Stanley F. Druckenmiller — Monetary Policy & Markets
Transcript
Powell: Hi, I’m Raoul Pal, and the CEO of Real Vision. It’s my pleasure to personally introduce one of the most incredible conversations that I’ve ever seen — or we’ve ever had at Real Vision — and it’s led by my good friend Kiril Sokoloff. Kiril is one of the most legendary people in the investment research business. You can see by the quality of the guests that he brings to Real Vision that his contacts in the finance industry and the wider world are completely unparalleled. And this time, he’s going to do something extraordinary for us. In this episode, he’s going to interview one of the greatest investors of all time: Stanley Druckenmiller.
Stan is perhaps the best 30-year track record in money management history. He’s compounded over 30% returns and he’s never had a down year — over 120 quarters, he’s only lost money in five. How is this even possible? How has he managed to make money day after day, year after year, decade after decade? That’s a question that nobody’s ever been able to answer — that is, until now. You see, Stanley Druckenmiller has never given an interview like this before. And in this incredible conversation, Stan tells Kiril how he was able to build that track record, how he operates in this new world of distorted price signals, and the opportunities and risks that he says lie ahead. It’s a truly extraordinary conversation that every investor will want to watch and then return to time and time again. There’s so much learning in this. So now, in the second episode of Kiril Sokoloff’s series, please enjoy the full conversation with Stanley Druckenmiller.
Kiril: Stan, it’s a great pleasure to have you here.
Druckenmiller: Great to be here, Kiril. I’ve enjoyed your work for many, many years, so I’m excited about the opportunity.
Kiril: Thank you. Well, we are too. We’ve been friends for 25 years. Both of us are very low-profile people — we avoid publicity — and thank you for trusting me to do this. What I really want to drill down on is that incredible brain of yours that’s created this phenomenal track record, which is really the best in history: 30 years managing outside money, never had a down year, 120 quarters with only 5 down, 30% compounded over 30 years. How did you do it? I want to understand the mindset, the approach, the intelligence that enabled you to do that.
And secondly, to take that and bring it forward to today’s complexity — how you look at the world, what challenges, what opportunities, how you’re operating differently given the fact that algos are running the markets and free money has destroyed price signals. And third, to discuss Stan Druckenmiller’s other passions: your family, your extracurricular activities, and your philanthropy, which you do in a very low-key way — which, of course, is the best way to do it.
So let me start off by asking you about your balanced life. People in our business tend to be very focused and very driven, but I wouldn’t say that many of them are happy. And you’re a happy man. You’ve got a balanced life. You’re one of the great philanthropists in America. You have a beautiful, evolved, spiritual wife whom you love. You’ve got three lovely daughters who are all successful. That is a balanced life with this incredible performance, and you’re a happy man. How do you do it?
Druckenmiller: That’s kind of you to say. The balanced life is the key. In my case, Fiona and I are both very private people, so we don’t really go out on the social scene in New York at all. We might go to three events a year, whereas I think most of my peers might go to three a week — and that frees up a lot of time. I had the benefit of a very highly intelligent, creative wife who’s now had four different careers. She repots herself about every 10 years. After my children were born, she gave up everything to raise those children, and she did it in a very intense, creative way. She had this thing called “special time” where each child, one day a week for two or three hours after school, could go anywhere in New York and do any activity with her — because she thought it was important, given sibling rivalry, to have individual time with each. So it all sort of starts with her.
Then I would really weigh in on the weekends. And maybe because I married a little late — which was when I was 35 — I was successful enough at the time and had acquired enough knowledge that I was able to spend most of my time with the kids on the weekends. If it had been in my 20s, I think it would have been a disaster. That’s been a very, very important part of the balance.
It’s interesting — someone asked Fiona and me about the difference between men and women and their response to their children. You have to understand, our children are 28, 27, and 25, and even today, when she has full-time jobs and is running a business, she says the first hour of her day is spent thinking of all the things she’s going to do for the children that day — through texts and emails she’s arranged. It’s the first thing she thinks about. Of course, the first thing I think about is the euro and the yen — and I love my children, but it’s just a whole different mindset. I’ve been a huge beneficiary of that.
One of my early mentors said: with children, if you get the first five years right, you’re rewarded the rest of your life, and if you get them wrong, you’re tortured. Fiona extended that five to about 20 years. Having a happy family provides a whole lot of happiness and a whole lot of balance. That’s pretty much been the key — and that’s freed up extra time to do some physical activities as well as the philanthropy you mentioned.
Kiril: We’re all worried about entitlement with our kids, and we’re always struggling with that. How did you deal with it?
Druckenmiller: That is such a fascinating question. Fiona and I had a totally different philosophy on that. She felt no holds barred in giving the kids material things, and there was no reason to hide our wealth from them. I thought she was crazy and this was going to be a disaster. But it was her area and I deferred to her. I’ve never heard her say no to those kids on anything except video games — that’s the only thing that was really heavily discouraged.
And somehow, through osmosis, or by observing their parents’ values, strangely they all ended up being high achievers. We never ever talked to them about philanthropy or charity or giving back, and yet they’ve all done things very actively to help the disadvantaged. I’m not sure how or why it all happened, but I guess it starts again with the mother who spent so much time with them and taught them values.
It’s bizarre — I’ll never forget, in the third grade, we had a teacher review for our oldest child. Fiona wasn’t there, and the teacher wanted to know what Fiona had done, because the other wealthy kids were all bragging about their country houses and this and that, and she said that Sarah — our oldest daughter — would never ever talk about any of that. We never hid their wealth from them, so Fiona kind of broke every rule in the book that you would read about in dealing with this subject. But things have worked out extremely well.
Kiril: Congratulations. Nothing like a happy man and a happy family. So, moving on to the world that we’re living in — this has been an especially volatile year. We’ve got a new Fed chair. We have possible contagion in emerging markets. We have a huge new fiscal stimulus in the U.S. that’s distorting things, and we have a very aggressive foreign policy and trade policy on the part of the United States. So, taking all that and whatever else you’re focused on — where’s your focus right now?
