Stanley Druckenmiller: The Fed is Playing with Fire

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This is Squawk Pod. I'm CNBC producer Katie Kramer. Today on our podcast, Stanley Druckenmiller, the billionaire investor, sounds an alarm on the Fed's pandemic response policies.

The Fed made a very reasonable bet. The government made a very reasonable bet last March, April. I'm glad they did what they did. But by August, it was very, very clear that these policies were inappropriate.

Why the Wall Street legend is urging the Fed to change its mind and what's going on in the markets.

I have no doubt, none whatsoever, that we are in a raging mania in all assets. I also have no doubt that I don't have a clue when that's gonna end. I will be surprised if we're not out of the stock market by the end of the year.

Plus, Druck weighs in on Big Tech, the dollar, and his bet on crypto.

Your best guess is that a crypto-derived ledger system will be invented and that that will become the reserve currency of the world?

Okay, let's not get too carried away.

That conversation plus inflation fears intensify.

Tells you something when the lead story's corn.

And Pfizer's COVID vaccine approved for children and teenagers.

If all goes well by Christmas, you could actually get all adults and all kids vaccinated.

It's Tuesday, May 11th, 2021. Squawk Pod begins right now.

Good morning, everybody. Welcome to Squawk Box here on CNBC. I'm Becky Quick, along with Joe Kernan and Andrew Ross Sorkin.

Today, we start with a selloff. The tech-heavy Nasdaq fell 2.5% yesterday. The Nasdaq and the S&P 500 posted their largest one-day percentage losses since March 18th. Some of the big names feeling the heat. Tesla down 6%. Facebook, Netflix, Amazon, Apple, Alphabet, and Microsoft all down more than 2%. So big cap tech names taking the beating from investors concerned about not what's down, but what's up and going up.

Inflation still kind of popping up everywhere you look. And if you take a look at the Squawk Stack, that is a look at everything that's been higher. Now, corn futures this morning down ever so slightly, but corn is up 50% for 2021. A bushel now costs twice what it did a year ago, and those prices were higher yesterday as well. 50% for the year 2021 sounds like a really big deal. But if you're looking at lumber prices, they're up 50% this month. Another new high that we were looking at yesterday with four times the typical amount you'd pay for lumber. And that's making its way into all kinds of things that the consumer sees. Home renovation projects, house prices, if you're building a new house, really have just skyrocketed to the point you can't believe some of the quotes that are coming back in.

It's not just that. Copper yesterday hitting record prices as well and indicated up this morning 1.4 percent. Copper is found in everything from homes to electronics. And then crude oil prices, which are down a little bit this morning, are still sitting at the highest levels we've seen since 2018. You look at soybeans, at pork, at any of those things, massively higher prices over the course of the month, over the course of the year to date. And then Ethereum, this morning down by 1%, but yesterday Ether was at a new high as well. And guys, I don't know if you've seen the front page of the Wall Street Journal. Used car prices up by 16%, new car prices up by almost 10%. So these are the types of things that consumers are seeing everywhere they turn these days.

You didn't say used cars, did you? Did you say that?

I did. I did.

Pre-owned.

Previously owned cars? Is that the term you prefer, Mr. Car Salesman? Pre-owned.

Pre-owned. Get on board. People in that industry, they would never say. They're barely used. They were owned by someone else, but there wasn't a lot of use.

No, my point was going to be... Certified pre-owned cars.

My point was going to be lumber working its way through all those different markets. When I was a commodities broker, I told you that. I got my CTA and all this stuff. Corn was always $3, $3 a bushel somewhere. So $7 is unbelievable. It's like, well, how much corn to eat? Corn-fed beef. Corn-fed beef, that's what you want, right? I mean, this goes all the way through the meat complex. So that ripples through a lot, and soy and all that, too, for livestock. But it's not just, you know, I mean, that's obvious, but I'm just making that point that that's going to ripple through. I don't know, transitory? Maybe. Maybe. But certainly commodity inflation. I'm just wondering why gold has perked up in the last couple of sessions.

But still amazing that that hasn't been more of a sort of a red flag for all of this, especially with the fiscal.

