Stan Druckenmiller on Fed Policy, Election, Bonds, Nvidia

I want to welcome in our Bloomberg Television and radio audiences to the special episode of Bloomberg Markets. Seated here with an exclusive interview with Chair and CEO of Duquesne Family Office, billionaire investor Stanley Druckenmiller. Now, Stan, in 2021, you had written an opinion paper in the Wall Street Journal that said the Fed is playing with fire. And a couple of weeks ago, you wrote to me and you said that you hope that the Fed is not making the same mistake that it had made in 2021. The mistake of being trapped by forward guidance. What's at stake here? Why are you so concerned?

Thanks. It's nice to be here. In 2021, I think, the Fed did a great job when we were facing a black hole in COVID in 2020. They took some very aggressive actions. One of those actions was forward guidance, where they try and settle markets, guided ahead to basically a zero interest rate policy, I think it was, frankly, for three years. We were all fooled by COVID. I was too. When, when it first happened, we're wondering, you know, are we sinking into a black hole? But it was pretty obvious, I'd say a month or two after vaccine confirmation, which was the fall of '20, that we weren't going into a black hole. Unemployment, which I think had been around 14 percent, started to drop precipitously. The economy came back.

We wrote the article in the spring of '21 because, at this point, we felt we were, like, booming, and it was, it was everywhere in the economy, and the companies we talked to, and unemployment rate everywhere. And the Fed wasn't adjusting. So they were buying, I think, 120 billion a month of securities—that might have been down to 95 a month by that time period—and rates were still zero. And I think, had they had a clean slate, they would have never been buying bonds to that degree with what was going on in the economy. But they were trapped, in my opinion, by forward guidance. It's pretty incredible. From the point we wrote the article, when it was so obvious that we even wrote about it, it was 13 months

from when inflation went through 2 percent to when they finally raised rates. They also bought 2 trillion in bonds during that period. So, I guess the reason I analogize it today—and it's quite different. I had a lot of confidence then that they were wrong on inflation. The money supply was growing at 40 percent. As I said, the economy was booming. This one's much more nuanced. However, just look at the asymmetry here. Back then, you go 13 months with inflation through the target, goes up to eight and a half percent, and you're still going on the three months, and you're keeping rates at zero, and you're buying bonds like crazy. And then you, when you finally move, you move 25 basis points, and your rationale is, 'We need to see the whites of inflation's eyes.'

And you're saying this one is three or four or five percent. Okay. Today, we're still quite a bit above target, depending on which measure you use, somewhere between two and a half and three and a quarter. The economy—they've come up with this, I guess, theory that monetary policy is restrictive because of real inflation rates. But I don't really go by theory. I'm a market animal. Frankly, we've found over the years that markets are better predictors than professors. And when I look at the landscape: equities at a record high, gold at a record high, GDP above trend, credit tight, bank earnings and forecasts look good. We don't see any restriction whatsoever. Crypto going crazy, you name it. So, all of a sudden, the crowd that said they wanted to see the whites of inflation's eyes and they wanted to be data-dependent, as opposed to forward-looking, are now cutting 50 basis points, not a quarter, which is what they started off, and we're not even to target yet.

And this is all on the theory that monetary policy is restrictive. So what I would say is this: I don't have the conviction I had in '21 when we wrote that article that the Fed is going to be wrong. But on a risk-reward basis, I just—it doesn't—I don't think it makes any sense at all to lay out the cards they've laid out and commit themselves through forward guidance once again. And what I was trying to say when I was saying it reminds me of '21 is I just hope if the data don't go with them—and they certainly haven't since they started this narrative—they adjust this time and they're not trapped by the forward guidance the way they were in '21.

Listen, does this mean that you thought 50 basis points was an absolute mistake? And do you think that there is a risk of an inflationary spike in the way we saw in the 1970s?

Yeah. Do you have the chart we talked about earlier?

Let's see if we can pull that up. There's certainly one that investors have been looking at.

And while you know even if we don't have the chart. So in the 1970s inflation came down from a remarkably similar level to where it was in twenty one I think twenty one peaked at nine. I think it was eight back in the 70s. They came down to three. The Fed was easing because they they had the seventy five recession. So the Fed started easing and inflation went right back up. to I think it peaked at a 12% when Volcker came in and smashed it. I'm not predicting that, but when you're easing into a melt up in financial markets and we have the fiscal policy we have going forward, it's certainly a risk. And I just I think it's a mistake not to be taking that risk into account. I don't really understand the rush of 50 basis points.

And I think that markets have priced in a 97% cut at the next meeting. That's all through Fed guidance. It's funny, my—my friend Jim Grant, who's one of my favorite writers, said they're not really data-dependent, they're forward-guidance-dependent. And that's what they're showing again. And look, he might be right, and I hope he is right. But it's a big risk, because if, in fact, they're wrong and inflation takes off because monetary policy is, in fact, not restrictive and we have fiscal expansion going on and they have to tighten again, I think it could be a—it could be a nightmare for markets and maybe even for the independence of the Fed. You can't—you can't make multiple mistakes. That—that would have been...

