Stanley F. Druckenmiller: Monetary Policy & Markets

Capitalism requires a hurdle rate for investment; taking away the hurdle rate through QE is destroying capitalism's allocation mechanism and causing malinvestment; Druckenmiller hopes for a return to normal monetary regime within 20 years so things start making sense again.

“part of capitalism which you got to have a hurdle rate to investment right you can't just go on these silly inflation this and that right that if you're gonna make an investment it should have some hurdle rate and I think taking the hurdle rate away from investments and all this stuff is causing a lot of this stuff we're talking about”

Berkshire Hathaway was down 40% from 1998-2008 (10 years), which nobody talks about—if this were a hedge fund, it would have been out of business in 3-4 years, showing the advantage of concentrated equity positions in closed structures.

“for all the hoopla around mr. Buffett from 98 to 2008 that's a ten year period Berkshire Hathaway that was down 40% nobody talks about that if you had a hedge fund you couldn't have a hedge fund down for ten years forty percent they would have been out of business in here three four somewhere in there”

Druckenmiller sees no stopping mechanism for the elite-commoner rift created by meritocratic clustering and wealth concentration until major economic and political dislocations force change, and this cannot be reversed by policy since it's 'built into the system.'

“I don't see what stops this until you end up with some major major dislocations politically and economically because of it”

Casino gamblers lose money with 33-32 odds against them (worse than coin flip) because they're overly cautious while winning (wanting to go home and brag) and aggressively bet while losing (trying to catch up)—this inverse discipline destroys capital and mirrors what most money managers do.

“I know because I like to gamble that in Las Vegas 90 the people that go there loose and the odds are only 33 to 32 against you in most of the big game so how can I have sent lose it's because they want to go home and brag that they won money so when they're winning and they're hot they're very very cautious and when they're cold and losing money they're betting big because they want to go home and tell their wife or their friends they made money which is completely irrational”

Money managers have a critical discipline: understanding whether they are in a hot or cold streak—like a baseball hitter, they're sometimes seeing the ball and sometimes not—and when cold, should take small bets to reestablish rhythm rather than swing for the fences.

“one of my most important jobs as a money manager was to understand whether I was hot or cold life goes in streaks and like a hitter in baseball sometimes a money manager is seeing the ball and sometimes they're not and if you're imagining money you must know whether you're cold or hot and in my opinion when you're cold you should be trying for months it shouldn't be swinging for the fences”

Even if some aspects of the China trade conflict are justifiable, fighting it without allied support (Europe, Canada, etc.) is ineffective, and the U.S. isolating itself undermines any strategic objective.

“you can make a good argument that some of the aspects of the China situation are a fight worth fighting you can also make an argument that not but they're not a fight worth fighting without Europe and Canada and all these allies we would have had that that's just if you want to take on China and again fair people can debate on on whether that should be done if you want to take on China you can do it with a united front you don't do it by alienating all your partners”

Unlike 2008 when subprime was identifiable, Druckenmiller doesn't know what the boogeyman is this time; however, zombies clearly exist and the question is whether they will infect the banking system like subprime did—we tripled down on the problem rather than learning from it.

“I don't know who the boogeyman is this time I do know that there's zombies out there are they going to infect the banking system the way they did last time I don't know what it what I do know is we seem to learn something from every crisis and this one we didn't learn anything in my opinion we tripled down on what caused the crisis and we tripled down on it globally tried to solve the problem of debt with more debt”

Algorithmic trading has removed the rhythm from markets and become extremely confusing to Druckenmiller because it decouples price action from news, which violates his core discipline of using market signals to predict the economy—a methodology he relied on for 35 years.

“I think I was always open-minded enough and had enough humility that if those signals challenged from my opinion I went back to the drawing board and made sure things were changing these algos have taken all the rhythm out of the market and have become extremely confusing to me and when you take away price action verses news from someone who's used for i-section news as their major disciplinary tool for 35 years it stuff and it's become very tough”

The U.S. is a net debtor running fiscal deficits near 2009 crisis levels despite being at full employment, and is rolling over $10 trillion in nominal debt annually, selling $130 billion in Treasury bonds in July alone (a record since 2008-2009).

