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Druckenmiller: Storm worse than '08 coming as seniors steal from youth

March 01, 2013 | About:
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Hedge fund icon Stanley Druckenmiller sat down for a rare one-on-one interview with Bloomberg Television's Stephanie Ruhle, saying that he’s decided to speak out now because he sees "a storm coming, maybe bigger than the storm we had in 2008, 2010."

Druckenmiller said that the mushrooming costs of Social Security, Medicare and Medicaid, with unfunded liabilities as high as $211 trillion, will bankrupt the nation's youth an pose a much greater danger than the debt currently being debated in Congress. He said, "While everybody is focusing on the here and now, there's a much, much bigger storm that's about to hit…I am not against seniors. What I am against is current seniors stealing from future seniors."

Tune in for the interview at 10 am on "Market Makers." Full transcript available upon request. Video for viewing and embedding here:



Druckenmiller on why he's speaking out now:

"I see a storm coming, maybe bigger than the storm we had in 2008, 2010. And really, the reason could happen without people looking as for a lot of similar reasons that we could get into. But the basic the basic story is, the demographic bubble I was looking at way back in '94 that started in 2011, we are right at the first ramp-up of this thing that is about to hit."

On U.S. demographics:

"Something remarkable has occurred since 1994 until now, which is entitlement spending, or let me say transfer payments to be a little more correct. Transfer payments which were 28% and 60, and were 50% when we were in the budget mess in '94. Lo and behold, they've gone up to 67% of government outlays. But they haven't gone up because of demographics. They've gone up because the seniors have a very, very powerful lobby. They keep getting more and more transfer payments from the youth.But the demographic storm is just starting now. It reminds me of '05 when people just extrapolated housing prices going up for 50 years…Everyone sorta lives with their rulers in the past and doesn't look at coming changes. So what's going to happen is we now have a working population, this is the way entitlements work, where the current workforce is paying for the benefits of the seniors. And since 2000, we've had about 4.5 to 4.8 workers for every retiree. By 2050, that number will drop to 2.4 workers per retiree. Another catchy way to say it is by 2030, the average population of the United States is gonna be older than the average Floridian right now."

On who is going to stop seniors from stealing from the next generation:

"You asked me why I'm here. And I think people like me and others need to speak out. It's about the future, not about the present where the problem is. And let me just say one thing. I am not against seniors, okay. I love seniors. Unfortunately I'm going to be one in the not-too-distant future. What I am against is current seniors to me stealing from future seniors."

On who should be blamed for hurting the economy:

"It's hard to tell who's going to be blamed-- if we don't act and this occurs…There's plenty of blame to go around. If I had to analyze how do we get into the financial crisis, I would say it started way back in the '90s when then-Chairman Greenspan refused to address the dot-com bubble, came up with some new theory of productivity and therefore we're not going to have a problem, so all these NASDAQ companies who were never going to earn money went to hundreds-of-times earnings and then of course, we had a major bust. And instead of taking a recession and having the cleanup…they needed an offset. So they created the housing bubble. So now by hindsight, everybody says, 'Well, you had these horrible Wall Street actors,' and I'm sure there were quite a few horrible Wall Street actors. And I don't doubt that they were part of the problem. In fact, I know they were part of the problem. But I also know it was negative real interest rates for 12 outta 20 years that enabled these actors to do the things they were doing and incented, yes, incented them to go out and gamble the way they were gambling."

On gridlock in Washington:

"I'm pretty frustrated. This sequester thing-- if you just look at how it came about, first of all, every five minutes all the suffering and all this horrible stuff is going to happen in various sectors if this goes through. But there's three things that are not on the table in the sequester. I know you're gonna be shocked by this. Medicare, social security and Medicaid, okay."

On why Medicare, Medicaid and Social Security are not on the table:

"I'm sure it's because of short-term politics. The problem with politicians is, they really only do have a four-year life cycle. The rest of us should have the responsibility to look a little further than that ahead. But yeah, I don't know whether 'mad' is the word. I'm extremely frustrated by their refusal to deal with this problem. And the sequester thing, I think the president made a deal. It was a deal so they would extend the debt ceiling, which they did, all right. I am very much for tax reform. But I don't think it should be part of this particular thing and we should be parading out the crowd we'd been parading about to say how horrible this is going to affect the economy. Let me tell ya, I don't know what the economy's going to do. But it's just a little ridiculous to say a $600 billion tax increase over ten years and $150 billion increase in the payroll tax is going to have no affect on the economy. But an $85 billion cut in discretionary spending is going to tank the economy? If the economy were to soften, I can tell you it won't be because it will not be because of this $85 billion."