But I'm not predicting. I'm just saying, why did they go 50, and why do they need this forward guidance?

You know, I'm glad you brought up the Fed independence. I wanted your view on this. Are you concerned about the independence in the scenario of a Donald Trump win? In an interview just a day ago with Bloomberg Editor-in-Chief John Micklethwaite, he said that the job at the Fed is to show up in the office once a month and say, let's flip a coin. On the other hand, your longtime colleague Scott Bessent has been informally advising Trump and floated the idea of a shadow Fed chair. How compromised is Fed independence at this juncture?

Well, I think a shadow Fed and this kind of talk is a horrible idea and irresponsible. However, I think were Trump to be elected, the institution will hold. I think a bigger threat to the Fed would be major, major mistakes by the Fed. I think the Fed is obsessed with soft landings and fine-tuning. To me, that's not the real job. The real job is to avoid the kind of problems we had with the Great Financial Crisis, which, in my opinion, were because the Fed was too easy going into them, creating a housing bubble. And then, obviously, after COVID—not the initial actions, but sticking with it for a year and a half or two years, buying bonds with the money supply exploding. To me, they've got to stop the fine-tuning and start looking at the bigger picture.

And committing yourself now, and then if they stick to forward guidance and inflation starts going up again, that could lead to a hard landing, not a soft landing.

Speaking of the future, of course, another big uncertainty ahead beyond Federal Reserve policy is the November election. I'm wondering what the Druckenmiller playbook is around this election cycle and what you think the most likely scenario is and how you set up for it.

Well, it's an evolving situation. If you would have asked me this 12 days ago, I would have said, 'I don't have a clue. It's a total toss-up.' I still don't have conviction who's going to win the election. But as I said earlier, I like market indicators for the economy and for financial restrictiveness. I also like them for elections. I remember how right the market was on Ronald Reagan in 1980 despite what the pundits were saying. And I must say, in the last 12 days, the market and the insides of the market are very convinced Trump is going to win. You can see it in the bank stocks. You can see it in crypto. You can even see it in DJT, his social media company. But throughout the whole, I would say, the industries that are deregulated, if we get deregulation, will benefit from Trump or outperform the others.

If you put a gun to my head—and thank God there's not one to my head, so this really doesn't matter—I would say that I would have to guess Trump is the favorite to win the election now, but who knows what these polls even mean. No one even responds to them anymore. But that's what we're looking at. I think the delta between, let's say, four outcomes: blue sweep, red sweep, Trump with a blue branch of Congress, Harris with a red branch of Congress. First of all, I think the blue sweep is extremely unlikely. Even if Harris wins the presidency, looking at state-by-state polls, it looks like the Republicans are going to win the Senate. Where do you get a blue sweep? I think just the math of taxes, business confidence, lack of animal spirits, no change on the regulation front, in investors' minds...

you would have a rough time for equities, I would think, for three to six months. I think this would probably translate into the economy because equity ownership is 25 percent of financial assets, at an all-time high. That was 15 percent just not that long ago. So that's a blue sweep. But the good news or the bad news, depending on how you view life, is I think it's highly unlikely. So that playbook is probably going to be irrelevant.

A red sweep, which I think is probably more likely than a Trump presidency with a blue Congress, because personally, I think anybody that votes for Trump is probably not going to switch their—change their ballot for a Democrat in Congress. A red sweep, I think you get animal spirits in the business community. You get deregulation, and there might be some sort of uplift relative to where we are in terms of the business community. So I think the economy could be potentially stronger for three to six months. My fear would be, because of those reasons and because I think bond yields already don't reflect a proper economic outlook, you would probably get a bad response in the fixed income markets,

which could then snuff out the equity rally. But anyway, at Duquesne Family Office, we're worried about bonds. We're not playing it through the stock market; we're playing it through the bond market. If you want to go after the cause rather than the symptoms, it still looks like there's stocks and things to do. I also think under a red sweep, the Fed, for the reasons I just cited and maybe because of past relationships, would be much more hawkish than they would be under a Harris administration. So I think that would all be in our playbook and the responses to it. Under a Harris administration with a Republican Congress, probably not a lot of change from the landscape we currently have in terms of trying to figure out what's going to happen.

I want to remind our viewers, if you're just tuning in right now, I'm standing by with Stan Druckenmiller for our Bloomberg Television and radio offices. Of course, he leads the Duquesne family office. And you were talking through each scenario here. But what about your personal views here? In a recent conference, you had mentioned that you wouldn't vote for either Kamala Harris or Donald Trump. Which concerns you more?