“especially when the u.s. is a net debtor to the tune of a trillion is running fiscal deficits that are close to what they were in 2009 I think we have full employment at full employment and I mean III if we're in a recession that thing could go to two trillion and a heartbeat that's when deficit explodes...we're rolling over if I remember correctly something like 10 trillion of nominal and new each each year we sold a hundred and thirty billion in in July which is a record since two thousand eight or nine”

NYU Langone Medical School has risen from ~40th ranking to 3rd in national medical school rankings since Langone's involvement and Grossman's leadership, with only Harvard and Johns Hopkins ahead, demonstrating the power of aggressive institutional leadership.

“I don't think it's an accident that that place has gone from like 40th to third in medical school rankings since Langone got involved in broad grossman awards just ridiculous I mean the only people out of them now are Harvard and Johns Hopkins and I think they were considered average as late as 15 years ago”

The seeds of the 2008 financial crisis were in the 2003-2004 period when the Fed had 9% nominal growth and kept rates at 1%, which was too loose and caused serious malinvestment that could have been identified with the right people analyzing subprime.

“to me the seeds of it were born in a three-room we had nine percent nominal growth in the fourth quarter and we had one percent rate which wasn't even enough he had that stupid considerable period thing attached to it and you had serious serious malinvestment you know for three or four years subprime was pretty easy to identify”

Earlier mentors taught Druckenmiller that getting the first 5 years of parenting right rewards you for the rest of your life while getting it wrong tortures you for life; Fiona extended this principle to 20 years of intensive parenting, suggesting that the critical period for values formation may be longer than conventionally understood.

“one of my early mentors said with children if you get the first five years right you were awarded the rest your life and if you get him wrong you're tortured it's on your life that you're Fiona extended the five to about 20 years but having a happy family provides a whole lot of happiness and a whole lot of balance”

Global entitlement liabilities total approximately $100 trillion in unfunded liabilities for Medicare, Medicaid, and Social Security—five times U.S. GDP—combined with worst demographics in 500 years and rising dependency ratios, creating coming creditor vs. debtor conflict.

“we've got this huge entitlement issue which you've read a lot about 100 trillion of unfunded liabilities Medicare Medicaid Social Security five times US GDP just as bad in the rest of the world worst demographics in 500 years dependency ratios rising”

Current U.S. economic conditions warrant a Fed Funds rate of 4-5% given robust global growth, massive fiscal stimulus, unemployment below 4%, yet the actual rate is 1.75%, which is being criticized even by the President for being too high.

“if you came down from Mars you would probably guess the Fed Funds rate would be four or five and you have a president screaming because it's at 175”

If Druckenmiller were running the Fed, he would raise rates at every meeting until experiencing genuine financial disruption (not a 5-10% market correction), then back off—this is the only way to gradually normalize without triggering sudden crisis.

“I would raise rates every meeting as long as I could and the minute you got 15 an shal disruption I would back off and the sad thing is since I made that statement oh my god we've had these just rip-roaring markets and what I was saying is just sneak one in every time you can”

The criticism that Google is a monopoly because everyone uses Google search is nonsensical—users are one click away from any alternative search engine, and the product quality is so superior that Druckenmiller would prefer to stop using the internet rather than use Yahoo search.

“you're one click away from any other search engine I just I wish that woman would have to use an on Google search engine for a year just okay fine you ain't Google don't use the product because it's a wonderful product”

Druckenmiller made approximately 70% of his money during the 30-year period in currencies and bonds, which have become squished and challenging profit centers since free money was instituted, forcing him to refocus on equity markets in the last 8-9 years.

“I promptly made about 70% of my money during that time in currencies and bonds and that's been pretty much squished and become a very challenging area both of them as a profit Center so while I started in equities and that was my bread and butter my first three or four years in the business I've evolved in other areas and it's a little bit of Back to the Future the last eight or nine years where I've had to refocus on the equity market”

Algos are based on standard-deviation models that cause them to sell when price moves are 3 standard deviations away from normal, precisely when human traders would be piling into positions as momentum accelerates, creating a systematic conflict with trend-following strategies.

