Stanley Druckenmiller 2021 Keynote - USC Marshall
Transcript
Sheldon: It’s a pleasure to introduce Stan Druckenmiller. Stan and I go back 50 years to college together. Over that period, ironically, we both ended up in similar businesses, although in different aspects. As some of you know, I’m a credit guy — nuts and bolts — and Stan is macro and an extraordinary investor in that realm. Not only is he an extraordinary investor, I would say legendary investor, but he also is quite a generous philanthropist of his treasure and of his time. I’ve had the involvement with Stan on some of those aspects.
There’s a saying in the business that there are old investors and there are bold investors, but there aren’t many old and bold investors. Stan Druckenmiller is the exception. Now I can get away with it because I’m a year older than Stan. And obviously, it’s a statement that’s true. Stan is a real student of the markets, has delivered extraordinary results. He has been kind enough to give us a 20-minute presentation plus or minus, and 40 minutes for Q&A. So I think you’re in for a real treat. Stan, thank you for agreeing again to speak to the SIF dinner at USC.
Druckenmiller: Thank you, Sheldon. If you can hear me, just shake your head — everything’s good? Okay, good. This is actually my third interaction with USC in the last eight years. It’s the first one virtual, but I’m thrilled to be here.
I will say it’s about the most challenging time to talk about the American market and economy I can remember since I got in the business. I actually believe we are in the most unique set of economic circumstances that I’ve seen in my career — and certainly in the post-war period. I believe policy makers are failing to acknowledge how unique this period is, and I think the consequences of that could be with us for years, if not decades to come.
Now, why do I say the period is so unique? Well, first of all, the COVID-induced decline that we experienced last spring was both violent and abrupt. To put it into math terms: we had five times the decline of the average recession in 25% of the time. Think about that — five times the average post-WWII recession decline in 25% of the time.
Monetary and fiscal policy’s response to that was equally unprecedented. It’s not pleasant to remember back to last spring, but if you think about that period, I think we were all terrified that we were experiencing a potential black hole — not only in our lives but in the economy itself — with potentially catastrophic consequences. If you look at the policy response, it was extremely aggressive, led by the CARES Act. In three months, we increased the government deficit more than the last five recessions combined. So if you took the Reagan ‘82 recession, the Saddam Hussein ‘90 recession, the dot-com recession, the Great Financial Crisis, and added up all those recessions’ effect on our budget and the size of the budget deficit combined — they do not equal how much the budget deficit increased in three months last spring.
The Fed’s response was equally aggressive and unprecedented. They did more QE in six weeks last spring than they did in the entire period from 2009 to 2018, which you’ll remember was itself somewhat unprecedented and a lot of people were questioning the size of that. The peak month during that nine-year period was when Bernanke did $85 billion in QE — we’re still buying $120 billion in securities after those six weeks I talked about. The final thing that happened last spring was the Fed crossed a lot of red lines in terms of what they would backstop — in terms of corporate debt, also in the municipal market. The results were very emphatic: corporations increased their debt in a recession — I don’t believe it’s ever happened before — over a trillion dollars, in response to the Fed backstopping that debt. Just to put that into perspective, in the Great Financial Crisis they shrunk their balance sheets $500 billion, which is much more consistent with historical activity.
The good news is this has resulted — pleasantly surprisingly — in a very abrupt and strong recovery. In that context, it was a good risk-reward to enact policy expecting a deep and protracted recession in the spring of 2020. It worked. It was dynamic. It was bold.
However, a lot has changed since then. By the fall, the outlook had already brightened considerably, and yet policy support continues to accelerate. Fiscal deficits are going to reach 30% of GDP in just under two years. I’m going to share a screen with you. This is a chart of the cumulative fiscal deficits from the start of the recession of all the recessions I mentioned earlier since 1980. You’ll see the top lines are the five recessions that preceded this one, and the black line is if you added all those up together. Remarkably, the red line is what we’re doing in 2020 and ‘21. Again, the boldness of what they did in the beginning — the first five, six, or seven months — makes a lot of sense. But what’s very surprising is we’re continuing to double down on these policies, even after it’s quite apparent we’ve had a very strong recovery in the economy. The Fed’s easy money will also top a similar amount — almost two times all previous Fed incursions into money printing.
Now, what we have observed in recent months is the sharpest recovery from any downturn in recent history. Despite losing 11 million net jobs during 2020, personal income grew at the fastest rate it’s grown in 20 years. Think about that: while 11 million people were losing their jobs in a year, we ended the year with the strongest growth in personal income in 20 years. The unemployment rate has recovered 70% of the initial hit in just six months — it typically takes 25 months for this to happen. Even after the sharp fall — again, five times the average recession — we’re already back in terms of GDP to pre-COVID levels in just five quarters. The average recession takes seven quarters. But don’t forget: we’re coming back from a much deeper hole that was five times as deep as that observed in the average recession.