Not only that, part of the reason. Part of the reason that you're seeing shortages in some of these areas is it's harder to get workers in some of those areas, too. You know, it's not necessarily a shortage of pigs, although there was some culling that was done during the pandemic for these things. But it's harder to get workers to do things like get the trees and get them cut and get them down. It's harder to get workers to be there in the processing plants, the stuff you never really want to look and see how it's made. It's a difficult structure, and it's going to be interesting to see how much of that goes back to having people on the job, how much of that goes into wage inflation. And that's what you typically would see.

Wage inflation is where it kind of really kicks in and spirals inflation. So we'll see.

The FDA has now approved Pfizer's request to allow its COVID vaccine to be given to kids aged 12 to 15. It's not that those kids are necessarily going back to work, but hopefully their parents would do so on an emergency use basis. Now, the CDC will meet tomorrow to review that data. If approved, the shot could be rolled out to kids this week. Pfizer said it expects to apply for vaccine use by toddlers and younger children in September and infants in November. So if all goes well by Christmas, assuming that you could get to some form of herd immunity, you could actually get all adults and all kids vaccinated. I believe that this vaccine for the 12 to 15 is similar to those for 16 and over and adults, which is to say, I believe it's the same formula, same amount.

But I believe that when you go to the younger ages, it's going to be... Same formula, different amount. Joe.

Yeah, they got great immune systems. They really do. I'm a little bit—I'm envious, except when you get the second shot where, you know, my body was just a big yawn. It's like, "What, that? No, I'm not even going to do anything with that." Whereas younger people, their immune systems go, "Woo!" Oh, you know, fevers and aches and pains and in bed and everything. I was like, so maybe we're, I don't know, is that a blessing or a curse? I'm not sure, not having the side effects.

The only thing is if you feel sick, you feel like, "Okay, great, something's working."

Yeah, exactly. Exactly. Makes me wonder. New warning from Stan Druckenmiller and Christian Broda, a partner at Druckenmiller's family office, in a new Wall Street Journal op-ed. They say the Fed shouldn't be in emergency mode after the emergency has passed. They warn that the distortion, Fed-induced distortion of long-term interest rates, is risky for the economy. And they also say there's big political pressure in the not-too-distant future that will require the Fed to stop enabling fiscal and market excesses. The recovery we've seen since the pandemic lows in the stock market and in the job market, we've gotten back 70% of the job losses quicker than in any recovery in post-World War II.

So it's come back more than anything. And we're talking about 32 months before the Fed is even talking about hiking rates. And they would normally be thinking about hiking rates probably right now, given where we are in terms of the labor market, GDP, and everything else.

Next on Squawk Pod, investor Stan Druckenmiller says policy aimed at keeping the economy and the markets afloat during the pandemic is risky now.

When the facts change, you have to change. And the facts have changed dramatically since then. I can't find any period in history where monetary and fiscal policy were this out of step with the economic circumstances. Not one.

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This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com/marketupdate podcast or find Schwab Market Update wherever you get your podcasts.

This is Squawk Pod. When the COVID crisis hit the U.S. markets last year, the Federal Reserve took its monetary policy into overdrive. Led by Chair Jerome Powell, the Fed lowered the federal funds rate, lowered the cost of lending for banks and small businesses, committed to keeping the key interest rate near zero, and introduced tools to keep credit flowing. It committed over $2 trillion, trillion with a T in lending support, bought assets under its quantitative easing measures, and for the first time ever, bought corporate bonds as well. The idea was to use every tool in the Fed's toolbox, literally. Here's Jay Powell in June of 2020.

The Federal Reserve is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and stability to ensure that the recovery will be as strong as possible and to limit lasting damage to the economy.

Remember, it was a scary time. Millions of Americans out of work, a public health crisis with no end in sight. It was the scariest economic moment since the Great Financial Crisis. So in response, the U.S. central bank was aggressive and acted considerably faster than it did in 2008. The Fed's idea: two main goals—achieve full employment and inflation that averages just 2% over time—and stick to the plan while the U.S. economy heals. So now we're over a year into this. The economy, well, actually the stock markets, have recovered to pre-pandemic levels, even beyond them. And investors and economists are getting worried about inflation and the long-term effects of the Fed's ultra-accommodative monetary policy.

