going to be a second round as big or bigger than that. And the idea is to take these things that were identified in the embryonic scale — that worked — with a great leader who has the vision to make them work long term. It’s about as exciting as anything I’ve been involved in in philanthropy since I got in the business.
Jones: That’s fantastic. Just want to leave one last thought for everyone here along those lines. It’s really so important that we all do participate — whether it’s through Robin Hood, Harlem Children’s Zone, Blue Meridian, whatever. I’m struck by the fact that New York City, with three times the population of Chicago, has a murder rate that is below that of Chicago. And of course, one of the reasons why is because Robin Hood Nation — folks like you in this room — help support the 60,000 501(c)(3) not-for-profits in New York City. It’s our social fabric that keeps this city so fantastic.
And who else keeps it fantastic is my friend here. Thank you so much. I know you were in pain today. I’m so grateful for you coming.
Druckenmiller: Much appreciated. Thank you. It was a pleasure to be here. And I want to reiterate everything Paul said about Robin Hood — hopefully you’ll all participate. I’ve watched them since 1987 and they’ve just done great work. It’s bigger and better than ever. I really appreciate everybody that’s helped out with that effort. Thank you.
[Applause]