It is unnecessary and frankly reckless that $575 billion of the $850 billion in direct transfers — of the $2 to $2.5 trillion of expected QE — are being provided after retail sales were above pre-COVID trends and after vaccine confirmation. If you look at the red line on the chart I have up — that is 2020. I think we can all agree it doesn’t look anything like the other recessions, which are more traditional in nature: a much more violent increase in unemployment and then a huge snapback in a much shorter period of time.
I think even moderate voices will agree that the level of support has been excessive. Let me show you how excessive it actually has been. This is a chart of retail sales over the last 20 years. They are currently above pre-COVID trend by 15%. Look at the period from 2008 to 2014 — it took six years to get retail sales back on trend after the Great Financial Crisis. But if you look at the current period, we had a sharp V-bottom. I mentioned the CARES Act — that’s check one. Then we had more fiscal stimulus last fall after vaccines were apparent and after it was apparent that we were in a very unusual recovery. And now, as you know, we’ve just passed another $1.5 trillion of stimulus when retail sales are 15% above trend.
What does that mean exactly? If you took the increase in retail sales from 2020 on this chart — that’s 3% a year in recovery — we’ve just done that in six months. We are absolutely booming. We are above trend by frankly five years — in six months.
Now let’s talk about the Fed’s excessive support. The Fed has constantly reminded us that monetary policy acts with long and variable lags. Why, then, is the Fed still providing emergency financial conditions when their recovery, as I’ve shown, is in full acceleration? Why are we buying $40 billion of mortgages a month when we are clearly running out of housing supply? Not only is the Fed still providing record amounts of accommodation, it is promising not to raise rates even when the recession is already over. If the Fed raised rates in the first quarter of 2024 as indicated, it will be 41 months after recovering 70% of the drawdown on unemployment. What do you think the average number of months before the Fed’s first hike after a 70% employment recovery is in the post-war period? Chair Powell is predicting 41 months — what do you think the average has been since World War II? Four months. And according to the Chair, they are not even thinking about thinking about ending $120 billion a month of bond purchases.
Simply put, the fastest and strongest recovery from any post-war recession is being met with the Fed’s easiest response on record — by a mile.
Policy makers say we need to go big to avoid downside risks and avoid the stagnation experienced after the Great Financial Crisis. But as I have shown, comparisons with the Great Financial Crisis are completely inappropriate.
What about the risks of financial stability? The worst economic periods of the last century have followed the bursting of asset bubbles — think the ’30s after the ‘29 bubble bursts, and think about the Great Financial Crisis after the housing bubble burst. With Dogecoin — which was started as a joke — with a $60 billion market cap, and NFTs on everything you can spell, is there any doubt in anybody’s mind that we’re in a bubble? Not to mention stock market to GDP is well above any level that we’ve seen in the past century.
More honestly, what about the risk of fiscal dominance and loss of our reserve currency status? This is a chart of foreign purchases of U.S. bonds. U.S. Treasuries have been the go-to assets for global portfolio managers for the better part of 20 years. They’ve particularly been attracted to them as a safe haven in so-called risk-off periods. Look at the period surrounding the Great Financial Crisis — look at all the green above the line.
Something stunning happened last March: in the middle of the equity meltdown, foreigners aggressively sold Treasuries as we proposed the CARES Act. I’ll never forget it — right in the middle of the worst part of the equity meltdown, in the third week of March, there was an 18-point decline in the bond market. We didn’t know what it was at the time, but we found out months later through Fed accounts that foreigners had sold a trillion dollars worth of bonds in response to the CARES Act. Again, this has never happened before. But they are watching our behavior — most of which I’ve outlined in the last five or ten minutes — and they’re frankly saying no. Most Asians and others have been purchasing Chinese assets. China has done no QE and much less fiscal stimulus in response to COVID, and they’re doing just fine, thank you very much.
With China representing 20% of world GDP and only 1.6% of global portfolios, and the U.S. representing 25% of GDP but 28% of world portfolios — remember: China, 1.6%. This process is probably early rather than late. And the last thing the U.S. needs is increased interest rate burdens.