Druckenmiller: Well, since free money was instituted, I have really struggled. I haven’t had any down years since I started a family office, but thank you for quoting the 30-year record — I don’t even know how I did that when I look back and compare it to today. I promptly made about 70% of my money during that time in currencies and bonds, and that’s been pretty much squished and has become a very challenging area — both as a profit center. So while I started in equities, and that was my bread and butter for my first three or four years in the business, I’ve evolved into other areas. It’s a little bit of Back to the Future over the last eight or nine years, where I’ve had to refocus on the equity market.
I also have “bear-itis” because I made my highest absolute returns in bear markets — I think my average return in a bear market was well over 50%. So I’ve had a bearish bias and I’ve been way too cautious the last five or six years, and this year is no exception.
I came into the year with a very challenging puzzle: rates are too low worldwide, you have negative real rates, and yet you have balance sheets being expanded by central banks at the rate of a trillion dollars a year — which I knew by the end of this year was going to go to zero, because the U.S. was obviously going to go from printing money via QE to letting $50 billion a month run off the balance sheet starting actually this month. I figured Europe, which is doing €30 billion a month, would also go to zero. So the question to me was: if you go from a trillion in central bank buying per year to zero, and you get that rate of change happening within a 12-month period — does that not matter? Global rates are still what I would call entirely inappropriate for the circumstances. You have outlined those circumstances perfectly: robust global growth, massive fiscal stimulus in the United States, an unemployment rate below 4%. If you came down from Mars, you’d probably guess the Fed Funds rate would be 4 or 5% — and you have a president screaming because it’s at 1.75%.
Maybe because of my bearish bias, I had this scenario that the first half would be fine, but by July–August markets would start to discount the shrinking of the balance sheet. I just didn’t see how that rate of change would not be a challenge for equities — especially since margins are at all-time records and we’re at the top of valuation by any measure you look at, except against interest rates. And at least for two or three months, I’ve been dead wrong. So that was sort of the overwhelming macro view.
Interestingly, some of the things that tend to happen early in a monetary tightening are responding to the QE shrinkage — and that’s obviously, as you’ve cited, emerging markets. The cocktail I mixed up here was to continue — as I’ve been doing for three or four years at my firm — to be long the disruptors: the cloud-based companies, the internet companies. To be short the disrupted: things like retail and staples. And with regard to China, to continue to own who I thought would be the winners in the Chinese internet.
It’s been a below-average year, mainly because the Chinese internets, which were very, very good to me the last two or three years, have been pretty much a disaster this year. I gave an interview at Sun Valley — not this year, but last year — and said that I thought the Chinese internets were at less risk of government regulation than the U.S. internet, and everyone in the audience broke out in laughter. I said, “No, I’m serious,” because they’re partnering with the government — they have all this information that they hand over to the government. The internet has been the greatest friend the Communist Party could ever imagine, whereas 15 years ago I would have told you the internet was going to destroy them. Well, at least on the gaming side with Tencent, I’ve been dead wrong, and it’s dragged that whole group down.
The other thing that happened two or three months ago: mysteriously, my retail and staple shorts — which had been fantastic relative to my tech longs — have had this miraculous recovery. I’ve also struggled mightily, and this is really concerning to me. It’s about the most trouble I’ve been in about my future as a money manager, maybe ever. And it’s what you mentioned: the canceling of price signals. But it’s not just the central banks — if it was just the central banks, I could deal with that. One of my strengths over the years was having deep respect for the markets and using them to predict the economy, particularly using internal groups within the market to make predictions. I was always open-minded enough, and had enough humility, that if those signals challenged my opinion, I went back to the drawing board. These algos have taken all the rhythm out of the market and have become extremely confusing to me. When you take away price action versus news from someone who’s used that as their major disciplinary tool for 35 years, it’s tough. It’s become very tough. I don’t know where this is all going. If it continues, I’m not going to return to 30% a year anytime soon — not that I think I might anyway, but one can always dream. When the free money ends, we’ll go back to a normal macro trading environment.
Kiril: Well, let’s talk about the algos. We haven’t seen the algos sell — we only see algos buy. We saw a little bit of it in February when there was some concentrated selling. We saw it in China in 2015, which was really scary — most people weren’t focused on that, but I was. I think you were too. They’re programmed to sell if the market’s down 3%. Machines are running, can’t be stopped. A huge amount of trading and money is being managed that way. And we’ve been operating in a bull market in a strong economy. What happens when it’s a bear market in a bad economy? Will things get out of hand? Knowing that risk could unfold at any moment — the way January–February just came like this — how are you protecting yourself? How are you insulating? What are you watching for if that might happen?
Druckenmiller: It’s a little bit like after 9/11, waiting for the next terrorist act — in which case you would have missed a roaring bull market for the next six years because you were sitting there after Dick Cheney told your neighbors to move out of New York. I’m just going to trust my instincts and technical analysis to pick up this stuff. But I will say — and I proved it to my own detriment the last three or four years — the minute the risk/reward gets a little dodgy, I get more cautious than I probably would have been without this in the background.
But I want to be clear: the major challenge of the algos for me is not some horrible market event. I can actually see myself getting caught in that, but I could also see myself perhaps taking advantage of it. The challenge for me is that these groups that used to send me signals don’t mean anything anymore.
I’ll give one example from this year. Pharmaceuticals — which you would think have the most predictable earnings streams out there, so there shouldn’t be a lot of movement one way or the other. From January to May, they were massive underperformers. In the old days, I’d look at that relative strength and say, “This group is a disaster.” Okay, Trump was making some noises about drug pricing — clear chart patterns and relative patterns suggested this group was a real problem. They were the worst group of any I follow from January to May. And then, with no change in news, no change in Trump’s narrative, and if anything an acceleration in the U.S. economy — which should put them further toward the back of the bus, not the front — they’ve been about the best group from May until now. I could give you 15 other examples. That’s the kind of stuff that didn’t used to happen, and that’s the major challenge of the algos for me.