Jay Powell addressed concerns about inflation in April.

If it turned out that inflation, and particularly inflation expectations, were to move up materially in a way that suggested that they were being de-anchored and that inflation might move persistently well above 2%, we would react. Of course, that would be our job. One of our two mandates is price stability. The other is maximum employment. We don't think that's the most likely outcome, but we do have the tools to deal with that outcome.

The Fed's commitment to sticking to the plan has thrown some folks on Wall Street for a loop. Powell has said time and time again, "We're not there yet." Last month?

It is not time yet. We've said that we would let the public know when it is time to have that conversation, and we said we'd do that well in advance of any actual decision to taper our asset purchases, and we will do so. In the meantime, we'll be monitoring progress toward our goals. We first articulated this "substantial further progress" test at our December meeting. Economic activity and hiring have just recently picked up after slowing over the winter. And it will take some time before we see substantial further progress.

And again last week.

We're not out of the woods yet, but I'm glad to say that we are now making real progress. The economic downturn has not fallen evenly on all Americans, and those least able to bear the burden have been the hardest hit. We will only reach our full potential when everyone can contribute to and share in the benefits of prosperity.

Today on Squawk Box, Joe Kernan, Becky Quick, and Andrew Ross Sorkin spoke to billionaire investor, hedge fund manager, and philanthropist Stanley Druckenmiller. He has an op-ed today in the Wall Street Journal criticizing the Federal Reserve's long policy and urging Jay Powell to change his mind when the data changes. The piece is called The Fed is Playing with Fire. Here's Joe.

You have pointed out that the Fed has stayed a little bit too long, I think, after the financial crisis with emergency accommodation. But you seem to have taken your criticism up to a new level to the point of, if you combine fiscal policy that we're seeing with the monetary policy, it's the scariest combination in the post-World War II period, in your view?

Certainly the most radical policy ever, by a long shot, that I've ever seen relative to the economic circumstances. Let's not forget that Ben Bernanke at the peak was doing $85 billion a month. We are now back to normal on GDP. We're above trend on retail sales. Funny, last year at the Economic Club around this time, I said that a V recovery was a fantasy. I couldn't have been more wrong, but this is all about risk-reward. I understand why the Fed and Congress did what they did at the time. I think it was the right decision on a risk-reward basis. But when the facts change, you have to change. And the facts have changed dramatically since then. And yes, I don't think—I can't find any period in history where monetary and fiscal policy were this out of step with the economic circumstances, not one.

Stan, you talk about how quickly the job market has come back. You pointed out retail sales, a lot of other things that are almost at pre-pandemic levels. And in normal situations, you might think that the Fed would be talking about an interest rate hike right now. And you point out it's 32 months. The other statistic that I saw you point out was, and I don't have it right here, but the amount of asset purchases that the Fed has orchestrated just in a very brief period of time, it eclipses what we did through the whole financial crisis for the seven, eight years after the financial crisis. What is that number?

In six weeks, last spring, we did more QE, more purchase of Treasuries than we did the entire time, the nine-year period from 2009 to 2018. Frankly, Joe, I don't have a problem with that. We were in a black hole. No one knew where we were headed. What I have a problem with is the Fed is expected to do $2.5 trillion of QE after vaccine confirmation and after retail sales reached trend and were above trend. So the black hole didn't occur. That's wonderful. We're all happy, but we're still acting like we're in a black hole. And in fact, the economy is accelerating. If you look at retail sales the last 20 years, they grow about 3% a year. And after the last, the Great Financial Crisis, it took about six years to get back to trend.

If you look at the current recession, it's like nothing we've ever seen. A sharper decline, but then within six months, you were back to trend level. And you see check one, that's the first stimulus package. That's the one I have no problem with. I think it was the right risk-reward, which was right at the bottom. But look at check two and check three when they're coming. Not only are we back to trend, we're now 15% above trend. To put that in perspective, retail sales grow at about 3% a year. So we are five years' worth of demand above trend. There's some pull forward here away from travel, but it's not 15%. So when you look at this chart and then you look at the Fed policy and all the stimulus and them talking about the hole we're in, I just think it's totally inappropriate.