As the last few administrations have refused to mitigate the growth in entitlements, knowing that we are entering a great boom as baby boomers turn 65 — debt to GDP was already set to cross 100% in the next decade — I mentioned earlier I’ve been to USC before, back in 2013. It was part of my college tour to outline the problem of the gray boom. Basically, since the Great Society, various programs have increased entitlements per person in the United States dramatically. What I was worried about back then is that guys like me and children born a few years after World War II were all about to turn 65 — and there were a lot of us. It was called the baby boom, and it was about to turn into a gray bill. The problem is Social Security and Medicare were on a pay-as-you-go system, and as we were about to receive all these benefits, there were fewer workers available to provide them. That was the problem I outlined back then.
We are now throwing $6 trillion of extra spending into the pot just as the gray boom accelerates. Ironically, one of the answers I would give when inevitably asked what to do about the problem was: we should raise the age of Medicare, because people are living longer and are healthier. The Biden administration is requesting to lower the age of Medicare to 60, creating a $400 billion hole — in the name of infrastructure. I mean, seriously, you can’t make it up.
All of this spending has been encouraged by the Fed and aided and abetted by QE and low rates to finance it. There is no way bond yields would not have gone up without the Fed financing all the things that I’ve been showing you. But look at this chart: the CBO projects that at the new debt level — despite drastic cuts in the growth of non-entitlement spending, that’s the gray line — will result in interest expense of 27% per year if the 10-year rate were to normalize to 4.9%. Simply put, the system cannot handle it. So the Fed will be forced to monetize it. Think about that: 27% of GDP just in interest costs alone — that’s basically all the money we’ve spent in COVID relief in the last 12 months.
Like many post-war periods, this will inevitably lead to inflation and financial repression by central banks, despite not having had to finance a major war. I believe we have crossed the Rubicon, and this is the only solution for this unnecessary and self-inflicted situation from this radical monetary and fiscal policy I’ve outlined.
Currently, 85% of the world’s transactions are done in dollars. I think we have crossed the Rubicon, as I said, and for the first time in my career, I believe we will lose this reserve currency status — and all the benefits that come with it — within 15 years. I’ve never said this before. I’ve never even thought it before. At present there is no alternative, because of the lack of trust in the communist dictatorship in China and the mess that Europe currently is. I don’t know who’s going to replace us, but my best guess is the biggest threat is a crypto-derived ledger system that will be invented by a group — an army of engineers — leaving universities like USC.
I will conclude my remarks with how my family office is positioned given this background. This comes with a huge word of caution: for those who know me, my intermediate view is very flexible and I do change my mind.
For obvious reasons, we are positioning ourselves short the dollar — I think you understand that from what I presented. One might ask: in terms of shorting the dollar, why did the dollar not go down when foreigners started selling bonds last March and had continued to sell them through today? So as opposed to $500 billion in bonds flowing into the United States a year, they’re now flowing out. The answer is it happened in COVID, and as you all know, COVID was extremely beneficial for companies that serve the digital economy. It just so happened that the FANG stocks and many U.S. companies like Zoom were better positioned to deal with COVID than any of our foreign counterparts. So we had a huge inflow into the equity market here that made up for the change in the bond flow. Once valuations got high, that dissipated, and the dollar peaked out in July. We’ve recently had a bounce that I think is unsustainable — that bounce is frankly because the U.S. growth outlook has picked up relative to others because of our vaccine rollout. But as soon as the vaccine rollout catches up in Europe and Asia — which I don’t think will be far behind — I think the downtrend of the dollar will resume.
We are short global fixed income. The booming economy I’ve outlined — I just think 1.6% on the 10-year is a ridiculous price, particularly relative to history. They’ve historically traded right on top of nominal GDP, which is running at 10%. I’m not predicting that — as I said earlier, we’ll never get there. The other way we’ve positioned ourselves for this inflationary outcome is we’re long all sorts of commodities. We’ve been long oil, we’ve been long copper, we’ve been long the grains — pretty much if it moves, we’re long it in the commodity world.
And finally, equities. We are long, but I will be very surprised if we don’t make the exit by the end of this year. I was lucky enough to start Duquesne as Ronald Reagan entered with Paul Volcker running the Fed. As many commentators agree, the combination of Jerome Powell and the Biden administration is an unwinding and exact opposite of what Reagan and Volcker did. I don’t really see how — the S&P I think was 780 at the time, or the Dow was 780 — we’ve gone up 5, 10, 15, 20-fold since then. If Reagan and Volcker were so bullish, I don’t think what we’re doing now in terms of regulation and taxation is sustainable. I will remind those: if you invested when Ronald Reagan was elected because of Volcker, you lost a lot of money the first 18 months. So they did not take a myopic view, and the dividends paid for 20 years. I think today we’re very much in the opposite situation.
I’ve overstayed my welcome in terms of time, and I’m happy to answer any questions.
