Investment visionary Kiril Sokoloff, chairman & founder of 13D Global Strategy & Research, sits down with a revered titan of the investment world: Stanley F. Druckenmiller, whose unrivalled track record spans many decades, making him one of the world’s most successful money managers. This interview provides an unrivalled opportunity to learn the previously unheard secrets of an investment legend.
Stanley Druckenmiller: The Possible Contagion In Emerging Markets
Hi I’m Raul Powell and the sea of real vision. It it’s my pleasure to personally choose one of the most incredible conversations that I’ve ever seen or we’ve ever had a real vision. And it’s led by my good friend Carol Sokoloff. Carol is one of the most legendary people in the investment research business. You can see by the quality of the guests that he brings the real vision that his contacts in the finance industry and the wider world are completely unparalleled. And this time Kiran is going to do something extraordinary for us in this episode. He’s going to interview one of the greatest investors of all time. Stanley drunk Stanis perhaps the best 30 track record in money management history his company over 30 percent returns. And he’s never had a down year over 120 quarters. He’s only lost money in five men. How is this even possible. How has he managed to make money. Day after day year after year decade after decade that’s a course that nobody’s ever been able to answer. That is until now.
Stanley Druckenmiller has never given an interview like this before. And in this incredible conversation Stan tells Carol how he was able to build that track record how he’s operates in this new world of distorted price signals and the opportunities and risks he says lie ahead. It’s a truly extraordinary conversation that every investor wants to watch and then returns him. Time and time again there’s so much learning in this. So now in the second episode Carol Sokoloff series please enjoy the full conversation with Stanley Druckenmiller.
Stan is a great pleasure to have you here.
Great to be here. Carol I’ve enjoyed your work for many many years so I’m excited about the opportunity. Thank you.
We are too. We’ve been friends for 25 years. Both of us are very low profile people. We avoid publicity. And thank you for trusting me to do this. What I really want to drill down on is that credible brain of yours that’s created this phenomenal track record that is really the best in history.
30 years performance managing outside money never had a down year 120 quarters only five were down 30 percent compound at over 30 years. How did you do it. And to try to understand the mindset you approach to intelligence that enabled you to do that and secondly to take that and bring it forward to today’s complexity. How are you look at the world. What challenges what opportunities. How are you operating differently given the fact that algos are running the markets. Free money has destroyed price signals. And third to discuss Stan Druckenmiller is other passions your family your extracurricular activities and your philanthropy which which you do in a very low key way which of course is the best way to do it. So let me start off by asking you a question on your balance life. People in our business tend to be very focused and very driven. But I wouldn’t say that not that many of them are happy and you’re a happy man. You’ve got a balanced life. You’re one of the great philanthropists in America. You’ve have a beautiful evolved spiritual wife who you love. You’ve got three lovely daughters who are all successful.
And have this balanced life with this incredible performance and you’re happy man. How do you do it.
That’s kind of you to say. The balance 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 reports herself about every 10 years who after my children were born. She gave up everything to raise those children and she did it in a very intense creative ways. You have this thing called special time where each child. One day a week for two or three hours after school could go anywhere and you aren’t can any activity with her because she thought it was important. Sibling rivalry to have individual time with each. So it all it all sort of starts with her. And then I would really weigh in on the weekends and maybe because I married a little late with her which was when I was 35.
I was successful enough at the time and had acquired enough knowledge that I was able to spend most of my time with the kids on on the weekends. Had been in my 20s I think it would have been a disaster. That’s been a very very important part of the balance. It’s interesting we are. Someone ask me Oh Fiona and I talk about the difference between men and women and their response to their children and you have to understand our children are 28 27 and 25 and even today when she has full time jobs she’s running a business. She says the first hour of her day is spent thinking of all the things she’s going to do for the children that day. Texts and emails she’s gotten and arranged and the first thing she thinks about of course the first thing I think about is Euro and the yen.
I love my trolling but it’s just it’s a whole different mindset and I’ve been a huge beneficiary of that and one of my early mentors said with children if you get the first five years right you were awarded the rest of your life and if you get them wrong you’re tortured. It’s very bitter 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. So I think that’s that’s pretty much been the key and that’s freed up the extra time to do some physical activities swells up.
You mention we’re all worried about entitlement for our kids and we’re always struggling with that. How did you deal with it.
You know that is such a fascinating question. Fiona and I have a totally different philosophy on that. She felt no holds bar in giving the kids material stuff. And there was no reason to hide our wealth from them. I thought she was crazy and this is going to be a disaster. But it was her area and I deferred to her. I’ve never heard her say no to those kids on anything except video games. It’s the only thing that was really heavily discouraged and she said no to.
I guess through osmosis or observing the parents values or whatever somehow strangely they all ended up being high achievers. We never ever talked to them about philanthropy or charity or giving back. And yet they’ve all done stuff very actively to help the disadvantaged. I’m not sure how or why it all happened but I guess it starts again with the mother that was with them so much time and taught them values. But it’s bizarre because I’ll never forget in the third grade we had a teacher review with our oldest child. She wasn’t there and the teacher wanted to know what Fiona had done because the other wealthy kids were all bragging how had country houses and this and that and she said that Sarah Earl’s daughter would never ever talk about any of them want to know how we had schooled her in that but it was never ever brought up. So we never hid their wealth from them. So Fiona kind of broke every rule in the book that you would read about in dealing with this subject. But things have worked out extremely well.
Congratulations. Nothing like a happy man and a happy family.