Now, what you’re talking about might be a challenge for society and the investing public in general, and yes, I could get caught like anybody else. There’s probably some degree of having one foot out the door that I otherwise might not have, because I do know this is in the background.
Kiril: You do know — I skimmed the article — there was something in the paper about how they’re taking more measures to put in circuit breakers, whatever they call those things, to stop the phenomena you’re talking about. Doesn’t mean they’ll be effective. But how are the algos operating? Why are they distorting the price signals?
Druckenmiller: Well, I’ll tell you why it’s so challenging for me. A lot of my style is: you build a thesis — hopefully one nobody else has built — you put some positions on, and then when the thesis starts to evolve and people get on board and you see momentum start to change in your favor, you really go for it. You pile into the trade. It’s what my former partner George Soros was so good at. In baseball terms, it’s the slugging percentage as opposed to the batting average.
Well, a lot of these algos are apparently based on standard deviation models. So just when you think you’re supposed to pile in and lift off, their models tell them you’re three standard deviations from where you’re supposed to be — and they come in with these massive programs that go against the beginning of the trend. If you really believe in yourself, it’s an opportunity. But if you’re a guy who uses price signals and price action versus news, it makes you question your scenario.
They have many, many different schemes and different factors. And if there’s one thing I’ve learned — currencies being the most obvious example — every 15 or 20 years there’s a regime change. Currencies traded on current account until Reagan came in, then they traded on interest differentials, and about 5–10 years ago they started trading on risk-on/risk-off. A lot of these algos are built on historical models, and I think a lot of their factors are inappropriate because they’re in an old regime as opposed to a new one. The world keeps changing, but they are very disruptive if price action versus news is a big part of your process — as it is for me.
Kiril: So how does that play out? Is this going to get worse, or does it blow up? How do you see it?
Druckenmiller: I pray it blows up, but I don’t see that happening because money managers are so bad at it — I assume they’re going to outperform 95% of them. I don’t know if you’ve read Kasparov’s book, but he thinks the ultimate chess player is not the machine — it’s the machine combined with a man and his intuition. I think there are always going to be five or ten humans — maybe not many more — that even the best machine in the world, the AlphaGo type, will never beat, as long as that human is using the machine. They need to be used and understood. I can’t see myself passing my money entirely to a machine, but I’d be an idiot not to know the effect these machines are having and not to use them. It’s just one more input I didn’t have 20 or 30 years ago. But you’ve got to understand when the signals are real and when they’re driven by machine behavior, and you’ve got to understand the timeframes.
Am I using machines myself? I have money with a couple of machines — a very small amount, just enough so they send me signals when they think something dramatic is happening. I’m early enough in the process that I don’t know my conclusion, but I assume a lot of these machines are running on the same factors. If the machines start saying something is going to happen, they send me a notice — and to use a football term, that’s “under review.” I’m going to watch this for a year or two and see if they’re on to something or not.
There seem to be correlations that make no sense. For example, the RMB and gold are trading very closely — it makes no sense, and it’s very dangerous. Even day to day there are correlations that make no sense. It’s all messed up.
My great hope is that we get out of this ridiculous monetary regime, and when we do, things start to make sense again. I’ve been a critic — as you know, maybe to a fault — of the new monetary regime, which is very academically run. I’ve always argued that capitalism requires a hurdle rate for investment. You can’t just go on these silly inflation targets. If you’re going to make an investment, it should have some hurdle rate. Taking the hurdle rate away from investments is causing a lot of what we’re talking about. I don’t know that for certain, but that’s my intuition. I’m hoping we go back to some sort of normal regime sometime in the next 20 years, and then I’m hoping the stuff you’re talking about diminishes greatly. But I just don’t know. Like everything else, I’m open-minded on it.
Kiril: So, summer of 2017, there was a hope that Kevin Warsh might run the Fed. I met him. He was against QE2, as you were, as I was. And unfortunately, that didn’t happen. He worked with you for seven years?
Druckenmiller: He still works for me. He still does.
Kiril: What a fantastic opportunity it would have been to have him as Fed chair — grounded in the real world for once. So if you were running the Fed now, what would you do? And give the two challenges that you obviously know — but for the audience: if you don’t raise rates, asset prices continue to build. One of your major points in the past has been that the way you cause a deflation is to deflate an asset bubble that went too high. On the other hand, because of the enormous rise in debt — $247 trillion, up 11% in the last year, three times global GDP — a lot of companies and countries would be bankrupt if interest rates go too high, plus all the malinvestment that took place as funds were forced to lend money at ridiculous rates. How do we regularize this?
Druckenmiller: It really is a problem. You said I’m low-key and under the radar, but in every private talk I’ve given for the last five years, I’ve answered this question the same way. Though it’s a much, much more challenging situation than it was five years ago, for the reasons you cite.
One of the more revealing things Trump said when he went after the central bank was: “We shouldn’t be raising rates — don’t they know we have all this debt to issue?” But it’s the chicken and the egg. The reason debt has exploded is that there’s no hurdle rate for investment. When you can borrow money at zero, of course debt is going to explode. So you’re exactly right: we have this massive debt problem. If we don’t normalize, it’s going to accelerate and cause a bigger problem down the road. If we do normalize, we’re going to have a problem — and unfortunately, a much bigger problem than we would have had if we had normalized four or five years ago.
I’m going to give you the same answer I gave at dinner four or five years ago: I would raise rates every meeting as long as I could, and the minute I got meaningful financial disruption, I would back off. The sad thing is, since I made that statement, we’ve had these just rip-roaring markets — and what I was saying was: just sneak one in every time you can. Just sneak one in. And they’ve passed up on so many golden opportunities.
But the problem now, as you articulated beautifully, is that the debt is so much higher — particularly in emerging markets — than it was five years ago. You’re not going to be able to raise that much more, and we’re already starting to see the consequences. But somehow — if I’m reading them correctly, which is not easy — they seem to have stumbled into, with Chairman Powell, pretty much the formula I would be doing now. Although I wouldn’t be on this quarterly path — it’s way too predictable. As I’m reading them — and by the way, other people with just as big brains are reading in the opposite direction — they’re going to go every opportunity they have until you have a dramatic tightening of financial conditions. And because of the debt out there, that’s how I would play it right now. You can’t just say, “Okay, I’m going to 3.5 or 4%.” No — you just sneak one in, see if they handle it. And when I say “handle it,” I’m not talking about a 5 or 10% correction — I’m talking about all the various measures out there that we need to look at. That’s what I would do.