Reuben: Thanks, Stan — appreciate it. And thank you so much for joining us. Certainly for me, this is a true honor. For those just joining, I’m Reuben Miller, class of 2015, and I’ll be helping moderate our Q&A. I did see during the presentation — the Babcock California Fund — one of their big takeaways from this past year was to take bigger positions in high-conviction ideas. So I do think we have the right keynote speaker, and I’m looking forward to diving in a little bit.
I heard you, Stan, mention Dogecoin and potential loss of the U.S.’s currency status, so no doubt we are in for a colorful Q&A. Just a few housekeeping items: SIF board members are all now co-hosts of this meeting, so I will kick us off with a few questions and then, like last year, I’ll pause and allow for a discussion among Stan and the board. Any other attendees with questions please send them through the chat to me, and I’ll do my best to integrate them into our conversation tonight. I’ve already gotten about 15 of them, Stan, so we’ll have a lot to chew on.
With that, I’m really looking forward to this. Why don’t we start here — this will, for many of the graduating members, Stan, be their last formal education experience. Thank you to them. Any formative educational moments or mentors in your life that you recall as particularly impactful?
Druckenmiller: Oh, absolutely. I was hired when I was 23 years old at Pittsburgh National Bank. I worked for a very eccentric, brilliant investor who made me — at the age of 25, this was 1978 — Director of Research, which was basically the number two position in the investment division of the bank. All the people reporting to me were 35 or 40 years old — they had MBAs, and I did not. I was a little confused. Also, I was a little cocky and arrogant — I was 25 years old.
So when I walked in, he said to me, “Do you know the reason I’m promoting you above all these people?” I said no. He said, “For the same reason they sent 18-year-olds to war — you’re too stupid and young to know not to charge.” I said, “What do you mean?” He said, “We’ve been in a bear market since 1968 — it’s been 10 years. You can’t see them, but I have scars from being in a bear market for 10 years, and you’re going to need to be able to pull the trigger. I think you’re going to be able to do that because you’re too young and too inexperienced and you won’t have any scars.”
That man — in addition to putting me in a place, if you’ve read Malcolm Gladwell, to get my 10,000 hours by the age of, say, 27 or 28 as an investment guy — taught me many things. First, to use technical analysis, which in academia at that time had always been frowned upon, as a counterbalance to my discipline. So I used fundamental and technical analysis in stocks — if there were 6,000 of them at the time, I wouldn’t buy a stock unless the fundamentals were great and the chart was great. If it didn’t pass either of those tests, I was out.
And he also taught me probably the most important lesson: never, ever think in the present. That’s a good way to lose money. Try to envision the world in 18 months — 12 to 18 months out — how different it might be, because security prices will be much different. There’s not one thing in the world that doesn’t affect the price of some security somewhere. And if you can envision the world 12 to 18 months ahead and not look at historic earnings or where we are now, you’ll make money. But if you’re buying things that are very popular now, you’re probably going to lose money — because things tend to change, and everybody else is already long them too.
My second mentor — I was lucky enough to work for George Soros. And I can put that in a nutshell: it’s not whether you’re right or wrong, it’s how much money you make when you’re right and how much you lose when you’re wrong. He was constantly telling me to size up my positions.
I’ll never forget — I walked into his office and told him the fund, at the time $7 billion, that I wanted to put a $7 billion position on: long the Deutsche mark and short the pound. I explained my reasoning to him, which I thought was very sound. He looked at me with what seemed like the most disgusted look, and I was getting angry just from the body language feedback I was getting. And he said, “Look, you only get an opportunity like this — this is a one-way bet — maybe two or three times in your career, and you’re just not betting enough. We shouldn’t put 100% of the fund in this trade — we should put 200% of the fund in the trade. Because the most you can lose is a half a percent, and you can make 20% on it, so your risk-reward is tremendous.” He was constantly — I was shocked when I went there — he was not as good at predicting security prices as me, but he always seemed to make a ton of money because he would size his positions accordingly.
Reuben: Thanks. You shared a little bit about your current positions in your talk, and just now a little about some concentrated bets. You certainly have a reputation for betting with conviction and size — I don’t think anyone would call you a Vanguard total-market guy. This is a time-honored tradition at the SIF annual meeting: a conversation around active management and its tiny cousin, passive investing. So I want to be a little bit more thoughtful about it with you — not “is it possible to outperform the market over time?” but rather: are the massive amounts of money moving from active to passive missing an opportunity, or are there too many underperforming active managers to start with, and is this generally a good trend for investors?
Druckenmiller: Not to be a smart-aleck, but it depends on who’s managing the money. I do think — because of basically what I outlined from my first mentor — that most investors lack discipline. They get excited when things are great in a situation, and it’s usually already in the price. It’s very likely that most investors will underperform the averages going forward, as they have historically. But I think it’s also apparent that there are investors who have historically outperformed the market, and they outperform by a lot, and I think that will continue.