Can we just talk about the—and then I do want to get to some of your worst-case scenarios, I think, that could result from this thing, because I've never seen you talk like this before. Let me get to that first, and then we'll go back to fiscal policy, which is, in your view, I think, being enabled to some extent by the Fed. And that's going to—reflect back on the Fed because the pressure is going to be on them from fiscal policy to stay like they are. So it's like a vicious circle. But let's talk about the dollar. And 85% of the transactions are still done in the dollar. You pointed out in a recent speech that you think we've crossed the Rubicon. Are you comfortable saying what you said there, that for the first time in your career you think we lose reserve status?

At some point?

I'm comfortable with it. That's my central case. As you know, Joe, I can change my mind. But yeah, you said that to some extent, the Fed is enabling the fiscal transfers. It's not to some extent. They couldn't be doing this without the Fed. The Fed is monetizing their activity. I mentioned all the QE after vaccine confirmation and retail sales. We've had $850 billion of direct transfers. $575 billion of them came after retail sales were above trend. 575 of the $850 billion. I'm old enough to remember the bond market vigilantes. I used to be one of them. Without the Fed buying, I don't know what the exact number is. I think it's 60% of all the debt issued. The bond markets would be totally rejecting this.

They are enabling this massive expansion in fiscal policy. And the problem is, if you end up getting inflation, and frankly, even if you don't, the debt is going to be so big. You remember I did my entitlement talks eight or nine years ago. That's all happened except for one thing, the interest rate level. So we're right now in the crux of when the demographic, when the Baby Boomers accelerate in terms of, of getting Medicare, Medicaid, Social Security, that stuff. Right as we're doing that, we just put $6 trillion of new debt on. Again, all enabled by the Fed. These guys could not be doing it. Bond rates would go to a prohibitive level. So my issue here is, in the future, as we go forward, if you look at, this is the CBO, this is not me, okay?

And they're saying, if 10-years go to 4.9%, which is their normalized projection, the interest expense alone will be close to 30% of GDP every year. That's basically what we just spent on the COVID emergency in the last year. There is no way we can afford to have 30% of all government outlays be toward interest expense. So what will happen is the Fed will have to monetize that. When they monetize it, I believe it'll have horrible implications for the dollar. And that's why I said in that speech yesterday that I think it's more likely than not within 15 years we lose reserve currency status. Last spring, in the midst of an equity market meltdown, and I've been trading for 40 years and I've never seen anything like this, right in the middle of an equity market meltdown, the bond market went down 18 points one day.

And everybody thought it was macro traders like me and others that were rejecting the implications of the CARES Act. The Fed did a deep dive and, by hindsight, foreigners sold a trillion dollars, a trillion of Treasuries overnight as we were proposing the CARES Act. They've continued to sell Treasuries ever since then. Why is that important? Because for 20 years, Treasuries have been the go-to asset of foreigners to hedge global portfolios with. In every case, whenever you had a problem in the equity market or in the world economy, they fled to Treasuries and they fled to the dollar. Last spring, that was violated. So since then, they've continued to sell Treasuries. So what we've gone from is, for 20 years, an average flow of $500 billion a year into Treasuries to an outflow out of Treasuries.

So when you have a $700 billion current account deficit, our estimate for the year, you need capital to flow in to offset that. If you just erase a $500 billion inflow and turn it into an outflow, you see the pressure it will put on the dollar. A reasonable person might ask, well, if that's true, why did the dollar not go down from March to July? Very simple. Who is the biggest beneficiary of COVID? Obviously, the massive digital transformation companies—Google, Microsoft, not so massive, but Zoom, those kinds of names. What country dominates in terms of those names? United States of America. So the $500 billion outflow out of bonds was offset by a massive inflow from world central banks, from sovereign wealth funds into our equity market.

By July, that had become pretty much in the market. The relative prices had gone up. And frankly, the vaccine profile was starting to look better. So that is when the dollar peaked as that offset started to diminish. And as you know, Joe, the vaccine tends to cause a rotation out of growth stocks into value stocks. Our big advantage over here are the growth stocks. So that's why I think the pressure on the dollar is going to continue.