On why he doesn't become a policymaker:

"Because my wife loves New York and I love my wife."

On equities vs. bonds:

"One of the things that is kinda one of my pet peeves is hearing all these people on TV say, 'Well, you gotta go into equities 'cause they're so cheap relative to bonds and there's no other game in town.' They are cheap relative to bonds. But everything is cheap relative to bonds…So just because equities are cheap relative to bonds doesn't mean their price isn't subsidized. I'm not making a forecast here because the subsidization could go on for a long time. But real estate, gold, equities, they're all priced off of ZIRP, zero interest rates, and they're all subsidized."

On whether the hedge fund industry could be in hot water 12-24 months from now and become even further consolidated:

"Oh, I don't know. I think the hedge fund's short-term thinking is just a manifestation of our entire society. Whether it's the fed or whether it's-- the administration or whether it's Congress, no one bothers to think about the long term anymore. And the hedge funds are just one more manifestation of that."

On where investors should put their money right now:

"That's hard for me to answer. Because I have the luxury of a lot of experience in sitting in front of a screen. And I can go into currency markets where it's at a relative price. So it's the one area where prices aren't subsidized. And I'm arrogant enough to think I can time these things. But I don't really know how to answer that question for public invest-- but let me just say that this idea that you've got go plowing into risk because rates are zero, that they will rue the day one day. The music will stop. And I would probably be invested right now thinking I'm smart enough to know that we're quite away from the music stopping. I don't think Bernanke is about to end these policies for a while. But let's just know what we're dealing with here."

On whether there needs to be more consolidation in the banking industry:

"I'd like to see them be more like utilities. I could care less whether they make money, unless I happen to own equities in it. But if we're talking about as a United States citizen--I have no problem with banks being utilities and going back to what banks used to do…"

On whether banks should just be making loans:

"Yeah."

On whether the most sophisticated bankers should work at hedge funds, not on sell-side trading desks:

"You said it, Stephanie, not me."

On what his future looks like:

"I'm probably going to disappear again at some point. But in the meantime, I'm gonna do what I can to try and bring the awareness of this issue out because with respected economists, again, focusing on a little problem over here when you've got this big problem over here, I think the message needs to be out there."

On whether he'll start tweeting:

"No tweeting for me."

**CREDIT: BLOOMBERG TELEVISION**

Rating: 4.7/5 (7 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
The reality is that tomorrow's seniors and beneficiaries will receive less. That will happen in the USA and steps have already been instituted in my own country of Canada to ensure seniors will receive less here too.

Now consider this: Just as the shopkeeper doesn't turn away a teenager because that teen received an unearned allowance from his or her parents, the shopkeeper doesn't turn away an entitlement beneficiary because he or she received a payment from the government - he transacts with that beneficiary. Money doesn't vanish, money doesn't stop, money circulates.

Moreover money paid to the most needy in society circulates at a high velocity with little international leakage. You won't see many seniors going out and buying Audis, Mercedes, Lexus, etc with their pension cheques. (Tomorrow's youth may be robbed of a chance to ship or take a good portion of their hard earned income abroad as they buy foreign made electronics or travel the world just as past youth have done so. Meanwhile, their grandparents will be creating jobs through their spending.)

It's more of a question of efficient capital allocation. Who won't be saving and investing because of higher taxes, who will be spending because of higher taxes. Proper capital allocation to worthy participants takes the capital and returns greater value than received. Big chunks of current society don't do that now. The seniors won't do that, they will just spend it - but they will spend it locally, and create jobs locally and not at some tropical beach resort.

Is that so bad or unusual? In a few short years the tech boom of the 1990s redistributed hundreds of billions of dollars to unworthy younger programmers and games makers that returned less than received, and society suvived. In a few short years the middle east wars redistributed hundreds of billions of dollars to unworthy participants of all stripes, and society survived. In a few short years, the credit boom of the 2000s redistributed hundreds of billions of dollars to unworthy bankers and home builders and society survived. So will redistributing trillions not over a few years but over several decades - to your parents and grandparents - destroy society? I doubt it. The grandchildren might do very well in life bringing better health, better technologies, better services to that older generation.

People forget that in the late 1940s, the 1950s and the early 1960s, the birth and raising of those very same baby boomers created a major disruption to society and its finances requiring more hospitals and more health care workers, more pediatricians, more nursery schools, more elementary schools, more teachers, and on, and on, and on... Society has been on this demographic ride before.

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