A Conversation With Stanley Druckenmiller - Full Show

Stan, how do you feel going into 2020?

About the markets or my health?

About the markets, the economy. We could talk about your health too, if you like. Let's not.

Well, you have very low unemployment here. You have fiscal stimulus in Japan. You have fiscal stimulus and a lot of confidence coming to Britain. We're running a trillion-dollar deficit at full employment. Apparently, we're going to have some sort of green stimulus in Europe. And we have negative real rates everywhere and negative absolute rates a lot of places. So, with that kind of unprecedented monetary stimulus relative to the circumstances, it's hard to have anything other than a constructive view on the markets, risk, and the economy intermediate-term. So, that's what I have.

Because everywhere you turn, you're being encouraged to take more?

I don't need to take more. I have enough. But I just—I've always believed that expansions end usually with tight monetary policy or credit problems, and I think what we're doing is definitely borrowing from the future and will probably end badly, as the '07 period did. But, you know, that could be years. I'm 66. I might be dead by the time it happens. So, the intermediate-term technicals are good. You have breadth at an all-time high. Economy's fine. And if anything, our biggest problem going in, once the Fed shifted away from their QT and tightening program—our biggest problem was obviously global trade and worries over global trade. And I'm not saying everything is all peaches and roses now, but certainly on a rate of change basis, I don't see that being—if anything, there's a de-escalation, not an escalation there.

For now, all systems go.

So you're constructive, all systems go. How are you expressing that in your portfolio?

Well, I'm long equities. I'm long some commodities. I'm short fixed income. I'm long commodity currencies, short the yen. So all sort of, for now, betting on a benign economic outlook and a benign market outlook. But as you know, Erik, I tend to change my mind, so that's for today. Hopefully it'll last at least a couple weeks.

Let's be a little more specific if we can. Short the yen, commodity currencies, I'm assuming Canadian dollar, Australian dollar? That's very good. Anything else I'm missing there?

I have some New Zealand lying around. I even have some Mexico lying around. They're not big, massive positions, but they're enough to matter in my non-competing world. I might have more if I still had clients.

Commodities have been unloved for an awfully long time. What do you own?

I own copper, believe it or not. Basically, I think on the margin as I just described, particularly with fiscal stimulus and monetary easing at the same time and the diminution of trade worries, global economy is going to be better than the IMF thinks. Copper has a little extra kicker relative to the other ones. We think that EVs probably add 0.5% a year in demand, and the supply outlook's challenged. It could become more challenged if the Chile situation doesn't clear up, but that's not why we own it. We don't own energy. Probably should, but... I just think the demand outlook is so challenged long term. Just not that interested. If you like the commodities short term, it kind of makes the equities challenged because they're a long-dated asset, and hopefully we'll go greener and greener.

I am on the board of Environmental Defense Fund, so I'm perfectly happy if oil doesn't go anywhere. And in the stock market, anything particularly you like? It's interesting, when we met a year ago, my portfolio was heavily growth-oriented, particularly the cloud.

It was ServiceNow, remember, Microsoft.

Yeah, the theory being there's like a 10-year runway and these companies would grow very well in a low nominal growth world. I still own that stuff, but my mix has changed dramatically to stuff that will do well in a higher nominal growth world. So I have banks, financials, I own Japanese. So I wouldn't call it a mix value-weighted, I wouldn't call it a mix dominated by value, but it looks more like a normal mix now. It's not just concentrated into companies that would do well in a low nominal growth world.

We haven't talked about your favorite currency. Were you long the pound heading into the British election?

I was. It is my favorite currency. And I just, you know, I'm very good friends with Johann Rupert, and he had told me he calls her Mrs. T. And that's Margaret Thatcher, and he said, You know, when I met with Mrs. T., she said, Never underestimate the common sense of the British people. And I just felt that they were not going to go for socialism. And frankly, when I look at what's going on in Europe, and then when I look at what's going on in Britain, I was always sort of a Brexiteer, because they did perfectly fine for five hundred years without that. union of countries down there who seem to all hate each other and they can't make a decision on anything so i think this is going to be actually very good for the british economy i separate myself from most on that i think boris johnson is sort of a smarter version of trump without some of the

the antics to go along with it, and I would expect investments to fly into that country, and I think they'll do very well there. So, you know, it's funny. If you look at it, what if I were to tell you there was a Republican president but a better version? AND YOU HAD TWO-THIRDS REPUBLICAN MAJORITIES IN BOTH HOUSES OF CONGRESS, AND YOU HAD A DEFICIT TO GDP OF TWO, NOT FOUR AND A HALF, AND YOU HAD A DEBT TO GDP LOWER THAN THE UNITED STATES, AND 12 TIMES EARNINGS AND A 4% YIELD. Sounds like a decent place to invest to me. So we not only had the pound and still do, we had the British financials, the banks. We have some Barclays, Lloyds, that kind of stuff lying around. Just lying around. Well, I don't take big positions anymore.