Yeah, for now, anyway, we've still got that innovation, Stan. I worry about that as well. I want to get to something that just is amazing to just see it in print from you, and that is when we do lose the status as a world's reserve currency, it's going to be hard to find a replacement because in China, there's a lack of trust in the currency of a foreign dictatorship, obviously. And then Europe's a mess. Your best guess is that a crypto-derived ledger system will be invented and that that will become the reserve currency of the world.

Okay, let's not get too carried away.

I know, but that just sizzles with, you know, sell the steak. Go ahead.

I knew crypto was going to come up in this show. Okay, so it's okay. But look, one of the lines about the dollar we've all heard 100 times the last 10 years is we're the cleanest dirty shirt in the room. There's no alternative. And it's true. That is what has been our strongest case for the dollar. Europe is a complete mess. Who's going to trust the Chinese? So it can't be them. And I've been groping, well, how does that resolve itself? Well, you probably don't remember this, Joe, but five or six years ago, I said that crypto was a solution in search of a problem. And that's why I didn't play crypto the first wave, because we already had the dollar. What do we need crypto for? Well, the problem has been clearly identified.

It's Jerome Powell and the rest of the world's central bankers. There's a lack of trust. So, sort of groping for an answer, for a central case, at best guess—and it's hard to make a forecast three months from now, much less 15 years from now—I think the most likely answer, the most likely replacement, would be some kind of ledger system invented by some kids from MIT or Stanford or some other engineering school that hasn't even happened yet that can replace the dollar worldwide. I don't know what it will be. I just know if the Fed is forced to monetize the debt—remember, all in the name of raising inflation 30 basis points—I really don't understand why 1.6% inflation with a mandate of price stability is a national tragedy.

But okay, if they want to do all this and risk our reserve currency status, risk an asset bubble blowing up, so be it. But I think we ought to at least have a conversation about it. So if we're going to monetize our debt and we're going to enable more and more of this spending, that's why I'm, I'm worried now for the first time that within 15 years we lose reserve currency status and, of course, all the unbelievable benefits that accrue from it.

We have had, and I know Judy's watching actually right now, but we've had Judy Shelton on talking about the lack of, or the complete consensus at the Fed. Do you think that is a problem? I mean, how is this happening? There's no one saying anything to disagree with the consensus at the Fed? And I know Neel Kashkari made some comments I thought were kind of funny. He said that all you hedge fund guys are complaining about what the Fed's doing, and he doesn't have any pity for you that you're not doing as well. And what hedge fund guy is complaining about what the Fed is doing right now in terms of their investments? I hear you warning, but in terms of your investments, have you had a tough go of it recently, Stan?

Well, I don't know who Neel Kashkari is talking about. We were up 42% last year and we're up 17% this year. So they're certainly not hurting my trading strategies. I think I've made those numbers because of the Fed, not in spite of them. I have six outside money managers who are up a lot more than me. I haven't heard one person complain about their business with regard to the Fed. I mean, a monkey could make money in this market. So, you know, I don't know. I literally don't know what he's talking about with regard to the consensus of the Fed. I'm just confused. You've got a lot of output gap people there. As you know, by the Fed's own projections, we have the most favorable output gap—in other words, production relative to capacity, forward-looking, in history.

I assume there's still a few Taylor Rule people around. I don't know whether there are, but by the Fed's own projections, again, the most extreme gap between policy projections and what the Taylor Rule would call for. But I'm not inside the Fed. I don't talk to anybody there. So I don't know why there's a consensus. It seems so obvious to me, but I've been wrong before. Again, you know, last year, I didn't think we could have a V-recovery. We clearly are. But as you just heard by my performance, despite not being in the market in April and May and being dead wrong, I adjusted because the risk-reward changed. And it just seems to me that the Fed made a very reasonable bet. The government made a very reasonable bet last March, April.

I'm glad they did what they did. But by August, it was very, very clear that these policies, particularly buying $120 billion a month or how about $40 billion a month in mortgages when we don't even have enough housing supply in the country, were inappropriate.

