Stan Druckenmiller | Annual investment conference 2023 | Norges Bank Investment Management

Stan, we have been discussing in Oslo inflation, energy, AI, chips, geopolitics, and so on. So when you put your investing hat on, what's at the top of your mind?

The top of my mind, first of all, it's good to see you, Nicolai. I would guess the top of my mind is just how uncertain for me trying to analyze the environment is going forward. I've been doing this for 45 years. I've studied a lot of economic history, but I've never had a situation where you had free money for 11 years, a very broad asset bubble, followed by jacking up rates 500 basis points in 12 months. So for someone like me who likes to look at history and come up with potential scenarios, this is a particularly difficult period. Two years ago wasn't so difficult when you had two-years at 15 basis points and money's probably growing at 30. It didn't take a genius to figure out that was a good risk-reward.

These days, things are a lot more complicated. But you just mentioned about everything on our mind: generative AI, inflation is on our... asset bubbles, currencies, all the stuff we usually think about.

So how do you navigate it then?

Well, luckily I don't have any clients, so I don't have... Well, I have one client and it's pretty big. It's really big. I don't feel performance pressure. So historically, I deal in five or six asset buckets. It tends to keep me out of trouble in terms of playing in an area where I shouldn't be playing at a particular time. And I think it's one of the most important things to do is not to play when you don't see a fat pitch. I don't see if that pitch and fixing comes extremely complicated because I'm in the hard landing camp probably sometime later this year. But again, this is so complicated. I'm not willing to place a big bet. And even if I believe in a hard landing, which I do, what do you do with two-year treasuries at a sub 4% with Fed funds at 5 and 1 quarter?

I better be right on my hard landing if I want to own fixed income. And then in the longer end, historically, this is easy. If I believe we're in a hard landing, I'm supposed to own bonds, but they're not exactly a screaming bargain: 10-years at three and a half in the U.S., particularly with a Fed that has certainly shown some mettle in the last year, but historically, I wouldn't say Jerome Powell is a profile in courage. So if we get into a hard landing and he moves aggressively, I could see bonds and inflation coming back with a vigor from what I expect to be a lower level than right now. I will say that the response to Silicon Valley unnerved me a little, because in four days they printed enough money that basically wiped out the entire reduction of the balance sheet they had done for five or six months.

So if I'm trying to look ahead and anticipate, I don't have a lot of faith in these guys, should we get into a hard landing, that they're going to hold the line and not do something maybe worse than Arthur Burns.

And where does it leave equities?

I think equities are really complicated. I think within the equity market, if you put a gun to my head, I'd be short the economy to the extent I could through something pure like the Russell 2000. Obviously, I don't want to go into individual short names, but names like that—old economy, economically sensitive stuff. But let's just say we're going to have a hard landing and a bad recession in the U.S. What does that mean for NVIDIA? I don't know. I mean, oils and chemicals went up in '73 and '74. Staples have gone up in bad recessions in the U.S. historically. What do I do with a company if you have a bad recession in the U.S. but it's growing wildly throughout that period because we have an arms race going on in its space? It's not clear to me it goes down. So I think the equities are complicated. I mean, I'd say the one area that I feel reasonably comfortable in is I'm short the United States dollar.

Currency trends tend to run at least two or three years. We had a long one here, over 10 trillion, something like 13 trillion came into the US dollar during the previous decade. I will say, full disclosure, I missed the dollar, probably the biggest miss in my career in currency trade. I missed the last nine-month run-up in the dollar. I just couldn't bring myself to own Joe Biden and Jerome Powell. But I think now that, on a relative basis, the tightening in the U.S. going forward will not be as much as foreigners' now that we've weaponized the dollar. And you've got people like Lula running around asking why we need to be trading in U.S. dollars. By the way, it's not a bad question. Historically, we could be trusted.

We had a rule of law, a lot of things. So about the only space I have any risk on right now is in the U.S. dollar. don't want out on short dollars, I could change my mind in a week. But that's where I am right now, and I'm also on gold, obviously, for the same reasons.

But just to come back to this. So you say you haven't seen it as problematic for 45 years, and it's really complicated and so on. So what do you do then? You sit in cash, or...?

Oh, no, I'm too... I'd like to say I had... i sit in cash but i'm too much of a junkie i'm always doing something i i'd say uh our equities were about three percent net short which is nothing but again i've got there's always equities we like versus other equities our fixed income position is minimal except in uh JGBs where I don't know whether I'm going to get paid or not, but I think the risk-reward is ridiculous. It reminds me a little, just a little, of the two years ago. They have an inflation problem, but again, I'm dealing on government action. So it's not cash. We got stuff going on, but I'd say my P&L doesn't move generally more than 30 or 40 basis points a day. That's how button down I have what I'll call our matrix here, our matrix being the buckets I talked about and the investment within those buckets.

Yeah, well, you'll be pleased to hear that I'm joined by roughly 200 junkies here in Oslo who also think it's difficult to not do much. Now, tomorrow we are releasing a podcast with Stephen Schwarzman from Blackstone, and he has one of his 25 rules not to lose money. And so I mentioned to him, I said, 'Isn't that a bit of lame advice? It's a bit obvious.' But you are kind of in the same camp, aren't you? I mean, I think you never had a down year, and you are pretty super keen on not losing money. Why is that so important? I mean, again, it's a lame question, right? But it's actually not that lame. But let's listen to you.