So moving on to the world we’re living in. This has been an especially volatile year. We’ve got a new Fed here. We have the possible contagion in emerging markets. We have a huge new fiscal stimulus in U.S. distorting things and we have a very aggressive foreign policy and trade policy on the part of the United States. So taking you all that and whatever else you’re focused on what are you really thinking about. What you where’s your focus right now.
Yeah well since free money was instituted I have really struggled and I haven’t had any down years since I started the family office. But.
Thank you for quoting the 30 year record I don’t even know how I did that. When I look back and I look at today but I probably made about 70 percent of my money during that time. In currencies and bonds. And that’s been pretty much squashed 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 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 and I also bear itis because I made my highest absolute return for all in bear markets. I think I was average term bear market was well over 50 percent. 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. I came into the year with a very very challenging puzzle which is rates are too low. Worldwide you have negative real rates and yet you have balance sheets being expanded by central banks at the time of a trillion dollars a year which I knew by the end of this year was going to go to zero because the US was obviously going to go from printing money and QE to letting 50 billion a month starting actually this month run off on the balance sheet. I’ve figured Europe which is doing 30 billion euros a month would go to zero. So the question to me was if you go from a trillion in central bank buying a year to zero and you get that rate of change are all happening within a 12 month period. Does that not matter if global rates are still what I would call any appropriate for the circumstances and those circumstances you have outlined perfectly you pretty much have had robust global growth with massive fiscal stimulus in states where the unemployment rate is below 4 if you came down from Mars you’d probably guess the Fed funds rate would be 4 or 5 and you have a president is screaming because it’s 175. I may be because I have a bearish bias. Kind of had this scenario that the first half would be fine but then by July August you’d start to discount the shrinking of the balance sheet. I just didn’t see how that rate of change would not be a challenge for equities that other than PCs and that’s because margins are the all time record. We’re at the top of the valuation on any measure you look except against interest rates and at least for two or three months I’ve been dead wrong. So that was sort of the the overcount overwhelming macro. You know interestingly some of the things that tend to happen early in a monetary tightening are responding to the QE shrinkage. And that’s obviously as you’ve cited emerging markets. So the cocktail of mixed up for here was to continue in this move going on for three or four years for him to continue on the disruptors. That would be the cloud based companies the Internet companies to be short 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 which were very very good to me the last two or three years has been pretty much a disaster this year. I gave an interview at Sun Valley. Not this year but last year said that I thought the Chinese internets were at less risk of government regulation than the US Internet. And everyone in the audience howled with laughter and I said No I’m serious because they’re partnering with the government because they have all this information that they hand over the government. The Internet has been the greatest friend the Communist Party could ever imagine. Whereas 15 years ago I would have told you the Internet was going to destroy them. Well at least on the gaming side with Tencent I’ve been dead wrong and it’s tended to drag that whole group down. It happened in two or three months ago.
Mysteriously my retail Staples shorts that have just been fantastic relative to my tech longs just have had this miraculous recovery and I’ve also struggled mightily and this is really concerning to me. It’s about the most troubled life about my future as a money manager. Maybe ever.
Is what you mentioned the canceling of price signals. But it’s not just the central banks. If it was just the central banks I could I could deal with that. But I’m one of my strengths over the years having deep respect for the markets and using the markets to predict the economy and particularly using internal groups within the market to make predictions. And I think I was always open minded enough and had enough humility that if those signals challenge for my opinion I went back to the drawing board and made sure things for 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 versus news from someone who’s used phraseS. News as their major disciplinary tool for 35 years. It’s tough and it’s become very tough.
I don’t know where this is all going. If it continues I’m not going to return to 30 percent a year any time soon. Not that I think I might not anyway. But one can always dream when the free money ends we’ll go back to a normal macro trading environment.
Let’s talk about the Alekos. We haven’t seen the algos sell. We’ve seen our gross by we saw a little bit of it in February and there were some concentrated selling. We saw it in China in 2015 which is really scary. Most of the people weren’t focused on that but I was thinking you were too and there are programs to sell if the market’s down 2 percent. Machines are running can’t be stopped huge amount of trading and money is being managed that way. And we’ve been operating in a bull market and a strong economy. What happens when it’s a bear market and a bad economy and things get out of hand. So knowing that and knowing the risk of that any moment unfolding January February it just came like this. How are you protecting yourself and insulating you. What are you watching for that that might happen.
It’s a little bit like after 9/11 waiting for the next terrorist attack. In which case should the most or where a roaring bull market for the next six years are sitting there because Dick Cheney told your neighbor you’re supposed to move out of New York. I’m just going to trust my instincts and technical analysis to pick up the stuff. But I will say that and I’ve proved it to my own detriment the last three or four years. The minute the school board gets a little dodgy I get more cautious than I probably would have been without this background but I want to be clear that the major challenge for the algos for me is not some horrible market that I can actually see myself getting caught in that but I could also see myself perhaps taking advantage of it.
The challenge for me is these groups that used to send me signals. It doesn’t mean anything anymore I give one example this year so 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. Look at that relative strength logo. This group is a disaster. OK. Trump’s making some noises about a price in the background but they clearly had chart patterns and relative patterns that suggest this group a real problem. They were the worst group of any follow.
From January to May and with no change in news and with no change in Trump narrative and if anything any acceleration theU.S. economy which should put them more toward the back of the bus than the front of the bus because they don’t need a strong economy. They have now been about the best route from May until now and I could give you 15 other examples and that’s the kind of stuff that didn’t used to happen. And that’s the major challenge. The owl goes for me. Now what you’re talking about now that that might be a challenge for society and the investing public in general. And yes I can get caught like anybody else. But yeah there’s probably some degree of having one foot out the door the other weather otherwise might not have. Because I do know this is in the background.