Hey, Stan, I love what you said about how even a monkey could make money in these markets. Everything has gone up. It's been the everything bubble. But the stuff you're talking about is pretty scary. And I just wonder, with all of these concerns about what comes next, does that change your perspective on the stock market? Is there a point where you say you have to get out of it or where you might even short some situations?

Becky, that's the big question. I have no doubt, none whatsoever, that we are in a raging mania in all assets. I also have no doubt that I don't have a clue when that's going to end. I knew we were in a raging mania in '99 and it kept going on. And if you had shorted the tech stocks, say, in mid-'99, you were out of business by the end of the year. But we are still long the stock market. We're not as long, nearly as long as we were four or five months ago. We're still playing the game. We've shifted a lot of our relative bets into commodities, into interest rates, into the dollar. All those shifts occurred last, say, August through October when it became clear to us that the recovery was going. But I will be surprised if we're not out of the stock market by the end of the year, just because the bubbles can't last so long.

But I really have an open mind. And right now, treacherously, we're still playing the game to some extent. Hopefully, losses, if—if I'm wrong and the stock market comes down before I think it's going to, our other asset categories will benefit enough, because to some extent, they would be the cause of the stock market bubble popping.

Hey, Stan, you made some interesting comments both about the dollar and then crypto. But I'm curious about where you stand. You suggested that there'd be some kid who's going to create this next crypto blockchain ledger. Does that mean that the cryptos that exist today don't fulfill the requirements that you think that we'd need in the future? What does that say about a Bitcoin or an Ethereum then?

First of all, Andrew, that's a very good question, but I'm a 68-year-old dinosaur who has historically used gold as a replacement for fiat currencies, but I'll take a shot at that. It's going to be very hard to unseat Bitcoin as a store of value asset because it's got a 14-year brand. It's been around long enough, and obviously there's a finite supply. Obviously, Ethereum has the lead in terms of smart contracts, in terms of commerce, that kind of stuff. But yes, my guess would be, and thankfully I'm not betting on this one way or the other, Andrew, but my guess would be, you remember Facebook was not the first social network. It was number 11. Yahoo invented the search engine and with just a marginally better, speedier technology, we all know what happened with Google versus Yahoo.

It's just not probable in my mind that Ethereum is going to be the ultimate winner, and that some kid somewhere—because don't forget, some of the best and brightest of kids coming out of these engineering programs, they're all going into crypto. The quality of the competition that's going to come against the incumbents in this space is going to be brutal. That's why I just think it's too early to call who's going to be the winner in terms of the payment system, commerce, and that kind of stuff, as opposed to store of value, where I think it is going to be tough to unseat Bitcoin.

Stan, you mentioned you missed the V-shaped recovery to some extent, or calling it. Now it's in place. Do you think that the stock market rebounded so quickly because it smelled out that incredibly quick rebound? Or is it because of the Fed and all of the cheap money? And then as a corollary to that, do you think actually some of these COVID-type names or plays are actually higher than they would have been if we hadn't had a pandemic, and maybe the stock market itself is higher than it would have been because of all the cheap money?

The answer to number one, modestly, I absolutely missed the bottom, but I did not miss the recovery. I had adjusted my entire portfolio by the end of May. It cost me dearly not to be exposed from April to May. To be fair, I also wasn't exposed from February on the way down. But I think that answer is probably both, Joe, that being the most free money we've ever experienced in our lifetime. And once the Fed started crossing red lines in terms of backstopping corporate credit, once we saw the amount, yes. And then I think in terms of the recovery, it's had more to do with the rotation than it has with the stock market itself. As you know, Joe, that we started a very subtle rotation from August to October, which has accelerated now out of the COVID beneficiaries into what I would call reflation beneficiaries, reopening stocks, economically sensitive stocks.

You asked the third question, which I've forgotten. What was it?

It was whether some of these names have actually done that.

Yes, I think they're higher than they would have been if we hadn't had COVID, no doubt. Although that was an easier statement to make a month ago than today. When you look at what happened to Zoom and some of these other names, a lot of that has been accounted for in the last month and a half. And I don't see a situation like 2000 where the bubble stocks' earnings collapsed. I think the whole problem here is price and the fact that so much money has been parked in these names and they're kind of stale longs, and it's coming out as we reopen because there are viable alternatives out there.