And if anything, in the future I would say: what creates price movement is change — big change. With all the disruption going on in the world economy in terms of digital transformation, in terms of labor, in terms of everything else — and if you look at the macro picture I just laid out, which is potentially the most fruitful set of opportunities I’ve ever seen in terms of magnitude of change — I do think there will be investors who are willing to bet those and bet them big. So it’s just like stocks: if you can find the right active manager, that’s great. But if you just go with the crowd, I don’t think you’re going to make money.
Reuben: Thanks. Okay, I do want to start moving to some of the questions I’m getting in the chat — I’m getting several just on cryptocurrencies and Bitcoin. So I actually have a poll here for people joining us. The question is: what percentage of your net worth is invested in cryptocurrencies?
All right, so there are our results. More than 50% — that’s zero. Looks like 20% are dabbling between 2% and 10%, about 13 people. And then people with above 10% of their net worth — looks like six people in the audience. Thanks for that.
So Stan, maybe I’ll leave it pretty open-ended for you, but one thing I’m particularly interested in is just your perspective on the expected return of cryptocurrencies. We can get more granular if you want to use a specific one like Bitcoin — but what is the expected return, and where do you sit on it?
Druckenmiller: Well, I’d be even dumber than I am if I gave you an expected return on cryptocurrencies. I don’t think there’s any way to know. They come in all shapes and sizes.
I do think it’s probable that we’re going to end up with a ledger system that requires cryptocurrency as a medium to execute it. But I want to remind you that Facebook was the 11th social network, and before Google there was a company called Yahoo — I guess they sort of still are a company. But there’s a very good chance that if cryptocurrency ends up being an actual medium of exchange, the winner not only has not been identified — it might not have even been invented yet. I wasn’t just kidding when I was talking about this army of 25-year-olds. One of the things we’ve always looked at in investing privately is where are the hot young graduates from the great engineering schools going? And remarkably — I haven’t understood it, probably because I’m approaching 68 years old — the lion’s share of them are still going into crypto. And I think they will solve this problem in terms of using this stuff for a payment system.
Bitcoin — I’m in the 1% on your chart, and I’m kind of ashamed, after I told you you’re supposed to make big bets. I tried to buy $100 million of it last spring at $6,800. I bought $20 million, it took me about 10 days, and I said the hell with this — this is too illiquid, I don’t want to play with it. Then I sold it back down — that was only a four-tenths of one percent position. Then when it went to $36,000, I couldn’t stand it and I sold it down to a 1% position, and I haven’t touched it since.
I don’t think Bitcoin will ever be a currency — it doesn’t make sense to me. There’s too much volatility. I think if there is a currency, it’ll be something else. But it does look like — and I don’t disagree with Charlie Munger that this thing’s been created out of thin air — but you know what, there’s a painting above my fireplace in the living room that’s worth more than my apartment, and if someone thinks it’s worth what it is, that’s what it is. For whatever reason, millennials — and maybe more importantly, zillionaires on the West Coast and in the technology economy — prefer Bitcoin to gold. And it’s been around 13 or 14 years now. It’s a brand. So it’s probably here to stay.
Right now you’re in a space sort of like an elephant trying to get through a keyhole. The people that own this are sort of religious zealots, and now you have institutions coming in. So I wouldn’t doubt that Bitcoin continues to go higher. But as you can tell, I don’t really believe in it or not believe in it — so I have 1% of my net worth in it.
Reuben: Great, thanks, Stan. I’m going to pause here and let the board of directors of SIF jump in on a conversation with you. You should be able to unmute yourselves if you want to ask Stan a question.
Larry Tastron: I have a question — can you hear me? Larry Tastron. Thank you for the presentation — it was very thought-provoking. Given a lot of us have been in the money management business for a long time, we couldn’t disagree with anything you said. Could you give us some thoughts on some areas you didn’t talk about that I think play consistently into your theme? It seems like your point earlier of skating to the puck — 12 to 18 months from now — what are your thoughts on income diversity, tax policy, the social unrest that we’re going through today, and a more left-leaning administration — not making a political statement at all — and its impact on your thoughts on the dollar?
Druckenmiller: Okay, there’s a lot in there. What I leave out, just remind me — you asked about four different things. But let’s start with inequality.