“a lot of these algos apparently are based on standard deviation models so just when you would think you're you're supposed to pollen and lift off their models must tell them because you're three standard deviations are where it's supposed to be they come in with these massive programs that go against the beginning of the trend”

Druckenmiller uses small amounts of algorithmic money as a signal—when multiple machine systems detect something unusual, he monitors it closely for a year to determine if they're genuinely onto a pattern or just experiencing correlation noise.

“I have money with a couple of machines it's very small amount of money it's just enough money so they send me signals when they think something dramatic is happening and I'm early enough on in the process that I don't know my conclusion but I assume a lot of these machines are on the same factors and if the machines start saying something is gonna happen they send me a notice and that's to use a football term that's under review I'm gonna watch this for a year or two and see if they're on to some or if they aren't”

Druckenmiller's strategy is to build a thesis nobody else has built, make initial positions in the first or second inning, then pile in when momentum confirms the thesis—he avoids averaging up in late innings.

“I'll get a thesis and I don't really I like to buy not in zero inning and maybe not in the first thing but no later than the second inning and I don't really want to pile on in the third or fourth or fifth inning”

Envy is one of the strongest human emotions, and the combination of increasing wealth disparity plus internet broadcasting of that disparity through constant media coverage creates the psychological seed of populism.

“the previous populist periods we have required much worse aggregate economic statistics to set them off but when I was running Soros a year end for the first few years we had a fixed system as a percentage of the profits and the rage where 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 and when you look at the wealth disparity today which by the way in my opinion the biggest accelerant of has been QE it's it's not even like that it's kneadable and then you have the internet broadcasting this disparity through millions of bits of information on an ongoing basis”

Druckenmiller wants to be remembered as someone who made a difference with the compounding money gift he was given, lived humbly and without ostentation despite great wealth, and avoided the consumption patterns of many peers—influenced by his wife Fiona's humble background and old-money behavior.

“I'd like to be remembering as as not some loud ostentatious overly consumptive person in the mean time but I think I thank God I married Fiona because she wasn't from a lot of money but she had old money and she taught me to behave in a way I probably wouldn't know from the get-go when I see some of my peers and I'd like to avoid that stamp of a sure sure now we have a president who seems to have exceeded that culture just so I guess that would be it just that I made a difference in live at least a life for some humility”

Druckenmiller learned from Soros to focus on capital preservation and make concentrated bets, with most money managers making the majority of their money from 2-3 ideas despite holding 40+ positions—successful traders concentrate conviction into liquid positions.

“many managers make all their money on two or three ideas and they have 40 stocks or 40 assets in their portfolio and it's that concentration that has worked”

Every 15-20 years currencies experience regime changes (from current-account trading to interest-differential trading to risk-on/risk-off trading), and many algos are built on historical models that fail to recognize when regimes shift, making them persistently inappropriate.

“currencies probably being the most obvious every 15 or 20 years there's regime change so currencies traded on current account until Reagan came in and then they traded on interest differentials and about five years ten years ago they started trading on risk-on risk-off and a lot of these algos are built on historical models and I think a lot of their factors are inappropriate because they're missing they're in an old regime as opposed to a new regime”

Pharmaceutical stocks showed massive underperformance from January to May despite no fundamental deterioration, then mysteriously reversed to become the best-performing group from May to present with no corresponding change in news or Trump's drug-pricing narrative, exemplifying how algos have distorted price signals.

“the pharmaceuticals which you would think are 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'll look at that relative strength and I'll go this this group is a disaster okay Trump's making some noises about drug pricing their background but they clearly had chart patterns and relative patterns of suggest this groups a real problem they were the worst group of any I follow from January to May and with no change in news and with no change in Trump its narrative and if anything an acceleration in the US economy which should put them more toward the back of the bus and the front of us because they don't need a strong economy they have now been about the best group from May until now”

Emerging markets were the most egregious recipients of free money due to the double effect of vanilla money managers pouring capital into them plus absence of market constraints on political actors, as exemplified by Argentina issuing 100-year bonds at 7% despite historical inability to survive 5-10 years.