Which concerns me more? I like Bret Stephens' line in the New York Times, 'I haven't decided who I'm going to vote against.' I can't see my voting self voting for either one of them, so it really doesn't matter who concerns me more, and I certainly would never support either one of them. I just think they're actually unified on some things, like industrial policy. Both of them think, apparently, the government should have a major role in allocating capital, which I find, frankly, generally bizarre. When I think back 10 or 15 years, I'm a reader of Tom Friedman, and quite a good writer, and he was constantly pointing out how the Chinese model was potentially superior to the U.S. model, talking about how nice their airports were and their roads and how they could target certain industries.

Well, my long capitalist suspicions have been confirmed, and China's been, as we all know, a disaster with that model. But somehow, both parties, Republican and Democrats, have adopted industrial policy, kind of throwing free-market Reagan and capitalism to the side. So the policies in terms of that, I find equally bad. I find her policies much worse in terms of anti-bigness, anti-business, and regulation. But frankly, I grew up in America with a certain model of a president: George Washington, Thomas Jefferson. Ronald Reagan was one in my lifetime where there was a certain dignity and behavior in the office. And I don't judge anyone who wants to vote for Trump. But for me, it's just a red line. So I'll probably write in someone when I go to the polls.

When you think about the policies Donald Trump has put forward, a day ago, he said to Bloomberg that tariff is the most beautiful word in the dictionary. He's negated the idea that many economists believe, that this could have many punitive impacts on the American consumer. How do you see it?

Well, I don't like tariffs. I just said I'm a free-market capitalist. The only thing I'll say about Trump is he's a bit of a blowhard. So I don't know whether he's negotiating with our foreign adversaries and, frankly, with our foreign partners. I don't think it will be the end of the world, but I am not in favor of tariffs. I don't like them at all.

You know, it's interesting.

By the way, the Biden administration kept all his tariffs. So it's not like I'm a fan of their tariff policy either.

What about taxation? At the end of the day, you have been very, very critical for many years about the U.S. debt load, the fiscal situation. And there are analyses that say both candidates would increase the federal debt load. The Committee for a Responsible Federal Budget says Trump more than the Harris administration would. At the end of the day, can Congress get away with extending the tax cuts from the Trump era, or is there another way to really close the gap?

Look, in my world, the less taxes are better, but we live in a world that I hope still includes compromise. And if there's some sort of agreement for spending cuts, I could definitely tolerate tax increases to balance them. I will say one thing: I don't—I don't really like the media narrative which compares fiscal irresponsibility with tax cuts and fiscal irresponsibility with spending. Again, you are right, I am a fiscal hawk. I am more worried about this and the effect four or five years out than whether we have a soft landing and our economy grows at 1.2 or 2. This is big stuff we are talking about. Tax cuts are accompanied by an addition to the capital stock; spending is a shrinking in the capital stock replaced by government spending.

So of the two, the two sins, tax cuts or lease... But personally, if I was in government, you can't just do tax cuts if you don't get the spending cuts. And it was Trump, to me, that took entitlements off the table in 2016. And that's where the money is. So I give him an F on fiscal responsibility also.

So, want to switch gears here because we only have a little bit of time left with you. I want to talk about the market, and I want to talk about how you're looking at certain wagers that you've put on. A while ago, we spoke about Nvidia, and you had said that it would be something that you held for years, and ever since then, you held it for a while. But more recently, you've been selling it off. How much do you have left of it, and why have you been selling? Can you see yourself getting back into it again?

I've made so many mistakes in my investment career. One of them was I sold all my Nvidia probably somewhere between 800 and 950. I think it's 1300 on that stock now.

I own none, and I own none the last 400 points. It was a big mistake in terms of AI. And by the way, when I—when I saw you at that conference, which was 18 months ago, I fully expected to own it for years, but I think it was 300 and change. And as I also said at a media interview, I'm not Warren Buffett. So I thought—I thought I was going to. But what changed is it tripled in a year, and I thought the valuation was rich. We are big-term, long-term believers in AI. And there's still many ways we're playing AI, particularly the infrastructure that's been built out to support the power needed. And yes, I think Nvidia is a wonderful company, and were the price to come down, we'd get involved again. But right now, I'm licking my wounds from a bad sale there.

You know the other question I have to ask you really quickly we don't have a lot of time. But you were saying that you express a lot of your views through the bond market. The 10 year hit four point one percent again recently. Do you think it goes much higher. And where do you think it ends next year. Would you go very short at this rate.

I don't know what very short means. We shorted bonds the day the Fed cut 50 because we thought it was a mistake. We still have that position. It's not so much I have a view on where it's going to go short term. What I—what I do believe, if—if Powell ends up being wrong here and inflation reaccelerates next year, bonds could go up a lot, a lot of basis points, hundreds, whereas if he's right, you might lose 25 or 30 basis points short. The golden rule I've always had is the 10-year is to trade around where nominal GDP is, which is 5.5%. So the risk-reward to me is being short bonds.