You do know though I read I skimmed the article but there was something in the paper about how we’re taking more measures to put in circuit breakers whatever they call those things to stop the phenomena you’re talking about doesn’t mean they will be effective.
So how are the Alagoas operating. Why are they distorting the price signals.
Well I just again tell you why it’s so challenging for me. I love my style it should build a thesis. Hopefully no one else has Bill you sort of put some positions on. And then when the thesis starts to evolve and people get on and you see the momentum start to change in your favor then you really go for it.
You pile into the pile on of the trade what foreign partners. George Soros was so good at and we call it if you follow baseball it’s a slugging precise as opposed to batting average.
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 you must tell them because you’re three austerity creations where he’s supposed to be they come in with these massive programs that go against the beginning of the trend. And if you really believe in yourself it’s an opportunity. But if you’re a guy that uses price signals and price action versus news it makes you question your scenario.
So they all have many many different schemes they use different factors that go in if there’s one thing I’ve learned 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 10 years ago they started trading on risk gone Roscoff and a lot of these algos are built on historical models. And I think a lot of factors are inappropriate because they’re missing. They’re in an old regime as opposed to a new regime. And the world keeps changing. But they are they’re very disruptive if price action versus news is a big part of your process like it is for me.
So how does that play out. Is this going to get worse or does it blow up. Do you see it.
I pray it blows up but I don’t see that happening because money managers are so bad I assume they’re going to outperform 90 to 95 percent of the money managers.
I think the you know I don’t know whether you read Kasparov’s book but he thinks like the ultimate chess player it’s not the machine it’s the machine with the man and his intuition using the machine that way. I think there’s always going to be five or ten maybe not a lot more humans. Who the best machine in the world. The Alpha go type thing will never be that human.
As long as he’s using the machine. And they they need to be used and they need to be understood. I can’t see me passing my money on a machine but I think I’d be an idiot not to know the effect these machines are having and frankly using them is just one more input that I didn’t have 20 or 30 years ago. But you gotta understand when the signals are real and when they’re driven by them and you’ve got to understand the time frames are using machines yourself I have money with a couple of machines.
It’s very small amount. It’s just enough money so they sent me signals when they think something dramatic is happening and I’m early enough on 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 going to happen they send me a notice and that’s to use a football term that’s under review.
I’m going to watch this for a year or two and see if they’re on to something or if they are and there seems to be correlations that have no make no sense. Yes. For example the R and B and gold are trading very closely. I mean it makes no sense. You know that’s very dangerous.
And even day to day there’s correlations that make no sense. It’s all messed up. My great hope is a we get out of this ridiculous monetary regime. And when we do things start to make sense again. I’ve always I’ve as you know maybe to a fault I’ve been a critic the new monetary regime which is very academically run and I’ve always thought part of capitalism was 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 going to 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. I don’t know that but that’s my intuition and I’m hoping that we go back to some sort of normal regime sometime in the next 20 years and then I’m hoping that the stuff you’re talking about at least diminishes greatly. But I don’t know Carol I just don’t know. Like everything else I’m open minded on it.
So a summer of 2017 there was a hope that Kevin Wirch might run the Fed. He worked for you for seven years. I met him he was against QE 2.
As you were as I was.
And unfortunately that didn’t happen. He worked for you for seven years so he still works for me. He still works. What a fantastic opportunity to have a Fed chair grounded in the real world for a while. So if you were running the Fed now what would you do. And I give the two challenges. You obviously know but for the audience if you if you don’t raise rates you know asset prices continue to build. What are your major points in the past has been the way you cause a deflation is to deflate an asset bubble that went too high. That’s been a major concern of yours and mine. On the other hand because of the enormous rise in debt 247 trillion ups 11 percent in the last year three times global GDP a lot of companies and countries would be bankrupt if interest rates go too high. Plus all the malinvestment that took place as funds were forced to lend money ridiculous rates. So how do we how do we regularize this is really a problem.
And you said on little care under the radar or whatever it is but in every private talk given for the last five years I’ve answered this question the same way but it’s a much much much more challenging situation than five years ago for the reasons you cite. One of the more incredibly revealing things Trump said when he went after the central bank is we shouldn’t be raising rates don’t they know we have all this debt to issue coming up. But it’s a chicken and the egg. The reason debt has exploded again there’s no hurdle rate for investment. And when you can borrow money at zero. Of course debt is going to explode.
So you’re exactly right. We have this massive debt problem. If we don’t normalize it’s going to accelerate and cause a bigger problem down the road. If we do normalize we’re going to have a problem. And unfortunately we’re going to have a much bigger problem than we would have had if we had normalized four or five years ago song and give you the same answer I gave a dinner four or five years ago. Is I would raise rates every meeting as long as I could. And the minute you got from Stansel 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 right. And what I was saying is just sneak one in every time you can just sneak one and they’ve passed stop on so many golden opportunities. But the problem now and you articulated it beautifully is now the debt is so much higher particularly in emerging markets than it was five years ago. You’re not going to be able to raise that much more and we’re already starting to see the consequences. But somehow if I’m reading them correctly which is not easy. They seem to have stumbled into what with Chairman Powell pretty much the formula I would be doing now although I wouldn’t be on this quarterly path.
It’s way too predictable which is as I’m reading them by the way other people with just as big brains are reading the opposite they’re going to go every opportunity they have until you have a dramatic tightening in financial conditions and because of the debt out there that’s how I would play it right now you can’t just say oh OK I’m going to three and a half for four.