As Sheldon knows, I’m co-founder of the Harlem Children’s Zone, and I am not a Johnny-come-lately to this issue. But let’s start with the Fed and inequality: I don’t think there has been any greater engine of inequality than the Federal Reserve Bank of the United States in the last 11 years. So hearing the Chairman talk about visiting homeless shelters is very, very rich indeed. I just had the best year I’ve had in 15 years — last year, everyone wealthy I know is making a fortune. And why are we making it? Because this guy is printing money like there’s no tomorrow. And the kids in Harlem, in my opinion, are not benefiting from money printing — but Stan Druckenmiller and other wealthy people are. So for the life of me, I can’t figure out why the left is so excited about money printing, when all the data says the people who benefit from money printing are rich people who know how to navigate the markets.
I would also say that this thing, in my opinion looking out 12 to 18 months, is going to take one of two paths. As you can tell by my portfolio, I’m betting on reflation. I’m hearing it from companies. When you grow the money supply at 25% for a year, it makes sense — it’s historically correct. We have a whole generation who hasn’t seen it for 10 or 12 years, so they can’t even deal with the concept. Chairman Powell likes to say we’re not going to have inflation because it hasn’t been persistent and it hadn’t been around. Well, what the hell — we had no inflation from ‘55 to ‘70 for 15 years, and if you went by that we couldn’t have any inflation, and then we had the ’70s when we got guns and butter. What I just showed you is about 5x guns and butter. So I think the odds-on bet is we’re going to have inflation — and inflation is going to hurt poor people a lot more than rich people.
Now let’s suppose I’m wrong. I mentioned earlier that anything I say on the markets comes with a word of caution, because I change my mind. But how does this thing end? To me, the asset bubble — which he’s blowing up into unbelievable proportions — busts before the inflation ever really manifests itself. That’s what happened with the housing thing in ‘08/’09 — we never really got to the inflation because the asset bubble burst. Not dissimilar to what happened in ‘29. That’s not my central case, but let me just say: we’ve never had a deflationary bust because inflation was too close to zero or 1.5% instead of 2%. We’ve had them because we’ve had these tremendous asset bubbles. It happened here in ‘29, it happened to Japan in ‘90, and obviously it happened in the Great Financial Crisis. And there is no one — no group — that will get hurt more by a bust than the poor. They will be first in line to get screwed — trust me.
In terms of the dollar, I think I covered that pretty heavily. But I’ll just reiterate: talk about American exceptionalism, which is what a lot of current money managers say is their case for the dollar. I started using that term way back in the ’90s. There is nothing exceptional about what I presented to you, other than — to me — our stupidity. And everything that has made America exceptional economically — which is a meritocracy, which is the American dream, which is not taxing producers — is shifting now.
I don’t want to make a political comment about taxation. I’ll just say historically, the outcome economically has not been great. I am very sympathetic to the fact that I shouldn’t be paying a lower tax rate than the plumber on my capital gains, and I have no problem with them going up a certain amount. But their own Joint Tax Committee did a study, and they’re going to lose revenues if they raise capital gains to 43%. And no matter how heinous you find it that rich people are paying a lower tax rate than you want them to — if they just go about avoiding that tax, it does not make any sense to raise tax rates if it does not increase revenues.
I think I answered three of your 12 questions, so maybe we’ll move on.
Larry Tastron: Thank you, that’s enough.
Reuben: Thanks, Larry. Anyone else from the board want to ask any questions? They might let you off easy, Stan. All right, I’ll ask one then.
Stan, many students and those graduating will go on to work in equity research, portfolio management, and hedge funds. I suppose this question is not just about investing but maybe a little bit about life: when you assess decisions that you’ve made or didn’t make, what does that process look like, and how do you consider whether your decision-making was high quality or low quality?
Druckenmiller: Well, I’ve been extremely fortunate. I think maybe the most important decision anyone ever makes is your partner in life — so marriage. You better choose properly there. I screwed it up the first time — I was 22, out of college — and I had a practice marriage. It lasted two years, no kids, and I got a second chance. That worked out. But if you don’t get that one right, that’s not great. And I’d say in that realm, there’s a lot more to look at than looks and temporary passion — you’ve got to look at the whole picture.
In terms of a profession, I was extremely fortunate to be in a profession where in my twenties I’d go to work at six in the morning and come home at 11 at night — not because I was trying to make a bunch of money, I just loved the business. There’s nothing I found more exciting than what I described earlier: this gigantic puzzle where you try to predict how things are going to evolve in the world and how security prices might respond to them.