But it’s just ridiculous, with the unemployment rate at 3.8% and conditions as they are everywhere, to have rates at this level. Probably the most egregious has been the ECB — one can’t even imagine the rot that must be in those banks from malinvestment.
Kiril: Well, I remember back in ‘96 — I think we were both in the same place — that the contagion in emerging Asia was going to spread to all emerging countries and then come back to the United States, which it did. But it fueled the U.S. bubble much worse than it would have been. So the question is: if we keep raising rates, is that same scenario going to happen, putting our market more at risk from higher valuations?
Druckenmiller: I don’t think that last blast-off had anything to do with higher rates. I think it was because — if you remember — we cut in September of ‘98, then there was an inter-meeting cut in mid-October, and then with the market at a new high, Greenspan did one final cut at the end of October. I remember having been bearish that summer, then doing an about-face and thinking, “We don’t need to be easing — there’s nothing wrong with the American economy, and this money is probably going to flow into the U.S.” So I think the phenomenon you described has already been happening. I think we’re somewhat well on the way.
It’s interesting you bring up that period, because one of the more disturbing things that Powell said at Jackson Hole was his praising of Greenspan in the late ’90s — and by the way, it’s all over the media — about what a genius he was for not hiking and letting the thing run. In my opinion, that was the original sin. The Nasdaq went to 125 times earnings, the dot-com bust happened, and then because of the dot-com bust we offset that with the housing thing. So that started the whole cycle. I have a very different view from the central bank consensus, but you hate to disagree with them because you’re not inside the central bank — they are.
But no — I think the phenomenon you’re talking about is already happening. Money is flowing in here. And on a practitioner’s basis, we have a lottery ticket in Brazil and in South Africa, because as we’ve seen back in the ’90s and again now, these things can move 50–60% and your risk is probably not much more than the carry. I don’t know whether I’m going to get paid, but with the monetary tightening we’re in, we’re kind of at that stage of the cycle where bombs are going off. And until the bombs go off in the developed markets, you would think the tightening will continue — and if the tightening continues, the bombs will keep going off in emerging markets.
There was no more egregious recipient of free money than emerging markets, because you had the double whammy: all the vanilla money managers poured money in, and you had no market constraints on the political actors. I mean — imagine that Argentina issued 100-year debt at 7%. I can’t even remember a government surviving for 5 or 10 years without going into arrears, much less 100.
Kiril: So you’ve been right, for the right reasons. How do you navigate the phenomenal oligopolies — the profit machines that they are — with what looks like a regulatory tidal wave coming at them? And how do you decide when to get off that investment?
Druckenmiller: Perhaps I should have gotten off a few weeks ago and I missed my window. Kiril, it’s hard to figure out. I guess let’s just take Google, which is the new bad boy — and they really are a bad boy, because they didn’t show up at the hearing. I have an empty chair because they only wanted to send their lawyer. But it’s 20 times earnings — probably 15 times after cash — and they’re unquestioned leaders in AI. There’s no one close. They look like they’re leading in driverless cars, and they have this unbelievable search machine.
One gets emotional when they own stocks. When I keep hearing about how horrible they are for consumers, I wish everyone who says that would have to use the Yahoo search engine. I’m 65, and once I hit the wrong button and my PC moved me into Yahoo — I’d say this though I know Jerry Yang is a close friend — these things are so bad. And to hear the woman from Denmark say that the proof Google is a monopoly — and that iPhones don’t compete with Android — is that everyone uses the Google search engine: it’s just nonsense. You’re one click away from any other search engine. I wish that woman would have to use a non-Google search engine for a year. Okay, fine — if you hate Google, don’t use the product. Because it’s a wonderful product. Clearly they are monopolies, clearly there should be some regulation, but at 20 times earnings with a lot of bright prospects, I can’t make myself sell them yet.
Right now, one thing the Chinese internets are proving — outside of Tencent — is that when we get into a bear market, it doesn’t matter what your fundamental earnings are. You could argue about Tencent: there’s an air pocket in gaming and we all know what’s going on there. But Alibaba has beaten every estimate, nonstop, and the stock has gone from $210 to $165. It’s just a reminder that all these estimates, where they project out earnings three or four years from now and then project price-to-sales based on today’s prices-to-sales — some of these cloud companies are selling at 10 times sales. If they’re selling at 6 times sales — which is not crazy in a normal market — in three or four years I’ve lost money. So it’s a challenge.
I completely missed Apple because I’m not really a value investor. I just looked at that enterprise and thought, I don’t even think the phone is going to be the medium in five or ten years. I don’t know if it’s going to be in your contact lens or some hologram. So I completely missed that one.
Kiril: When you worked with Soros for 12 years, one of the things you’ve said you learned was a focus on capital preservation and taking really big bets — that many managers make all their money on two or three ideas but spread themselves across 40 stocks or 40 assets, and it’s that concentration that has worked. Maybe you could go into that a little bit more: how it works, how many of those concentrated bets have worked, when you decide to get out if it doesn’t work, and whether you add when the momentum goes.
Druckenmiller: I would say — assuming algos don’t interfere with it, that’s the disclaimer — if you’re going to make a bet like that, it has to be in a very liquid market, and even better if it’s a liquid market that trades 24 hours a day. So most of those bets for me would end up invariably in the bond and currency markets, because I could change my mind. I’ve seen guys like Buffett and Carl Icahn do it in equity markets. I just never had enough trust in my own analytical abilities to go into an illiquid instrument. In equities, if you’re going to bet at that kind of size, you just have to be right. And for all the hoopla around Mr. Buffett — from 1998 to 2008, a ten-year period, Berkshire Hathaway was down 40%. Nobody talks about that. If you had a hedge fund, you couldn’t be down for ten years and forty percent — they would have been out of business in year three or four somewhere in there.