No you just sneak one in. See if they handle it well when I say they handle it I’m not talking about a five or 10 percent correction.
I’m talking about the all all the various measures out there that we need to look at. That’s that’s what I would do. But but it’s just kind of ridiculous. With unemployment rate at 3 8 here and conditions where they are where are everywhere have rates at this level and probably the most egregious has been the ECB and one can’t even imagine the rot that must be in those banks from malinvestment. Well I remember back in 96 I think we were both in the same place that the contagion in emerging Asia.
And I was argued was going to spread to all emerging countries and they come back to the United States which it did but it fueled all that money came into the U.S. and fueled the U.S. bubble much worse than it would have been. So the question is if we keep raising rates is that same scenario going to happen putting our market more at risk of higher valuations.
I don’t think that last blastoff from the now stuff that was because of higher rates. I think it was because if you remember we cut in September of 98 then when the intermeeting cut in mid October.
And then with the market a new high Greenspan didn’t one final cut at the end of October and I remember having been bearish that summer and then doing an about face sinking. We don’t need to be easing. There’s nothing at all wrong with the American economy in this. This money is probably going to flow into the U.S. So I think the phenomena you describe has already been happening. So I think we’re somewhat well on the way it’s interesting you bring up that period because one of the more disturbing things that Paos said in Jackson Hole was his praising of Greenspan in the late 90s in my opinion. And by the way it’s all over the media what a genius he was for not hiking and letting that thing run my painting that was the original sin. When the Nasdaq went to 125 times during the dot com bust and then because of the dot com bust we offset that with the housing thing. So that started the whole thing. So I have a very you hate to have a different opinion with the central bank consensus because you’re not in charge of Central Bank. They are but. So no I think the phenomena you’re talking about is already happening.
That money is flowing in here and we have you know a practitioner’s basis we have a lottery ticket in Brazil and in South Africa because as we’ve seen back in the 90s and again now these things can move 50 60 percent and your risk is probably not much more than the carry. I don’t know whether I’m going to get paid.
But with the monetary tightening we’re kind of at that stage of the cycle where bombs are going off and until the bombs go off in the developed markets you would think the tightening would 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 that emerging markets because you had the double whammy.
A all the vanilla money managers poured money into the place. B You had no market constraints on the political actors. I mean the stuff that was going on even a year or two ago. I mean can you imagine that Argentina issues a hundred year debt. A hundred years is 7 percent I can’t even remember a government surviving for five or ten years much less on your ears.
So you get into a big task you’ve been right for the right reasons. How do you navigate the financial oligopolies that they are the profit machine that they are.
With what looks like a regulatory tidal wave coming at them and how do you decide when to get off that investment.
Perhaps I should have gotten off of a few weeks ago. Missed my window. Carol it’s hard to figure out I guess. Let’s just take Google OK which is the new bad boy and they’re really bad boy because they didn’t show up at the hearing having to share because they only want to send their lawyer. But it’s 20 times earnings.
It’s probably 15 times earnings after cash for let’s just say it’s 20 times or else. Forget all of that 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 and this stuff selling and 20 times earnings and you know they’re they’re the leaders in a high unquestioned leaders. There’s no one close. They look like they’re the leaders in driverless car. And then they just have this unbelievable search machine. And one gets emotional when they own stock. What I keep hearing about how horrible they are for consumers. I wish everyone that says it would have to use Yahoo’s search engine. I’m 65 and I’m not too clever once I hit the wrong button in my PC moves from me to Yahoo.
And Jerry Engs close friends say this but these things are so bad and to hear the woman from Denmark say that proved that Google is a monopoly and the iPhone’s don’t compete with Android is that everyone uses the Google search engine. It’s just nonsense. You’re one click away from entering or a search engine. I just I wish that woman would have to use a non Google search engine for a year. Okay fine you had Google don’t use the product because it’s a wonderful product. But clearly they are monopolies. Clearly there should be some regulation but it 20 times earnings and all that and a lot of bright prospects I can’t make myself sell them yet. Right now one thing the Chinese internets are proving. Outside of tents they’re just reminding us if and when we get in the bear market. It doesn’t matter what your fundamental earnings are. You could argue 10 cent OK there’s an air pocket in games and we all know what’s going on there. But Alibaba has beat every estimate. Just non-stop and the stock’s gone from 210 to 165. It’s just a reminder that all these estimates for the project out earnings three or four years from now and then they project price Cecile’s based on today’s price sales. You know some of these cloud companies are selling at 10 times sales if they’re selling at six times sales which is not crazy in a normal market. By the way only sings in three or four years. All the last Monday. So it’s a challenge. It’s a challenge. I completely missed Apple because I’m not really a value investor. And I just look at that enterprise. I don’t even think the phone is going to be the medium in 5 10 years. I don’t know it’s going to be in your contact plans or some hologram.
So I completely missed that when you worked with us for 12 years.
One of the things you said you’ve learned was to focus on capital preservation and taking a really big bet and that many money managers make all their money on two or three ideas and they have 40 stocks or 40 assets in their portfolio and asset concentration that has worked. Maybe you can go into that little bit more how that works how many of those concentrated bets did work when you decided to get out if it didn’t work. Do you add when momentum goes up assuming there are holographs interfere with it as the disclaimer.
If you’re going to make a bet like that it has to be in a very liquid market. Even better of a liquid market that trades 24 hours a day.