“there was no more egregious recipient of free money than emerging markets because you had the double whammy a all the vanilla money managers poured money into the place B you had no market's constraints on the political actors I mean the stuff that was going on even a year or two ago I think in you imagine that Argentina issues a hundred year debt a hundred years at 7%”

Corporations are buying back stock to the tune of $5 trillion, running down balance sheets at the same time high-yield credit is covenant-light with massive issuance, creating extreme vulnerability when interest rates rise and reflect credit risk.

“a corporation's buying back their stock to the tune of five trillion running down their balance sheets and then you go to the high-yield market where it's covenant light and a huge amount of issuance what happens when interest rates start to reflect credit risk”

Charles Murray's book 'Coming Apart' documents that meritocratic universities created inbreeding where talented people marry other talented people and live in the same zip codes, intensifying inequality and creating the perception that the system is unfairly rigged.

“one of the most disturbing books I've ever read was Charles Maurice coming apart yes and I read that and I said oh my god this is gonna get worse and it can't stop it's just built into this system the irony being what really set it off is when these universities became meritocracy as I said an old boy network and then you sort of have inbreeding between the men and I'm going to Harvard and they all live in the same zip codes”

Populism is not specific to Trump but is a global phenomenon affecting elections from the U.K. to Europe to the U.S., and even if Trump were replaced with another populist, the fundamental tensions would persist.

“it's too global and it's happening everywhere and McCrone was probably a a short-term response to Trump but other than McCrone there's just been surprise after surprise after surprise to the elites on these elections”

Druckenmiller and Fiona did not want to give to the arts despite appreciating them, because arts are better supported relative to their utility to society, so they focused on at-risk youth, education, the environment, and health.

“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 so our our big areas and I'll get to your question specifically were at-risk youth education the environment and health”

Druckenmiller hopes that NYU's medical school funding innovation (free tuition) will trigger an arms race among top institutions to attract medical students competing with tech/finance sector salaries that now exceed physician earnings.

“I would also be well it wouldn't be the greatest outcome for NYU I think even the people who run in weiu our dream would be that starts an arms race because the brain drain going out of medicine and to less productive things like my business and and and the tech world social social media and things has been horrendous because by the time these kids go through four years of premed medical school residency and then fellowships they usually don't start earning money until their mid-thirties and they got 500,000 dead and now you can be making 2 or 3 million a year and my business with a lot less preparation at the age of 27 or 28”

Druckenmiller attributes much of his life satisfaction to marrying Fiona (at age 35 when already successful), having a partner who prioritized child-rearing, introducing 'special time' (individual one-on-one time with each child weekly), and being able to spend weekends with kids due to his success; he credits his wife's values and presence for his children becoming high achievers without ever being told about charity or philanthropy.

“the balanced life is the key and 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 who after my children were born she gave up everything to raise those children and she did in a very intense creative way she just have 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 can any activity with her”

The credit market has the fewest bankruptcies since the 1880s-1890s despite being the most disruptive economic period in history, indicating massive zombie companies kept alive by cheap capital that will trigger dislocation when liquidity tightens.

“there's probably since the 1880s 1890s this is the most disruptive economic period in history there's hardly any bankruptcies so whatever that buffett line about swimming naked with the tide there's probably so many zombies swimming out there”

Correlations between unrelated assets like the R&D index and gold have emerged and make no economic sense, exemplifying the breakdown of fundamental relationships caused by algo trading and distorted monetary policy.

“there seems to be correlations that have no make no sense yes for example the R&B and gold are trading very closely I mean makes no sense you know and that's very dangerous and even day to day there's correlations that make no sense it's all messed up”

Druckenmiller called 50 of his small-business owner clients during his 2000 sabbatical return and every single one reported their business was terrible, validating his thesis that corporate earnings were about to crash despite the Nasdaq recovery.

“I then went about calling 50 of my clients they stayed with me during my sabbatical who were all small business men I didn't really have institutional clients I had all these little businessman and every one of them said their business was terrible”

The Treasury bet in 2000 violated Druckenmiller's hot/cold streak discipline because he hadn't earned the right to play big after a down period, but a once-in-a-lifetime setup combined with his fresh mind from sabbatical made it justifiable.