But to answer your question: I’ll get a thesis, and I like to buy not in the zero inning, and maybe not in the first inning, but no later than the second. And I don’t really want to pile on in the third, fourth, or fifth inning. So I guess examples are best.
The best trade I made — which was the gift that kept on giving — came after a funny incident with Soros. I had been there six months. It wasn’t entirely clear who was running the fund — well, it was clear it was him, but he was trading very badly and I was trading very badly. I had come from an environment where people thought I was some kind of superstar and no one had ever questioned me. I flew to Pittsburgh because I had Duquesne at the same time, and he blew out my bond position while I was on the plane. I’d had total autonomy everywhere I’d been in my whole career. So I basically called him up from a payphone — that’s what we used back then — and resigned. When I came back, he told me he was going to go to Eastern Europe for five months and wouldn’t be trading. Maybe we were just in each other’s hair, and he couldn’t have two cooks in the kitchen. “Let’s see whether that was the problem, or whether you were really inept” — his words, not mine.
So while he was in Eastern Europe, the Wall came down. I had a very strong belief that Germans were obsessed with inflation — most of them thought Hitler would never have happened if the Weimar Republic’s hyperinflation hadn’t happened. When the Wall came down and it looked like they were going to merge with East Germany, the world’s thesis was: this is going to be terrible for the deutsche mark. My thesis was: the Bundesbank is the most powerful institution in Germany, the public is obsessed with inflation, and they will do whatever it takes to keep that currency strong. There’s no way the deutsche mark is going down — in fact, the place is going to grow like a weed with all this labor from East Germany.
So while he was gone, this happened, and the deutsche mark gets killed the first two days. We were in the zero inning, and I went in very, very big right away — the market gave me an opportunity. I can’t remember exactly, but it was down three or four percent and I thought it should be up ten. And of course, that led to this recurring devaluation: started with Italy, obviously then the pound — let’s not go over that, it’s been beaten to death — then Sweden. All these things we kept playing, going on and on. But there’s a case where we never really averaged up — and in fact, we couldn’t, because we were dealing with fixed currencies. You don’t have price momentum to latch onto; you’re betting that something’s going to break. But even against the dollar, it’s all in right away.
Normally, I’ll go in with about a third of a position and then wait for price action to confirm. When I get that technical signal, I go. I had another very pleasant experience with the successor to the deutsche mark — the euro. I think it was 2014, when the euro was at 1.40, and they went to negative interest rates. It was very clear they were in a race to trash their currency, and the whole world was long euros. I’d like to say I did it all at 1.39. I did a whole lot. But I got a lot more brave when it went through 1.35 — and that’s a more normal pattern for me.
Then there would be the strange case of 2000, which is kind of my favorite and involves some luck. I had quit Quantum and Duquesne was down 15%. I had given up on the year and went away for four months without seeing a financial newspaper. When I came back, to my astonishment, the Nasdaq had rallied back almost to the high. But some other things had happened: the price of oil had gone up, the dollar was going way up, and rates were going up — all since I was on my sabbatical. And I knew that normally, this particular cocktail had always been negative for earnings and the U.S. economy.
So I went about calling 50 of my clients — who had stayed with me during my sabbatical and were all small businessmen; I didn’t really have institutional clients — and every one of them said their business was terrible. I thought, “This is interesting.” The two-year was yielding 6.04% — not that I would remember — and Fed Funds were 6.5%. So I started buying very large positions in two- and five-year U.S. Treasuries, then explained my thesis to Heinemann. I thought that was the end of it. Three days later, he’d run a regression analysis: with the dollar, interest rates, and oil, what happens to S&P earnings? It spat out that a year later S&P earnings should be down 25% — and the Street had them up 18%.
So I kept buying these Treasuries, and Greenspan kept giving hawkish speeches with a bias to tighten. I was almost getting angry — every time he gave a speech, I kept buying more and more and more. That turned out to be one of the best bets I ever made. There was no price movement to validate it — I just had such a fundamental belief. So sometimes it’s price, sometimes it’s just such a belief in the fundamentals. But for me, I’ve never trusted myself to put 30 or 40% of my fund into an equity — I mean, I did it when I was managing $800,000, which is what I started with, but not in an illiquid position at scale.
Kiril: One of the great things I understand you do is: when you’ve had a down year, rather than getting aggressive to win it back — as a normal fund manager would — you take a lot of little bets that won’t hurt you, to get back to break-even. It makes a tremendous amount of sense. Maybe you could just explore that a little bit with me.
Druckenmiller: Yeah. One of the lucky things was the way my industry prices things: you price at year-end, you take a percentage of whatever profit was made that year. So at the end of the year, psychologically and financially, you reset to zero. Last year’s profits are yesterday’s news.
I know — because I like to gamble — that 90% of the people who go to Las Vegas lose, even though the odds are only 33-to-32 against you in most of the big games. How can they all lose? It’s because they want to go home and brag that they won money. So when they’re winning and hot, they’re very, very cautious; and when they’re cold and losing, they’re betting big, because they want to go home and tell their wife or friends they made money. Which is completely irrational.
And this is important — I don’t think anyone has ever said this before — one of my most important jobs as a money manager was to understand whether I was hot or cold. Life goes in streaks. Like a hitter in baseball, sometimes a money manager is seeing the ball and sometimes they’re not. If you’re managing money, you must know whether you’re cold or hot. In my opinion, when you’re cold, you should be trying for months — not swinging for the fences. You’ve got to get back into a rhythm. So that’s pretty much how I operate: if I was down, I had not earned the right to play big, and the little bets you’re talking about were simply a way to tell me whether I had reestablished a rhythm and was starting to make hits again.