I know it’s a cliché, but a lot of clichés are there for a reason: you’ve got to be passionate. If you’re coming into the investment business, I promise you — if you’re coming into it just because it looks like the best financial return to you but you’re not all that passionate about it — you’re going to lose. Because every time you make a trade, you’re trading against somebody who is passionate and probably working harder, and you’ll be behind the eight ball. So whatever the profession is — a not-for-profit to help disadvantaged kids, my business, medicine — you’re going to spend 50, 60, 70 hours of your week there, and you’re not going to be happy if you’re not enjoying it. It takes more than just the financial remuneration to make you happy. I’m just extremely fortunate that I got into a business that I loved — and the financial remuneration is ridiculous relative to what it yields to society. I mean, why I make more than a doctor is — well, it is what it is.
Reuben: Thanks. I’ll pause again. Jim, I see a hand up.
Jim: Good to see you, Reuben. Stan, thank you very much for your comments — really appreciate it, lots of thought-provoking thoughts and opinions. Stan, we’ve all been in the business a long time, and my question is a little bit more about our industry. One of the things I think we’ve seen is arguably a gradual — and some might argue, not so gradual — increase in short-termism and focus on the short-term rather than the long-term, particularly more so in the public markets than in the private markets, which inherently have a longer time horizon. For those of us more focused on the public markets, it’s difficult — that trade-off between making bets that will pay off over the long term and yet having to maintain a business, grow a business, keep clients, and so on. What do you have to say about that, and do you see this ever changing?
Druckenmiller: Well, that’s a great question, and it’s just brutal. I remember a lot of people that fought the dot-com bubble in ‘99 — they went out of business because their clients were looking at 60 or 70% returns. I also remember Capital Research, who stuck to their guns, lost like half their assets, and then three or four years later they were rewarded for their patience and were just killing it.
I think it depends on the manager. But I’d say the great majority — you’re going to do better not taking a myopic view, trying to stick with positions and think longer term. There are certain managers who like to trade — I’m guilty of that sin at times. But I think by and large, in terms of the business, one thing you can do is really communicate your investment philosophy with your clients. So when you’re fighting what might be a short-term headwind, you’ve explained to them in advance what your plan was, why you’re going to do that plan, and you’re just executing on it — they’re much more likely to stay with you if you’ve prepped them.
And I know this is easy for me to say, but I also think it’s important how you choose your clients. I threw every fund of funds out of Duquesne in 1993. It’s the smartest thing I ever did — by the way, once individuals heard about it, money just wanted to fly in. It was sort of reverse marketing. But I think it’s really important that you educate your clients to whatever your investment philosophy is.
One more thing I’d like to say about the myopia of investing: part of the problem is the myopia of our policy makers. If you look at what Ronald Reagan and Paul Volcker did — Volcker engineered a recession to break inflation. Can you imagine, in today’s world, some Fed chairman standing up saying we’re going to do whatever it takes and break inflation, including knock the hell out of the economy? It wouldn’t happen. And this myopia is frankly a disaster, because that led to maybe 20 or 30 years of prosperity. Now we’re using a new bar: we’ve got to have full employment. Well, I don’t know about USC, but at Bowdoin, employment is in the lagging indicators. So the Federal Reserve — who’s supposed to be forward-looking by 24 months — wants to be at full employment before they stop doing QE and start raising rates. It’s just absurd.
Anyway, that’s how I stand on that. I feel the pain of investment managers — it’s tough. Some of them won’t make it because of this phenomenon. But it’s just one of the risks of the business.
Jim: Thanks.
Reuben: Obviously, if we could make this MBA program 20 years long, we could finally get some statistically significant alpha from these portfolio managers. We’re getting a few more questions. We have about eight minutes left. I thought I’d ask one I’ve gotten a couple of times tonight: what are your thoughts on SPACs?
Druckenmiller: Just part of the mania. I could have included them with Dogecoin. Look, it’s a unique way to raise money — there are probably 5 or 10 out of the 200 that are deserved and were a better way to do it. But to me, Reuben, I could give you 20 examples and every one of them comes down to free money and speculation.
I was with my sister-in-laws last night — I haven’t seen them in years, I’ve known them for 30 years, and they’ve never asked me about a stock. They wouldn’t leave me alone — all they wanted was an investment idea. SPACs are just one manifestation. I don’t like them, I think they’re terrible. I wouldn’t refuse to own a company because it was a SPAC — you never say never, there might be a diamond in the rough — but you’re looking for a diamond in the rough because most of these things are just big pump-and-dump jobs. And frankly, the biggest mania I’ve seen in my lifetime — not just SPACs, but the overall mania —
Reuben: You’re on mute, Stan.
Druckenmiller: Thanks. (continues) Anyway — that captures it.
Reuben: Anyone else on the board with a question for Stan? Are we going to have to wait another five years to get you back here?