“The example I gave you of the Treasury bet in 2000 it's a total violation of that which shows you how much conviction I had so this dominates my thinking but if a once-in-a-lifetime opportunity comes along um you can't sit there and go oh whoa I have not earned the right now”

Druckenmiller believes Jeff Bezos deserves every penny he has and Amazon is one of the greatest companies ever, but the constant media coverage of his $150+ billion net worth is creating psychological resentment in the average citizen.

“I personally think Jeff Bezos deserves every penny he has I think it's one of the great companies ever but you know there have been 20 articles in the last 48 hours I promise you on that he's worth more than a hundred and fifty billion dollars I mean how does it how does a normal citizen look at that and he's not contemplated exactly so I think that is the seed of it”

Druckenmiller's highest absolute returns have come from bear markets with an average return of over 50%, creating a persistent bearish bias that has caused him to be overly cautious for the last five or six years despite bull market conditions.

“I also have bare itis because I made my highest absolute return for all in bear markets I think I was average of turning bear market was well over 50% so I've had a bearish bias and I've been way too cautious the last say five or six years and this year is no exception”

Google is being critiqued as a monopoly, but at 20 times earnings with 15 times earnings after cash, while dominating AI, driverless cars, and search, it's still undervalued relative to its prospects and regulatory risks—users could switch to alternatives in one click.

“Google okay which is the new bad boy...it's 20 times earnings it's probably fifteen times earnings after cash but just say it's 20 times I just forget all other stuff and they're under earning in all these areas and losing money they could turn it off and then I look at Campbell's Soup in this stuff selling it 20 times earnings”

Druckenmiller's investment thesis for the year involved continuing to own disruptors (cloud-based and internet companies) while shorting the disrupted (retail and staples), and owning Chinese internet companies expected to be winners, but Chinese internet stocks were a disaster in the year due to government regulation concerns.

“the cocktail I mixed up for here was to continue in this and going on for three or four years at my firm to continue on the disruptors that would be the cloud-based companies the internet companies to be short the disrupted which would be things like retail staples that kind of stuff 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 Internet's which were very very good to me the last two or three years have been pretty much of a disaster this year”

Druckenmiller's most exemplary trade was the Deutsche Mark in 1990-1991: he had a conviction that German inflation obsession and Bundesbank dominance would keep the mark strong despite reunification, went in very big early, and the trade validated over months as currencies devalued.

“I had a very very strong belief that Germans were obsessed with inflation...the world's thesis was this is gonna be terrible for the deutsche mark my thesis was the Bundesbank is the most powerful institution in germany...and there's no way that deutsche mark is going down”

The Euro's collapse from 140 to 135 in 2014 when the ECB went to negative rates validated Druckenmiller's thesis that it was trash at that level, allowing him to become braver about adding to the short as technical breakdown confirmed.

“I can't remember I think was 2014 when the thing was at 140 and they went to negative interest rates it was very clear they were in a trash at currency...I would 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 135”

The political elite's surprise at Trump's victory, Sanders' strength, and Brexit despite polling showing these outcomes makes no sense—populism is global and recurring, yet elites act surprised each time.

“other than McCrone there's just been surprise after surprise after surprise to the elites on these elections and you wonder why they're surprised anymore”

Druckenmiller began following populism in 2011 as a coming trend, and his 2012 visit to Beijing showed the new leadership was planning to clamp down on corruption using a 'give a little now rather than a lot later' strategy to save the Communist Party.

“I started following populism back in 2011 that's when I felt it was coming then we had Raziel I came back from Beijing in October 2012 and was clear to me that the new leadership we didn't know about she that he'd be appointed but we we knew what they were planning to do which was to clamp down on the corruption to save the Communist Party and the word was that we used to describe it as given give a little bit now rather than a lot later”

U.S. shift toward nationalism under Trump contrasts with the rest of the world maintaining multilateral alignments—Japan signed major trade deals with EU, Mexico joined TPP, and China is pursuing 'One Belt One Road' initiative.