The Treasury bet in 2000 is a total violation of that rule — which shows you how much conviction I had. This principle dominates my thinking, but if a once-in-a-lifetime opportunity comes along, you can’t sit there and say, “I have not earned the right.” I will also say: that was after a four-month break. My mind was fresh, my mind was clean. I will go to my grave believing that if I hadn’t taken that sabbatical, I would never have seen that opportunity in September and never made that bet. It was because I had been freed up. I didn’t need to be hitting singles. I came back clear and fresh — it was like the beginning of the season. I hadn’t been hitting badly yet; I had flushed it all out. But it is really, really important, if you’re a money manager, to know when you’re seeing the ball. It’s a huge function of success or failure. Huge.
Kiril: So when you made that trade you just described, there was a huge amount of conviction and historical proof that this had always worked. Today, as we look at the U.S. equity market that’s gone up for almost ten straight years and our performance has been dramatic — what would you need to see to give you the conviction to want to go short?
Druckenmiller: Unfortunately, I have gone short several times this year, and at least I’m alive — but I regret having done so. I looked at seasonals in July–August. I had no precedent for a balance sheet rate of change going down a trillion dollars from where it had been, but that gave me the conviction to go short — on top of the fact that seasonally, I had a trusted period that also rhymed with right when the slope of the QE curve was shrinking. It didn’t work. I got a bloody nose, and now I’m contemplating my future.
But everything for me has never been about earnings and never been about politics — it’s always about liquidity. My assumption is that one of these hikes — I don’t know which one — is going to trigger this thing. I am on triple red alert, because we’re not only in the right timeframe, we’re in the right part of the cycle. Maybe markets don’t anticipate the way they used to. I thought markets would anticipate there being no more ECB money spilling over into the U.S. equity market at year-end, so this looked like a good time to take a shot. Clearly it wasn’t.
If we get a blow-off in the fourth quarter — which seasonally tends to happen, particularly in Nasdaq-driven markets, particularly if these bombs keep going off in emerging markets — I could see myself taking a big shot somewhere around year-end. But that’s a long way off. I’ll cross that bridge when I come to it. Right now, I’m just licking my wounds from the last shot I took.
Kiril: Well, we have JGBs, which have been the most amazing vehicle. Back in the late ’90s, everybody’s favorite short was JGBs, and I think I jumped on the bandwagon at one point. The thought was that the JGB was the outlier — but the JGB was really the leader.
Druckenmiller: Absolutely — that was what we all missed.
Kiril: And then when I figured that out, we got to minus 30 basis points, I think, on the 10-year JGB — which I thought had to be a short. But it would have been dead money for a year or two. Now it looks like yields are breaking out of the JGB. I don’t know if you agree with that. It looks like something is going on. Kuroda is accepting perhaps that it’s not working and they need to change. And them having been the most egregious of all the central banks — is that a really important change for the world?
Druckenmiller: It’s part of the puzzle I’m talking about. In and of itself, I don’t know. But since it looks like it could be happening by the end of the year — if not sooner — and at the same time the ECB will stop buying bonds, and at the same time we’ll be shrinking our balance sheet by $50 billion a month, all these pieces fit together for a reckoning. I’m not in the business of making a fortune if something goes from 10 basis points to 20 basis points — that’s not something I’m going to make a big bet on, though I might have a short on it. But I do think it’s very important in terms of the overall narrative.
It’s also instructive why they’re doing it, right? Because it looks like they’re not doing it for economic reasons — they finally understand that it’s killing their banks, which are the blood and oxygen you need to run the economic body. And that’s causing a political problem. I sure hope we don’t need 25 years of that kind of evidence before we normalize. I think it’s very important, Kiril — but only as a piece in an overall puzzle. They’re all lining up in the same direction, which is why I made the bet short in July. I was wrong, at least on a trading basis — but psychologically, I’m still there. It’s going to be the shrinkage of liquidity that triggers this thing.
And frankly, it’s already triggered in emerging markets — and that’s kind of where it always starts. Where I haven’t seen it yet, and where I think it should happen, is in equities. And God knows — talk about a crazy price market — it’s the credit market. It’s amazing. Probably since the 1880s and 1890s, this is the most disruptive economic period in history, yet there are hardly any bankruptcies. Whatever that Buffett line is about swimming naked when the tide goes out — there are probably so many zombies swimming out there. There’s going to be some level of liquidity withdrawal that triggers it. Who knows — it might start with Tesla. I mean, could the Tesla thing have happened in any other environment in history? I don’t think so. It’s just ridiculous what’s going on there in the last few weeks.
But I don’t look at it so much as Tesla — it just describes the environment to me. It’s nuts. All the malinvestment and the trillions of dollars spent without a cash return — you can’t imagine how many zombies are really out there. Corporations buying back their stock to the tune of $5 trillion while running down their balance sheets. And then you go to the high-yield market, where it’s covenant-light and there’s been a huge amount of issuance. What happens when interest rates start to reflect credit risk?
You can intuitively make a case that we’re going to have a financial crisis bigger than the last one, because all they did was triple down on what — in my opinion — caused that crisis. Bernanke and I have a big disagreement over what caused it. To me, the seeds were born in the period when we had 9% nominal growth in the fourth quarter and a 1% rate — which wasn’t even enough, and he had that stupid “considerable period” language attached to it. And you had serious, serious malinvestment.
For three or four years, subprime was pretty easy to identify if you had the right people showing you — which I was lucky enough to have. I don’t know who the boogeyman is this time. I do know there are zombies out there. Are they going to infect the banking system the way they did last time? I don’t know. What I do know is: we seem to learn something from every crisis, and this one — in my opinion — we didn’t learn anything. We tripled down on what caused the crisis, and we tripled down globally. Tried to solve the problem of debt with more debt, which is exactly what we did in the ’20s, and that didn’t work out — with Wall Street just cheering them on.
Kiril: Well, we’ve got this huge entitlement issue — which you’ve read a lot about: $100 trillion of unfunded liabilities in Medicare, Medicaid, Social Security, five times U.S. GDP. Just as bad in the rest of the world. Worst demographics in 500 years, dependency ratios rising. You’re going to have a battle between creditors and debtors at some point. Up to now, the creditors have been winning, but they’re starting to lose a couple. And when that plays out, we’re going to have some really tough times.