So most of those bets for me invariably end up being in the bomb in currency markets because I could change my mind. But I’ve seen like guys like Buffett and Carl Icahn do it in the equity markets. I’ve just never had the trust in my own analytical ability to go in an illiquid instrument which in equity is if you’re going to bet that kind of size on you just you just have to be right. And for all the hoopla aroundMr. Buffett from 98 to 2008 that’s a 10 year period. Berkshire Hathaway that was down 40 percent. Nobody talks about that. If you had a hedge fund you couldn’t have a hedge fund down for 10 years 40 percent they would about a business in year 3 4 somewhere in there. But to answer your question I’ll get a thesis and I don’t really I like to buy. Not in the zero inning and maybe not in the first day but no later than the second inning. And I don’t really want to pile on in the third or fourth or fifth inning. So I guess examples are the best one bet I made was which was the gift that kept on giving. It was after a funny incident with Soros. I had been there six months wasn’t clear who was running the fund. Well it was clear it was him. But he was trading very badly and I was trading very badly and I had come from our environment and modestly where people thought I was some kind of superstar and no one had ever questioned me. I flew to Pittsburgh because I had Duquesne at the same time and he blew out my bond position. I was on the plane. I’d had total autonomy anywhere I’ve been my whole career. So I basically called him up on a pay phone that’s used back then and resigned. When I came back he told me he was going to go to Eastern Europe for five months and that he wouldn’t be trading and maybe we were just in each other’s hair and he couldn’t have two cooks in the kitchen. And let’s see whether that was a problem or if I was really was inept. His words not mine.
So while he was in Eastern Europe the wall came down and I had a very very strong belief that Germans were obsessed with inflation. I know that most of them thought Hitler would never happen if the Weimar Republic thing happened.
And when the wall came down and it looks like they’re going to merge with East Germany the world’s thesis was this is going to be terrible for the deutsche mark my thesis was the Bundesbank is the most powerful institution in Germany. The public is obsessed with inflation and they will do whatever it takes on the rate side to keep that currency strong and there’s no way the Deutschmark it’s going down. In fact the place is going to grow like a weed with all those labor from Eastern Germany. So while it was gone this happened and the Deutschmark gets killed the first two days.
Now here we are in zero meaning and I went in very very big.
Right away because the market gave me an opportunity. I kept my what it was. I was down three or four points and I thought it should be up 10 percent. And then that of course led to this recurring devaluation started with Italy. But I was at the pound. Let’s not go over that. That’s been beat to death in Sweden. All these things we kept playing and they they’re going on and on but there is a case where we never really average stop. And in fact we couldn’t because we were dealing in those instances with fixed currencies so you don’t there’s no price momentum you’re not getting a break. But in the even against the dollar it’s all in right away. Normally I’ll wait for I’ll go in with say a third of a position and then wait for price confirmation and when I get that when I get a technical signal I go I had another very pleasant experience with the successor of the deutsche mark which was the euro I can’t remember I think it was 2014 when that thing was at 140.
And they went to negative interest rates. It was very clear they were going to trash the currency and the whole world was long the euro and it would go on for years.
I’d like to say I did it all at 139 and I did a whole lot but I got a lot more brave when I went through 135 and that that’s a more normal pattern for me than there would be this strange case of 2000 which is kind of my favorite and involves some kind of law I had quit quantum and Duquesne was down 15 percent and I had given up on the year and I went away for four months and I didn’t see a financial news paper saying the same thing.
So I come back to my astonishment the Nasdaq has rallied back almost to the high. But some other things have happened the price of oil has gone up the dollar has gone way up and interest 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 U.S. economy. So I then went about calling 50 of my clients. They stayed with me during my sabbatical who are all small businessmen.
I didn’t really have institutional clients I had all these little businessmen. And every one of them said their business was terrible. So I’m thinking this is interesting and the 2 year is yielding 6 so for now that I would remember and fed funds were six and a half. So I started buying very large positions in two and five yearU.S. Treasuries. Then I explained my thesis to Ed Hyman and I thought that was the end of it and three days later he’s run regression analysis with the dollar interest rates and oil what happens to S&P earnings. And it spit out a year later S&P earnings should be down 25 percent and the street had them up 18.
So I keep buying these treasuries and Greenspan keeps giving these hawkish speeches and they have a bias to tighten. I’m almost getting angry and every time he gives a speech I keep buying more and more and more. And that turned out to be one of the best that I ever made again. There was no price movement I just had such a fundamental belief so sometimes it’s price.
Sometimes it’s just such a belief from the fundamentals. But for me I have never trusted myself to go put 30 or 40 percent of my funds in an equity. I mean I did it when I was managing a hundred thousand dollars which was what I started with but not not an illiquid position.
One of the great things I understand you do is when you’ve had a down year. Normally fund managers who would want to get aggressive to win it back and which view you’ve told me you do. You take a lot of little bets that won’t hurt you until you get back to breakeven it makes a tremendous amount of sense. Maybe you could just explore that a little bit with me.
Yeah. One of the one of the lucky things was the way my industry prices is you price on and at the end of the year you take a percentage of whatever profit made for the year. So at the end of the year psychologically and financially you reset to zero last year. So profits are yesterday’s news. So I would always be a crazy person. When I was down every year. But I know because I like to gamble that in Las Vegas 90 percent of the people that go there lose and the odds are only 33 to 32 against you and most of the big game. So how can 90 percent 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. So and this is important because I don’t think anyone has ever said it before. One of my most important jobs 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 managing your money you must know whether you’re cold or hot. And in my opinion when you’re cold you should be trying for months you shouldn’t be swinging for the fences you’ve got to get back back in a rhythm. So that’s pretty much how I operated if I was down. I had not earned the right to play big and the little that you’re talking about were simply on to tell me had I reestablished a rhythm and was was I starting to make hits again. The example I gave you of the Treasury bet in 2000 is 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 you can’t sit there and go Oh well I have not earned the right now. I will also say. That was after a four month break right. My mind was fresh my mind was clean and I will go to my grave believing if I hadn’t taken that sabbatical I would have never seen that in September and I would have never made that bet.