Druckenmiller: I think I might be done — we’ll see what your responses are after the talk. I don’t think it’s been exactly uplifting. Although I will say this is really not only sort of risky but it’s also just interesting as hell. Because when I said in my opening remarks how unique it was, I hope it’s never repeated. I don’t know how it’s going to end, but it’s going to end badly. I just don’t know when. And to Jim’s point earlier — I’m glad I don’t have any clients, because if you bet against it ending too soon and you’re wrong, you might not have any clients by the time it ends. It’s very challenging.
Reuben: Thanks. We’ll probably do about two more questions here, Stan. One I got is: post-Great Financial Crisis — for the last 12 or so years — what’s the biggest investment lesson you’ve learned in that time period?
Druckenmiller: What I learned is that I made 70% of my money previously in bonds and currencies, and when the central bank squashed them, I wasn’t as good as I thought I was. I don’t know how much I learned overall. I think we went through maybe the greatest innovative period since the Industrial Revolution in terms of change. But I don’t think I learned that. Some people are going to learn in the next five or ten years that that’s not going to last forever, and these valuations aren’t going to last forever.
It’s been a period for equity managers, and I’m just glad I started in equities. Because to me, you need a bunch of arrows in your quiver. I was murdering everybody in the ’90s because of bonds and currencies. I can’t keep up with these tech managers making 50% a year by just doing macro. But I’ve been in equities myself — I just haven’t made the big bets because they weren’t in my comfort zone, like we talked about earlier. I don’t think I answered your question. Probably too old to learn anything.
Reuben: No, it’s great. I’m mindful of the time — just a few minutes. I’m going to try to get two more questions in. The first one is from the audience: speaking of shorting stocks, do you still think there’s value in the practice, given it has come under scrutiny with the GameStop episode?
Druckenmiller: Now, those guys that got their clock cleaned in GameStop are some of the best investors on the planet. Hindsight is wonderful, and talking from the cheap seats is wonderful. But it all happened in like two and a half days. I think any rational analysis — when that stock was at $7, you thought it might go to $25 or $30, and then maybe in a mania it goes to $40. To think that it could have gone to $500 in a week — it’s just silly.
But like everything else, Reuben, people tend to fight the last war. The shorting environment has been as good as I’ve ever seen it — percentage-wise, we’ve done better on our shorts than our longs, supposedly, in the last two or three months. It’s a tough game, and that’s a new variable you’ve got to consider — the Reddit crowd. But everything I’ve described throughout my talk, where valuations are, SPACs and everything else — there’s about as much opportunity as I’ve ever seen on the short side. So I wouldn’t give up on it. But it’s been a miserable, miserable 12 years trying to short stocks. And it will be. But when this thing busts, it’s going to be miserable to be long stocks — like my poor boss had from 1968 to 1978.
Reuben: Thanks. I’m going to ask one more question and then turn it back to Professor Ku to wrap us up. Sheldon mentioned your philanthropy efforts, and you touched on them a little bit as well. I think that’s probably a good place to close. You were called the most charitable man in 2009 by the Chronicle of Philanthropy. Some graduating students here will go on to very lucrative careers, and at the very least many will find themselves with the opportunity to give back financially to society. What role, broadly speaking, has philanthropy played in your life, and how do you feel about giving away meaningful amounts of your money?
Druckenmiller: It’s been a huge role — it’s brought me great joy. And I’ll say: I’m not necessarily a good person, I’m a selfish person, and I give money away because I love it. I love the joy of watching lives change and being able to shape things.
Again, I don’t feel guilty about the money I made. I do think it’s strange that I’ve gotten the financial remuneration I have versus a doctor. But if I can take that money and raise the prospects for the American dream in a lot of underserved neighborhoods — or if I can, through the New York Stem Cell Foundation, end up having provided the fellowship for the guy that founded Moderna, or work on the environment with EDF — it just brings great joy.
I’m a competitive person. I love winning in the investment game. I don’t do it for money — I do it because I love competition and love winning. But there’s sort of an emotional, deeper joy and satisfaction I get from changing the outcomes for kids who didn’t have the same opportunity I had. I don’t think anybody should be guaranteed an outcome, but it really sticks in my craw that some kids just don’t have the chance I had at the American dream.
Reuben: Stan, thanks so much for joining us tonight. It’s been a real honor for me. I’ll turn it back to Professor Ku.
Professor Ku: Thanks, Reuben. Thank you, Stan, and thank you, Reuben — that was such an informative talk. I just wish, Stan, you didn’t sugarcoat your views and were more direct.
Druckenmiller: Well, as I said, I do tend to change my mind. I could be wrong. I often am.
Professor Ku: We very much appreciate you making the time for our students and all of us today. And I wanted to say again to the Class of 2021: congratulations.
[Applause]