Which brings me to populism. I want to kind of bring it all together. I started following populism back in 2011 — that’s when I felt it was coming. Then Brazil. I came back from Beijing in October 2012, and it was clear to me that the new leadership — we didn’t know that Xi would be appointed — but we knew what they were planning to do: clamp down on corruption to save the Communist Party. The word we used to describe it was “give a little bit now rather than a lot later.” Having studied the French and Russian revolutions, unfortunately that didn’t happen in America — it’s just gotten more wealth disparity.
Populism — some people think it’s represented by Trump, and others have different theories. My feeling is that populism is really about wealth divided and an unequal sharing in the economy. For 30 years, the worker didn’t get a real wage increase. Now you’re starting to get some, but it’s being taken away through a higher cost of living. So when we look at this whole debt situation, we also have to look at it in the context of populist sentiment and creditors versus debtors. How do you see all that working out?
Druckenmiller: First of all, I think you nailed the cause of it. The previous populist periods required much worse aggregate economic statistics to set them off. But when I was running Soros in the early years, we had a fixed system as a percentage of the profits. The rage that the high performers felt about the low performers — even though they were all ridiculously overpaid — taught me that envy is one of the strongest human emotions.
When you look at the wealth disparity today — which, by the way, in my opinion, the biggest accelerant has been QE — and then you have the internet broadcasting this disparity through millions of bits of information on an ongoing basis. I personally think Jeff Bezos deserves every penny he has — I think it’s one of the great companies ever. But there have been 20 articles in the last 48 hours about him being worth more than $150 billion. How does a normal citizen look at that? Exactly.
So I think that is the seed of it — it’s not some economic malaise, it’s the disparity. The disparity has never been worse. Probably the most disturbing book I’ve ever read was Charles Murray’s Coming Apart. I read that and said, “Oh my God, this is going to get worse, and it can’t stop — it’s just built into this system.” The irony is that what really set it off was when universities became meritocracies. Then you have inbreeding — everyone’s going to Harvard, they all live in the same zip codes. And I look at this and say, “Oh my God, this is my family.” It comes home. I don’t see what stops this until you end up with some major, major dislocations — politically and economically — because of it.
The Trump phenomenon is interesting, because had Bernie Sanders won the nomination — every poll that spring had Hillary running about even with Trump, but nobody believed it; they all had Bernie Sanders 18 points ahead of Trump. And Bernie Sanders was not losing Michigan and Pennsylvania and all those states. Bernie Sanders was also a populist. So I agree with you: it’s not about Trump. Trump is clearly a populist, don’t get me wrong. But it’s too global, and it’s happening everywhere. Macron was probably a short-term response to Trump. But other than Macron, there’s just been surprise after surprise after surprise to the elites on these elections. You wonder why they’re surprised anymore.
Kiril: Well, my theory on Bernie Sanders is that they used internal politics to deny him the nomination he should have won — and had he won, he would have beaten Trump. So we would have had that shift already. This leads me to what’s going on now: America’s shift towards nationalism, at least under Trump. The rest of the world is focusing on maintaining multilateral alignments. Japan just signed the biggest free trade deal with the EU. Mexico has the TPP powering ahead. And we have China’s One Belt, One Road — there’s a lot of controversy about it, but I think it’s a tremendous vision. I think it’s real, and I understand why they’re doing it.
Druckenmiller: Yes — which is destined to win in the end? The answer is: I don’t know. Probably the most destructive thing Trump has done in the global trading system is, once he figured out how powerful a weapon the U.S. banking system and sanctions are, he doesn’t understand that that weapon was created and is so powerful because — from the Marshall Plan on — we have been the only country that all the others, no matter how badly they’ve spoken of us, trusted to do the right thing. We’re the only nation in history that handled success the way we did. Yes, you should use that weapon once in a while. But when you start just shooting it all over the place — you’re now shooting it at Canada, Europe, here, there — that’s a lot different than shooting it at Iran or Russia. He’s like a little kid who found this water gun and just goes all over the place with it.
The biggest danger I see is that we lose the trust that America is good and, in the end, is going to do the right thing. I don’t think that can be lost in four years. But if Trump is re-elected — or maybe even worse, if another populist on the very hard left is elected — and they use the weapon the same way, I think by 2024, which is exactly when the entitlement thing will start to get crazy, this could be very bad.
I’m quite open-minded. Let’s see who the Democrats put up. Let’s see if Trump’s still in office. I don’t think the world will give up on us in four years. I’m open to Trump having been a one-off and the trade system surviving this. But it’s not like that’s an 80% probability — it’s somewhere between 40 and 55 that it works out. It’s sad for sure.
Kiril: The whole supply chain issue is phenomenally interesting and complicated. I’m concerned that the administration doesn’t understand the complexities of it — and that by trying to pull out all of the sensitive components from China and relocate them to the U.S. or to Vietnam or whoever, they’re being immensely disruptive and dangerous. And then you’ve started a process.
I was there during the worst part of the first meetings between the Chinese and Americans in Beijing. I was also in South Korea and met with Samsung. Already China was moving very aggressively to create its own semiconductor industry, investing $150 billion — which of course has ramped up 10 times faster since. I asked them: what are you going to do if the Americans forbid you to sell semiconductors to China? Would you continue? I was told they would, but they would also help China build its own industry, even though it’s going to cannibalize them.
I see these trends taking place that won’t be reversed. And Europe — which would normally be an ally of America in trying to hold back China’s advances — is now being forced more toward China. These aren’t things that are going to shift back, because once you start taking these positions, you’re not going to reverse yourself.
Druckenmiller: I agree with you on the semiconductors. And it again emphasizes what you talked about earlier: even if these policies worked — and I can make an argument that they won’t, because if you just disrupt supply chains, everything’s going to blow up — you’ve absolutely forced the creation of a Chinese semiconductor industry that didn’t need to happen on this timetable. I think there’s been enough frustration with the Chinese that the Europeans could look at this as a one-off and be right back as our allies. But you’re right — there are a lot of other things that are set in motion that we’re not going back to.