It’s because I had been freed up and I didn’t need to be hitting singles because I came back and it was clear and I was fresh and so that’s kind of what it was like the beginning of the season. So I was I wasn’t hitting bad yet. I had flesh that all out. But it is really really important. If you’re a money manager to know when you’re seeing the ball a huge function of success or failure.
So when you made that trade you just described there was a huge amount of conviction and an historical proof that this had always worked. So today as we look at theU.S. equity market that’s gone up for almost 10 straight years and our performance has been dramatic.
What would you need to see to give you the conviction to want to go short.
Well unfortunately I have gone short several times this year and at least some alive. But I regret having news so I looked seasonals in July August and I looked at the background. I had no press for a balance sheet rate of change going down a trillion dollars from where it began.
But that gave me the conviction to go short on top of the fact that seasonally I had a trustee period that also sort of rhymed with right when the slope of the curve of the QE was shrinking.
It didn’t work. I got a bloody nose and you know I’m now contemplating my future.
But everything for me has never been about earnings. It’s never been about politics. It’s always about liquidity right. And my assumption is one of these hikes.
I don’t know which one is it’s going to trigger this thing. And I am on triple red alert because we’re not only in the timeframe we’re in the part and maybe markets don’t anticipate the way they used to.
I thought markets would anticipate there’s no more Euro ECB money spilling over into theU.S. equity market at the end of the year. So this is a good time to take a shot. Clearly it wasn’t. If we get a blow off in the fourth quarter which seasonally tends to happen particularly in Aztec markets particularly if these bombs keep going off in emerging markets I could see myself taking a big shot somewhere around year end.
But you know that’s a long way off. I’ll cross that bridge when I come to it right now I’m just licking my wounds from the last shot I took. Well we have Gigi’s which are the most amazing vehicle back in.
The late 90’s. Everybody’s favorite short was ATPs.
And I think I’ve finally jumped on the bandwagon at one point but the thought was that the KGB was the outlier.
But the JTB was really the leader absolutely that was that was what we all missed but then we figured that out. So we got to minus 30. I think on a ten year on the JJB which I thought had to be short but it would have been used a year or two ago I would have been dead money.
Now it looks like yields are breaking out of the GGP. I don’t know if you agree with that. It looks like something is going on Corona’s excepting perhaps that it’s not working and they need to change and them having been the most egregious have all the central banks. Is that a really important change for the world.
It’s part of the puzzle. I’m talking about. And then I would self I don’t know quite since it looks like it could be happening by the end of the year if not sooner. And it looks like at the same time the ECB will stop buying bonds. It looks like at the same time will be shrinking our balance sheet 50 billion a month.
It’s an important. All these pieces fit together for a reckoning. I’m not in the business of making a fortune. If something goes from 10 basis points 20 basis points that really that’s not something I’m going to make a big bet on.
I mean I might I was short on use myself for something right. But I do think it’s very important in terms of this overall narrative. It’s also instructive why they’re doing it right because it looks like my they’re not doing it for economic reasons. They finally understand that it’s killing their banks which is the blood and the oxygen you need to run the economic body right. And that’s causing a political problem. I sure hope we don’t need 25 years of that kind of evidence before we normalize. But Carol I think it’s very important. But only as a piece in an overall puzzle. They’re all in the same direction which is why I made the bet short in July and what you know was wrong at least on a trading basis. But psychologically I’m still there. It’s going to be the shrinkage of liquidity that triggers this thing and frankly it’s already triggered it in emerging markets. And that’s kind of where it always starts where I haven’t seen it and where I think should happen for the equity.
And God knows. Talk about a crazy price market as the credit market. And it’s amazing that probably since the 80s 80s 90s this is the most disruptive economic period in history.
Now there’s hardly any bankruptcies. So whatever that buffet line about swimming naked with the tide there’s probably so many zombies swimming out there and there’s going to be some level of liquidity that triggers it. Who knows it might start with Tesla. I don’t know but it’s I mean could this test for thing have happened in any other environment in history. I don’t think so. It’s just ridiculous what’s going on there in the last few weeks. But I don’t look at it so much as Tesla it just describes the environment.
To me it’s not at all the malinvestment and the trillions of dollars that were spent without a cash return. And you just can’t imagine how many zombies there really are out there and the corporations buying back that stock to five trillion running down their balance sheets. Then you go to the high yield market where it’s covenant light and huge amount of issuance. What happens when interest rates start to reflect credit risk.
You know intuitively you can make a case that we’re going to have a financial crisis bigger than the last one because all they did was triple down on what my opinion caused it.
BERNANKE I have a big disagreement over what caused the crisis but to me the seeds of it were born in 0 3 when we had 9 percent nominal growth in the fourth quarter and we had 1 percent rate which wasn’t even enough.
He had that stupid considerable period thing attached to it. And you had serious serious malinvestment for three or four years. Subprime was pretty easy to identify if you had the right people showing you which I was lucky enough to have had them come in.
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 I do know. 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.