“America's shift towards nationalism at least under Trump the rest of the world is focusing on maintaining multilateral alignments Japan is just signed the biggest trade free trade deal with the EU Mexico has TPP is powering ahead we have the China's one belt”

Druckenmiller's portfolio includes small positions in emerging markets (Brazil and South Africa) specifically because they can move 50-60% on regime changes with limited downside risk (limited to carry costs); these 'lottery tickets' are positioned for the stage in the monetary cycle where bombs are going off in EMs, which precedes bombs in developed markets.

“we have a you know in a practitioners basis we have a lottery ticket in in Brazil and in South Africa because as we've seen back in the 90s and again now these things can move 5060 percent and your risk is probably not much more than the carry”

If recession hits, the U.S. deficit would explode to ~$2 trillion per heartbeat, and Treasury issuance would spike, making the current holders of U.S. debt (foreign countries engaged in trade war) ironic given they're the same ones experiencing U.S. tariffs.

“if we're in a recession that thing could go to two trillion and a heartbeat that's when deficit explodes yeah and I think we're rolling over if I remember correctly something like 10 trillion of nominal and new each each year we sold a hundred and thirty billion in in July...the whole owners of our of our dad are the very people that were having a trade war yes it seems a little ironic to me”

Negative interest rates are not something Druckenmiller wants to make money betting on (e.g., betting JGB yields go from 10 bps to 20 bps), because such small moves don't generate meaningful profits—he's only interested in the JGB normalization as part of the broader liquidity framework.

“I'm not in the business of making a fortune if something goes from ten basis points to 20 basis points that really that's not something I'm gonna make a big bet on I mean I might have a short on don't use myself for something like that right but I do think it's very important in terms of this overall narrative”

The Bank of Japan is changing policy and accepting that negative yields aren't working and have damaged banks, likely signaling the end of the most extreme central bank policy globally—this is a necessary step but represents a major pivot.

“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 bank's is that a really important change for the world it's part of the puzzle I'm talking about”

With monetary tightening underway, emerging market instability will continue, and once bombs go off in developing markets, the tightening cycle will prove itself necessary—the cycle will end when emerging market bombs trigger financial stress.

“until the bombs go off in the development markets you would think the tightening will continue and if the tightening continues the bombs will keep going off I would think in emerging markets because there was no more egregious recipient of free money than emerging markets”

Alibaba has beaten every estimate continuously, yet its stock has fallen from 210 to 165, showing that even strong earnings growth cannot protect stocks in bear markets, and projections of cloud company valuations at 10x sales are unrealistic.

“Alabama has beat every estimate just none stop and the stocks 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 they project price to sales based on today's prices sales you know some of these cloud companies are selling at ten times sales if they're selling it six times sales which is not crazy in a normal market by the way I own these things in three or four years I've lost money”

In 2000, after a 4-month sabbatical where Druckenmiller avoided financial news, he returned to find the Nasdaq rallied back near highs despite oil price increases, strong dollar, and rising rates—a combination that historically preceded earnings declines, leading him to buy 2-5 year Treasuries aggressively.

“the Nasdaq has rallied back almost to the high but some other things have happened the price of oil has gone up the dollars going way up and it's rates going up since I was on my sabbatical and I knew that normally this particular cocktail had always been negative for earnings and the US economy so I then went about calling 50 of my clients”

Polls in spring 2016 showed Bernie Sanders would have beaten Trump by 18 points while Hillary Clinton was running even, suggesting Sanders should have won the nomination but was denied through internal Democratic politics.

“had Bernie Sanders won the nomination every poll that spring had Hillary running about even with Trump just no one believed it they all had Bernie Sanders 18 points ahead of try and Bernie Sanders was not losing Michigan and Pennsylvania”

Druckenmiller and Fiona believe neuroscience and stem cell research represent the greatest remaining frontier for rapid human progress, particularly for autism, Alzheimer's, and Parkinson's, and they expect that with proper funding these problems can be solved within 20 years.

“we both think that the brain is sort of the last frontier in terms of rapid advances with the body and it's been extremely frustrating so far with the autism and Alzheimer's and Parkinson's and 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 say 20 years”