I've become a coward since I stopped competing.

2019 was an extraordinary year for investors. How did you do?

Not as well as I would like. I just got into double digits. Last week, I wouldn't even have been able to say that. I'm just too conservative in my old age. I was well positioned, but very timidly. I'll leave it at that. Why are you timid? You've got nothing to lose. I have a lot to lose. That's one of the reasons I'm timid. I don't know. When I was competing and managing other people's money, I'm a very competitive person, and I felt the compulsion to take risks. I'm still a competitive person, but it's either that or something about my age, I don't trust myself, or the last year in particular, I just never trusted this administration not to do something that would preclude me from taking positions that I just felt were safe and secure and all-in risk.

And I think unfortunately a lot of people probably felt the same way. As you know, people have actually sold equities and put them into bonds this year. I didn't do that. I was just timid about what I did do. This administration, with wondering about where the hell the next bomb is coming from, just doesn't allow me to take some of the positions I've taken historically where I just thought it was a one-way bet. To me, this was always binary and a two-way bet.

It's not just policy uncertainty. It's something... what would you call it?

Policy uncertainty is a great term. One of the reasons I'm pretty sanguine right now is I think we're close enough to the election and at least we can breathe for a few months that I think I don't expect any dramatic policy that can overwhelm the favorable backdrop of monetary stimulus in a decent economy. I don't think Jerome Powell will have the courage to raise rates next year. It's a lot easier to change your mind from a tightening to an easing mode, but I definitely don't think they'll be easing. It's kind of absurd when you look at where nominal growth and real growth in this country are, and you look at unemployment, and you look at all the other circumstances to have rates at 1.5%. If I came down from Mars and you showed me the broad landscape and asked me where Fed funds would be, I probably would guess 3.5, somewhere in there.

So if you don't think he'll have the courage to raise rates next year, should I imply that your short position is a little further out on the curve?

Yeah, we're short the long end because I just think these rates for these economic circumstances are inappropriate. I thought they were inappropriately high last year, particularly the quantitative tightening, and I think they're inappropriately easy this year.

You're a frequent critic of the Fed, have been over time for reasons you've articulated well. You say you can't figure these guys out, but do you feel, Stan, any more confident about the direction of monetary policy today than you did a year ago?

No, I feel much worse. First of all, the editorial Kevin and I wrote, we said, 'Don't raise rates for now.'

THIS WAS BACK IN DECEMBER OF 2012.

Yeah, our interview was the day before the hike. We wouldn't raise rates for now. We weren't saying to cut them. And one of the things we said in our interview is if you hike now, you may get really scared and have to start cutting and do something drastic the next year, which of course they've done. I'm not sure why, but I think it's always easy to be easing and things are great and you just feel like you're the cat's meow. You'll remember Bernanke claiming victory in '04 with the Great Moderation and Greenspan was a maestro. But I will go to my grave believing that that financial crisis happened because of bubbles created by easy money. And I just don't understand why we need interest rates where they are now.

We normalize, we're trying to normalize, okay, things got too tight, should back off, but you don't need to go the other way to the extent we've had. And then this crazy president saying we need negative rates to compete with negative rates in countries where they clearly aren't working. They're not growing as well as we are. It's the most anti-capitalist idea I could ever dream up. And he's pushing Powell. You know, I didn't want to believe this, but it's pretty clear now that he's had an effect on Powell. And, of course, the media has gone, 'Oh, he's really standing up to him.' Well, with verbiage, not in action. In action, he's been cutting and doing the president's bidding. He hasn't gone negative.

God help us.

Some people say he deserves high marks, whether it's the media or others, for resisting some of that pressure from the White House. What kind of grade would you give Jay Powell as Fed chairman?

Not a good one. I don't think he's resisted anything. He just... Well, rate him against Yellen, Bernanke, Greenspan. He's a weaker version of Yellen without the monetary framework. Bernanke and I philosophically disagree about easy money and helicopter money, but the man had conviction and he controlled the room, which I think is really important in a Fed chair. And I don't see that here. And of course, let's not compare him with my true hero, Paul Volcker, who...

The late, great Paul Volcker.

Yes, whom he cited for courage, and I couldn't agree more, and it's too bad we don't have some of that kind of courage at the Fed today.

I'm going to hold you accountable to something else you told me a year ago. You said at the time you thought we'd been in a global bear market for a year—yeah, not a correction in a secular bull market.

Yes.

And it was going to be hard to escape. Was that the wrong diagnosis, or are we still in a global bear market?