So I had to solve the problem of debt with more debt. Exactly which is what we did in the 20s and that didn’t work out with Wall Street just cheering them on.
Cheering them on.
Well we’ve got this huge entitlement issue which you’ve written a lot about 100 trillion of unfunded liabilities. Medicare Medicaid Social Security five timesU.S. GDP just as bad in the rest of the world. Worst demographics in 500 years. Dependency ratios are rising. You’re going to have a battle between creditors and debtors at some point. Up to now the creditors have been winning but they’re starting to lose lose a couple. And when that plays out we’re going to have some really tough times. Which brings me to this whole idea of populism and I want to kind of bring them all together so I started following populism back in 2011 that’s when I felt it was coming down we had Brazil.
I came back from Beijing October 2012 and it was clear to me that the new leadership we didn’t know about Xi 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 a given.
Give a little bit now rather than a lot later. Having studied French and Russian Lucian’s N14 America that that didn’t happen. So it’s just gotten more wealth disparity. So populism some people think is represented by Trump. And other people have different theories. My feeling is populism is really about wealth divide and an unequal sharing economy. So for 30 years the worker didn’t get a real wage increase. Now he’s starting to get some of it but he’s being taken away through higher cost of living. So when you look at this whole debt situation we also have to look at it in the context of Hockfield sentiment and creditor creditor versus debtor. And I may be ahead of myself here but how do you how do you see all of that working out.
First of all I think you nailed the cause of it because the previous populous 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 fix system as a percentage of the profits and the range 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 success of has been QE. It’s not even like that datable. And then you have the internet broadcasting. This disparity through millions of bits of information on an ongoing basis. 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 one that is worth more than 150 billion dollars. I mean how does that how does a normal Sideris and look at that and even contemplated. So I think that is the seed of it. It’s not some economic malaise. It’s it’s the disparity the disparity. It has never been worse. And probably one of the most disturbing books I’ve ever read was Charles Murray’s coming apart. Yes. And I read that and I said oh my god this is going to get worse and it can’t stop. It’s just built into the system. The irony being what really set it off as when these universes became meritocracies said an old boy network and then you sort of have inbreeding between the men and the women going to Harvard and they all live in the same zip codes. I’m looking at this and going oh my god this is my family. And you know it comes home so I don’t see what stops this until you end up with some major major dislocations politically and economically because you know the Trump comment is interesting because had Bernie Sanders won the nomination. Every poll that spring had Hillary running about even with Trump just no one believed that they all had Bernie Sanders 18 points ahead of Trump and Bernie Sanders was not losing Michigan and Pennsylvania in June as they say. And Bernie Sanders was also a populous. So I agree with you it’s not about Trump. Trump is clearly a populist Don’t get me wrong. Yeah but in the and it’s too global and it’s happening everywhere and McCrone was probably 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 and you wonder why they’re surprised anymore.
Well you know my theory on Bernie Sanders is that he was they use sort of internal politics to deny him the nomination that he should have won and had he won the nomination he would have beaten Trump. So we would have had that shift already.
This leads me to the what’s going on now and that is America’s shift towards nationalism at least under trump the rest of the world is focusing on maintaining multilateral alignments. Japan just signed the biggest trade free trade deal with you. Mexico has TPP is powering ahead. We have the China’s One Belt. There’s a lot of controversy about it but I think it’s a tremendous issue and I think it’s real and I understand why they’re doing it. Yes which is destined to win in the end the answer is I don’t know.
Probably the most destructive thing Trump has done in the global trading system. Once he figured out how powerful a weaponU.S. banking system was and how powerful sanctions are but he doesn’t understand that that weapon was created and is so powerful because from the Marshall Plan on we have been the only country that all the others no matter how they might badmouthed those that trusted to do the right thing where we’re the only nation in history that handled success the way we did.
And yes you should use this weapon once in a while but when you start shooting it all over the place and you’re now shooting at it you know it can have a Europe and here there that’s a lot different than shooting at Iran or Russia. Exactly. And he’s like a little kid that found this water gun and his registering on going all over the place with it.
And the biggest danger I see is we lose that trust that America is good. And in the end they’re going to do the right thing. I don’t think it can be lost in four years. I really don’t. But if Trump is reelected or maybe even worse if another populist on the very hard left is reelected. And they they used the weapon the same way I think by 24 which by the way is exactly when the Titelman thing will start to get crazy. This thing could be very bad. I’m quite open minded let’s see who the Democrats put up. Let’s see if Trump’s in office. But I don’t think the world will give up on us in four years. I think I’m open minded to Trump having been a one off and the trade system can survive this. Right. But. It’s it’s not like that’s an 80 percent probability. So it’s probably somewhere between 40 and 55. That it works out. It’s sad.
For sure the whole supply chain issue is phenomenally interesting and complicated and I’m concerned that the administration doesn’t understand the complexities of it by trying to pull out all of the sensitive components from China and relocate them to theU.S. or to Vietnam or whoever else is so immensely disruptive and dangerous. And then you start a process. So it was during the worst part worst part of the first meetings between the Chinese the Americans. I was in Beijing I was also in South Korea and I met with Samsung. And already China was moving very aggressively to create its own semiconductor industry was investing 150 billion which of course has ramped up ten times faster. And I asked them some what are you going to do with the Americans forbade you to sell semiconductors. Would you continue to do so. And I was told that they would but they would also help China build its own industry even though it was going to cannibalize. So I see these trends that are taking place that won’t be reversed. And Europe which would normally be an ally of America to try to hold back China’s advances is now being forced more towards China. And these aren’t things that are going to shift back because once you start to take these positions is really you’re not going to reverse yourself.