It's just mathematics. If you go down 50, you got to go back 100 to get it back to even. And I've always thought the way to build a long-term track record is when you really see the ball, swing really big. And when you don't see the ball, don't swing. And if you can build a record, and in your terrible years, you're up 0 to 5, and then throw a couple 50s and 60s in, the numbers look pretty good over time. If you make a bunch of 30s, and then you lose 55% or 60%, you got a long, long way back, and it's just the way the numbers work. Also, I'm a sore loser. I don't like to lose. So that kind of helps out too.

Just remind us of your compounding.

Well, when I had clients, which is the only audited record, it was just a little bit over 30% net a year for 30 years.

Yeah, well, that's pretty good.

But again, the top year was 99%. I had a lot of five and sevens in there. I didn't like 20%, 30% every year. It was a matter of never losing and then throwing some big numbers in there maybe 10 times.

Yeah, well, that sounds like a plan for the fund here as well. Now, tell us, how do you, when you invest, how important is the analysis and how much is now gut feel or pattern recognition?

Yeah, I don't know who, but I heard a saying, "With analysis comes paralysis." Or Soros used to say, "Invest and then investigate," which I was already doing before I met him. But it's more important now even than it was then. We're in such a fast-moving world with all the new communications that if I get an idea and I think it's attractive and for whatever reason that security price will be higher in a year or two, I generally go ahead and buy it and then tell the analysts to look into it, and if it turns out I was wrong after they analyze it, I get out. I don't like to wait around. A lot of my best ideas—I'm not that smart, so if I see it... whatever's going on to cause that idea to happen, someone else might see it, and by the time we get done analyzing, I will miss 30% or 40% of the move, and then I'm paralyzed because it just went up 30% or 40% and I don't have the guts to buy it even if I think it's going higher.

So we're more in the camp of, if we've got a strong feeling, we'll cut the analysis short and then, by all means, do our analysis thoroughly and then just unload it if it turned out my thesis was wrong.

Do you depend more on this type of pattern recognition than you did in your early days?

No, I started in the '70s, and my mentor turned out to be a chartist, and I still use that: A, to find things others may not be looking at because we use rate-of-change stuff that tends to lead; and B, if I do take a big position, it's a great check on me not falling in love with a security or falling in love with my idea to have those charts as part of this discipline. He used to say, "If there's 6,000..." Well, I don't know whether it's politically correct to say, "If there's 6,000 girls out there you can date, you can always find 20 that have a good chart and a good fundamental story." So if either one didn't fit, I wouldn't do it. So the technical provides a discipline on the fundamental, and the fundamental provides a discipline on the technical.

Now, I believe that one of the hallmarks of a great investor is to be stubborn, but at the same time agile and being able to change your mind. And you have that incredible combination. Now, how do you question your own beliefs?

Price action is important. I try to have young people around me who are not afraid to speak their mind to me and argue with me. If somebody's here too long and they agree with everything I say, they're not here that much longer because, you know, I need healthy debate. But, you know, we're constantly following the news. We're following the fundamentals and also the price action. I will say since the algos and everybody got involved in factor investing and whatever's going on these days, price action is not what it used to be 20 or 30 years ago. 20 or 30 years ago, if a company reported a horrible result and it opened down, say, 10% and ended up on the day, you could almost guarantee that stock was going to be higher in three months.

It's not the case anymore. Everybody seems to know these tricks. I've seen that action, and then a month later, the stock's right back down again. Part—a big part of my process—is price action versus news. I obviously still watch it. If I've got a thesis and it's really bullish and it's playing out and the stock's not going anywhere, it makes me go back and check the thesis over and over. But price action versus news is not what it used to be 20 or 30 years ago, probably because the competition has learned the same game. Whereas when I got in the business, you didn't have that many people that had it as that big a part of their process.

So is that the passive capital going into the ETFs, or is it actually the AI algo traders and so on?

I don't think it's so much the passive. I think it's very active hedge funds that learned the same stuff doing it. And obviously, these factor investors and algos and quants, definitely they've—they'll really mess up what used to be historical price action versus news and its message. A lot of people in my position have complained about them. To me, it's just a new world I got to deal with. People got to deal with me. I might as well have to deal with them.

Very good. So lastly, Stan, if you were to leave us with some good advice here, how are we going to make the most money for the next two years?

Oh, boy. I—I'm... You know, I said something that the press ran with, I don't know, eight months ago, maybe it was a year ago, that I wouldn't be surprised if the stock market was not higher in 10 years. I still believe that. But I do think, like the '68 to '82 period, we'll have some big swings. So I think the way to make money in the next two years in the equity space is to be patient because I do think we have possibly some rough roads ahead. And I do think the central bank will respond in some crazy way that will give you a period like '70 to '72 where you can make money, or '76 to '78 when you could have made a lot of money. And also, for me at least, I think the currency markets are very interesting.

But I think this is a movie—I've never seen anything like it. So I'm going to be very careful not to dig myself in a hole when I don't have a strong belief to come out, because I think the opportunities are going to be amazing as this movie unfolds in the next year in macro and in equities.

Great. I think that's a fantastic place to end. It ties in with what we heard here today, that the world is changing. We've never seen it before. It's a shift. It's a paradigm shift. We're going kind of through a new door. We are in a bit of a vacuum. So a big thanks for sharing your thoughts with us today.