Absolutely the wrong diagnosis. We're at new highs 12 months later. I'm proud of the fact that I pivoted before it mattered, but I couldn't have been more wrong. But I would say until the last month or so, the U.S. was about the only one that continued in this kind of market. But no question that was wrong. The question is, how long is this going to last? The answer is, I don't know. Nobody knows. Long enough that... I'm not sure. Maybe Jim Simons knows. I'm not sure Jim Simons knows, but I bet his machine that he created knows, so he can sleep at night and the thing makes money for him. God, talk about nirvana.

So it's awfully hard, of course, to predict when the next downturn is going to come. Do you have any idea, Stan, particularly as someone who's made more money in bear markets than in bull markets, what will trigger it?

Yeah, if there's a political event, change of leadership in the White House that goes to some of the anti-capitalists, I would think that would definitely trigger a bear market. Whether it would permanently end the bull market, I don't know, but that would trigger it. The other thing that would obviously trigger it is if by the end of this year we started to get enough inflation that the Fed started tightening. And then, of course, the other thing is if we had a credit event. And if you look at the credit markets, it's very obvious that you've got a real lot of bad apples out there that are not being exposed because the interest costs are so low. By the way, one of them being the U.S. government.

We're running a trillion-dollar deficit. Why? Because we can. In fact, a lot of these new professor geniuses think this is just a free lunch. But I would think it's one of those three events: political; B, change in Fed policy because, you know, who knows when inflation turns? You can come up with a theory why it would turn. I kind of believe the secular forces will hold it down, but I've been wrong before, and I'll be wrong in the future. And then the third one is—and this is more what happened in '07, '08—the bubble just... collapses on itself because things have just gotten so ridiculous. I don't think we're anywhere near there, but I've been wrong.

Would an Elizabeth Warren presidency really be that bad, in your view?

In what respect? Well... are we talking about markets? Are we talking about the United States? What are we talking about?

Well, let's start with the markets, because that's how we got onto the point, and then you can expand.

Well, with regard to the markets, let me just put it this way. Every consultant that ever studied Duquesne said, 'I have a negative correlation to the S&P, and I do very well in bear markets.' I think a Warren presidency would be very good for my business, but not necessarily good for America. Is there a Warren hedge? Well, let's see if it happens first. But yeah, you could just short stocks. It's not real complicated. And you'd probably sell the dollar. I mean, there's all kinds of stuff. I'm kind of on the other side—and this is not just Warren—of all this rhetoric out there, including the business community, about failed capitalism and we need to improve capitalism and capitalism is a failed experiment.

You're on the other side meaning what? I think capitalism... I'm a dyed-in-the-wool capitalist who believes in free markets and believes in creative destruction and believes that. So I just, I'm a little offended by the narrative in the media—not that it's anti-capitalist; everyone's entitled to their own opinion, I don't have a monopoly on the truth—but on the facts. So I don't think most people are aware. Let's just take poverty in the United States. It was 26% a few decades ago. It was 16% in the financial crisis, and it's 13% now. It's at an all-time low. Is 13% poverty rate low enough? Absolutely not. And it's something we have to work on. But do you think 99% of Americans would guess too high or too low on what had happened to the change in the poverty rate the last 15 or 20 years, much less the last five years?

As you know, I'm not a great fan of the president. But the fact of the matter is, this income inequality talk, it really doesn't stand up to the facts. The middle class and the poor are doing very well. In fact, they're doing better than they've done in quite some time. Are they doing well enough? No. Are they doing as good as Jeff Bezos? No, but on an absolute basis, they're definitely improving relative to where they were five or 10 years ago. And you'll probably be astonished to know that if you take income after government transfer payments and negative taxes—which I think we all agree it should be total compensation—the top quintile has had the same percentage increase as the bottom quintile.

Now, I'm not going to phony facts up here for you. The 1% have done better because they all own stocks. But in terms of the lower middle class, for the first time, they're actually improving relative to the upper quintile.

Heading into November of 2020, do you genuinely believe that capitalism as we know it is in question or at risk, or is it just an argument around the edges of the system we have?

I think we need more capitalism, not less. To me, when you have a president of the United States who puts hundreds of billions in tariffs and then goes and picks individual economic actors who pay those tariffs and who don't, depending on... Winners and losers. Exactly. It might as well be the Politburo. When you have monetary policy around the world with negative rates, you cannot have capitalism if you don't have a hurdle rate for investment. So we don't really have the markets allocating capital the way they would under a capitalist model. That's another version of it. You know, it's funny because if Trump gets reelected and things implode in the second term, capitalism will get a very bad name, in my opinion, and will probably have a big political response, but it will be under someone who is sort of the antithesis of capitalism.

Then you've got the other side who want to villainize billionaires, which is okay. But their view is, if I take money away from this billionaire, that means the lower income levels are going to rise. Erik, that's not the way it works. That's like Trump's trade thing with a zero-sum game. If China loses, we win. No, you can both lose.