You can make a good argument that some aspects of the China situation are a fight worth fighting. You can also make an argument that it’s not. But it’s not a fight worth fighting without Europe and Canada and all the allies we could have had. If you want to take on China — and fair people can debate whether that should be done — you do it with a united front. You don’t do it by alienating all your partners.
Especially when the U.S. is a net debtor, running fiscal deficits close to what they were in 2009 — at full employment. If we’re in a recession, that thing could go to $2 trillion in a heartbeat. That’s when deficits explode.
Kiril: Yeah, sorry to interrupt — if we have a recession.
Druckenmiller: And I think we’re rolling over. If I remember correctly, we’re rolling over something like $10 trillion of nominal debt each year — we sold $130 billion in July, which is a record since 2008 or 2009. And so the whole owners of our debt are the very people we’re having a trade war with. It seems a little ironic.
Kiril: Well, it is what it is. So let’s move over to your philanthropy and your passions. What’s happening there that’s exciting — your neuroscience and stem cell work?
Druckenmiller: In general, Fiona and I didn’t want to give to the arts. We don’t have anything against the arts — we think they’re wonderful — but they seem to be extremely well supported relative to the utility society gets out of them. Our big areas — and I’ll get to your question specifically — were at-risk youth, education, the environment, and health. The neuroscience and stem cell work were both Fiona’s original idea, not mine. We both think that the brain is sort of the last frontier in terms of rapid advances in the human body, and it’s been extremely frustrating so far — with autism, Alzheimer’s, and Parkinson’s. We’re both convinced — me by Fiona, Fiona by a lot of research — that this problem, with the right funding, can be solved over the next 20 years, and great advances are going to be made, not dissimilar to what started happening with cancer 7 or 10 years ago.
So that’s pretty much the thought on neuroscience and stem cells. We’ve non-anonymously funded the neuroscience center at NYU and a lot of the basic research, and we’ve also funded anonymously some of the more applied research elsewhere. We find them both very exciting. And NYU seemed like the perfect place because they have a great, aggressive leader in Bob Grossman — that’s a necessary requirement for anything we invest in. I don’t think it’s an accident that that place has gone from around 40th to third in medical school rankings since Langone got involved and Grossman got the job. It’s just ridiculous. The only schools ahead of them now are Harvard and Johns Hopkins, and I think NYU was considered average as late as 15 years ago.
And then of course stem cells are another great hope in all these areas. I know Fiona was very enthralled with Susan Solomon and what she was creating there — and the bang for their buck. So in both cases, we went for an area that showed great potential in terms of progress, and we picked institutions with very strong, innovative leaders who could execute on the proposition.
Frankly, if some other institution solves the problem, I’ll be thrilled. I don’t really care.
Kiril: I’m sure you saw what NYU did with the medical school — making it tuition-free. I would also—
Druckenmiller: Well, it wouldn’t be the greatest outcome for NYU necessarily, but I think even the people who run it — our dream would be that it starts an arms race. Because the brain drain going out of medicine and into less productive things — like my business, the tech world, social media — has been horrendous. By the time these kids go through four years of pre-med, medical school, residency, and then fellowships, they usually don’t start earning money until their mid-thirties and they’ve got $500,000 in debt. Meanwhile, you can be making $2 or $3 million a year in my business with a lot less preparation at age 27 or 28. So I really hope Harvard, with their $40 billion endowment or whatever it is, and the others decide they can’t just let NYU grab all the great medical students.
Kiril: So in terms of defeating Alzheimer’s and dementia — have you gotten far enough along to know what the formula is?
Druckenmiller: There are all sorts of theories out there, and some of the drugs right now that attack amyloid — I know Biogen had a resurgence, and this company we actually own in Switzerland, Novartis — those drugs would be a bridge. The ultimate solution, I think, would have to be something different. Fiona knows a lot more on the subject than me, and she’s pretty optimistic that they’re going to solve this thing in 20 years.
More and more of our friends are showing up with dementia, even at young ages. And you watch how debilitating it is — it’s incredibly depressing. We’ve seen it up close and personal, and it’s tragic. Just tragic. And very, very painful. Really hoping — and even though you’re seeing it in younger ages, we’re all living longer, so it’s manifesting itself more and more, simply because humans are living to ages they didn’t used to. Every part of the body has seemed to keep up with the progress except the brain. There aren’t going to be brain transplants, so we’ve got to fix this directly.
Kiril: How would you like to be remembered? What’s the most important thing — when you look back at your life, how do you want people to remember you?
Druckenmiller: I don’t know how important that is to me. But since you asked: I’ve been so blessed being in an industry with just crazy financial remuneration relative to society’s benefits. And obviously I was given a gift — I was a good student, but there were certainly smarter kids than me. I just have a gift for compounding money. I’d like to think that I made a difference with that. And if people are remembering things, I’d like to be remembered as not some loud, ostentatious, overly consumptive person. I think God — I thank God — I married Fiona, because she wasn’t from a lot of money but she had old money values, and she taught me to behave in a way I probably wouldn’t have known from the get-go. When I see some of my peers, I’d like to avoid that particular stamp.
And we have a president who seems to have exceeded that culture. So I guess that would be it: just that I made a difference, and lived at least a life of some humility.
Kiril: Well, you surely have, and I think you’ve going to help a lot of people with your insights today. Thank you very much for joining us here and giving us your time.
Druckenmiller: Fun — it was really a lot of fun.
Powell: Stan Druckenmiller is the most requested guest in the history of Real Vision — myself included. We’ve all wanted to see and learn how he does things, because his track record is extraordinary, and the brilliance of the man is something that doesn’t come across enough on television because there’s never an in-depth interview — you just don’t know that much about him. But I’m so pleased that Kiril managed to flesh out what makes Stan Stan, what makes him think the way he does. There is so much learning for all of us in this, and it’s truly an honor for us to have had Kiril conduct this interview. I really hope you enjoyed it as much as I did — and I cannot wait to see who Kiril brings next to Real Vision. It’s going to be somebody legendary.