Stan, 15 years is a long time, and we'll watch slowly as these things—hopefully you and I will still be alive, I know—and we'll watch this slowly play out. But just looking at what you think are some financial asset bubbles orchestrated by all this easy money, is there something that could trip that up in a much more kind of a scary scenario, and something that causes, not necessarily something we saw in 2008, but more than a slow, steady decline in the dollar and, you know, you see inflation go and interest rates start going up? Is there something that could cause a real significant break quickly on the horizon, in your view?

We can never say there's not, but... Well, the most probable and the elephant in the room is inflation becomes so obvious that the Fed has to move. And the longer they wait to move, the bigger the bubble will be and the bigger the reactions. So if they raise rates, say, three years from now, as opposed to three months from now, well, there'll obviously be pain in three months. But if they kept the bubble going, it would be a much more dire consequence. If you're talking, that would be the most probable problem, I'd say, is what it always is: the Fed gets mugged by reality. Frankly, I think they've already been mugged by reality, but they're ignoring it. But if they start to come around to some of the views I've expressed, that would pop the bubble.

The other problem would be, say, Taiwan.

Oh, Taiwan. That's interesting. We've got about two minutes left, and I just wanted to ask you quickly. You in the past have said you don't have a problem with higher capital gains rates, and that might not be the death knell for you. for financial assets, et cetera. Looking at everything we're doing, I also saw you mention that we shouldn't be coming down on the Medicare eligibility. We should probably be going up on Medicare eligibility to maybe 65. But just in terms of all these proposals from the Biden administration, whether it's taxes or the size of the entitlement spending, is there something that really bothers you there or scares you there?

I would just say the transfer payments that we've had as opposed to investment, I don't have a problem with infrastructure. But as you know, we're talking about $6 trillion and less than a trillion of it will have been infrastructure, maybe a lot. And when I say infrastructure, I mean infrastructure, not how they're defining it. That bothers me. The taxes, I don't have a problem with. unless they go above the level where they would raise revenues. I think it's not very smart to raise taxes if it decreases revenues, but normalizing capital gains, I don't have a problem with as long as their own department doesn't project a decrease in revenues from that. But the big problem again is creating fiscal dominance.

In other words, you get in a situation where the Fed's main objective—and frankly, policymakers in general—has to be not defaulting on the debt, as opposed to managing cyclical variability in the economy as well as good growth strategies. That's happened, as you know, to some of the emerging market countries.

I'm trying to think of that Fed guy that became... sort of the poster child for bad Fed policy back in the, you were around for it.

I think the one thing we haven't talked about that I really can't emphasize enough: what were the two worst economic experiences in the last century in the United States? They were after the '29 bubble busted and after the housing bubble busted. What has been the most egregious economic situation globally after the bubble busted? In Japan. These places didn't go into decline because interest rates and inflation were too—inflation was too close to zero. That happened because you busted an asset bubble. So why we're risking busting an asset bubble, not to mention monetization, fiscal follies, all for 30 basis points of inflation? Can I just say that inflation hurts the lower income more than it does rich people?

You read the story in the Wall Street Journal about the woman who switched from – fresh vegetables and frozen vegetables because they can't afford them. I can promise you I'm still eating fresh vegetables as both of the wealthy still are. So I don't even understand why they're rooting for inflation. It hurts the poor. It hurts the lower income. And if you bust an asset bubble, I promise you the people are going to get hit the hardest are my kids in Harlem and the lower income brackets, not the wealthy.

Pretty quick half-hour. I would ask you about gold and what happened, because it's obviously not that there's not inflation concerns, but it's been, I guess, replaced to some extent because that was—that was your go-to for fiat currency, and it's not anymore. So, well, maybe another time, Stan.

Thank you so much for having me. I think this is really important stuff, and we ought to at least have a conversation about it. I don't have a monopoly on the truth. But this is something we ought to really be thinking about: the risk-reward of these policies.

Thanks for all your time, Stan. And let's do it again. Don't be a stranger. Thanks, Joe. Appreciate it.

Thanks, Becky. Thanks, Andrew.

Squawk Pod. We'll be right back.

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