I agree with you on the semiconductors and again emphasize which talked about earlier which is sort of now policies. Even if they worked and I can make an argument that it won’t even work because of this disrupts supply chains everything’s going to blow up. But you’ve now you’ve absolutely put in force the creation of a Chinese semiconductor industry that didn’t need to happen in that time frame that’s going to happen. I think there’s been enough frustration with the Chinese that the Europeans could look at this as a one off and be right back with our allies as our allies again. But no you’re right. There are a lot of other things that are set in force that we’re not going back to an I think 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 whether that should be done if you want to take on China. You can do it with the United Front you don’t do it by alienating all your partners.
As the process gets underway especially when theU.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.
Full employment and I mean I if we’re in a recession I think could go to two trillion in a heartbeat. That’s when deficits explode.
Sorry to interrupt if we have a recession. I think we’re rolling over. If I remember correctly something like 10 trillion of nominal and knew each.
Each year we sold 130 billion in July which is a record since 2000 8 0 9. And so the holders of our debt are the very people that were having a trade war seems a little ironic to me is one of is you know. So let’s move over to your philanthropy and your passions there and what you’re most interested in and what’s happening that’s exciting you and your neuroscience and stem cell work.
In general Fiona and I didn’t want to give 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 and so are our big areas.
And I’ll get to your question specifically we’re at risk youth education the environment and health and the neuroscience and the stem cell are both Fiona’s original idea not mine. 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 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. Great advances going to be made not dissimilar are what started going on with cancer seven or ten years ago.
So that’s pretty much the thought on neuroscience and stem cells.
We’ve not anonymously we’ve we’ve funded the neuroscience center and obviously NYU and a lot of the basic research. And we’ve also funded anonymously some of the more applied research at other institutions but we find them both very exciting. NYU seemed like the perfect place because they have a great aggressive leader. And Bob Grossman that’s sort of a necessary requirement of anything we invest in. I mean I don’t think it’s an accident that that place is gone from like 40 to third in medical school rankings since Langone got involved and brought Grossman is just ridiculous. I mean the only people that have now are Harvard and Johns Hopkins. And I think they were considered average as late as 15 years ago. And then of course stem cells are another great hope in all these areas.
And I know Fiona was very enthralled with Susan Solomon and what they were creating and the bang for their buck. So in both cases we went for an area that we thought showed great potential in terms of progress. And we picked institutions which we thought with very strong innovative leaders who could who could execute on that proposition. Frankly if some other institution solves the problem I’ll be thrilled. I don’t really care.
I’m sure you saw what NYU did with the medical school. I would also be while it wouldn’t be the greatest outcome for NYU. I think even the people who run the NYU are Doraine would be that starts an arms race because that brain drain. Going out of medicine into 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 30s and they got five hundred thousand in debt. And you can be making two or three million a year in my business with a lot less preparation at the age of 27 or 28. So I really hope Harvard with their 40 billion endowment or whatever it is and the others decide that they can’t they can’t let you just grab all the great medical students. So in terms of defeating Alzheimer’s and dementia have you gotten far enough along to know what.
What the formula is to try it out.
Yeah I have. There’s all sorts of theories out there.
Some of the drugs right now that that attack amyloid. I know. I mean I know Biogen had a resurgence in this company we actually own in Switzerland called on those drugs will be a bridge the ultimate solution I think would have to be something different. And Fiona knows a lot more on the subject than me. She’s pretty optimistic that they’re going to solve this thing in 20 years.
More and more of our friends are showing up with dementia even at young ages. Yeah and you watch how debilitating it is and it’s incredibly depressing.
We’ve seen it. It didn’t happen before we started neuroscience but we’ve seen it up close and personal and it’s tragic just trudge very very very painful really hoping and even though you’re seeing it in younger ages we’re all living longer. So it’s manifesting itself more and more just simply because humans are living two agencies two in every part of the body has seemed to have kept up with the progress except the brain. What are be doing brain transpire. So we’ve got to fix this directly.
How would you like to be remembered. What’s the most important thing. And the back in your life is this is how I want people remember me.
I don’t know how important that is to me. But since you asked that question I just. I’ve been so blessed to be in an industry which is crazy financial renumeration out to society’s benefits and obviously I was given a gift.
I was a good student. But there were certainly smarter kids than me. I just have a gift of compounding money. I’d like to think that I made a difference with that and I guess have people remembering things I’d like to be remembering was not some loud Ostentatious overly consumptive person in the mean. But I think thank God I married Fiona because she wasn’t from a lot of money but she had old money. She taught me to behave in a way I probably wouldn’t. From the get go when I see some of my peers and I’d like to avoid that stamp. Sure. Now we have a president who seems to see that culture just so I guess that would be just that. I made a difference and lose at least a life with some humility.
Surely have and I think you can help a lot of people with your insights today. Thank you very much for joining us here giving us your time fun. It was really a lot of fun.
OK thank you Stan Druckenmiller is the most requested guest in the history of Real Vision.
Myself included. We all wanted to see and learn how he does things because his track record is extraordinary and the brilliance of the man is something that doesn’t come across enough in television because there’s never an in-depth interview. You just don’t know that much about him. But I’m so pleased that Keiro managed to flesh out what makes Stan Stan what makes him think in how he does things. There is so much learning for all of us in this and it’s truly an honor for us to have had Carol conduct an interview. And I really hope you enjoyed it as much as I did. And I cannot wait to say also who Carol brings next to real vision. It’s going to be somebody legendry.
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