“I’m not predicting a crash, I’m just saying the risk reward of going early (Fed raising rates) is better than going late.” - Stan Druckenmiller
I spent 45 minutes this morning watching the Bloomberg interview with Stan Druckenmiller. I had a number of other things to share with you today, gathered over the course of the week, but they have been moved to the backseat. Put Druckenmiller’s comments in the important category. Often gruff, I enjoy his clear and candid way.
Outperforming Warren Buffett (Trades, Portfolio) and most everyone else, Stan’s track record is reported to be 30% per year for 30 years (with never a down year). Let’s just say we should be interested in what he has to say.
I share my notes from the interview below but I encourage you to find some down time, grab a coffee, and watch the first 40 minutes of the interview. Additionally, you’ll see that the interview references a private presentation Stan made in January at a Ken Langone (Home Depot founder and frequent CNBC guest) sponsored event. Someone recorded the presentation and titled it “The Speech at the Lost Tree Club”. It is worth the read. You’ll find the link below.
You and I are in a tough business. It is based on probabilities and involves imperfection. The mismatch between customer expectations and practical reality is challenging. Art Cashin said, “That to survive 50 years in this business, you learn that the first thing you do when you enter a room is look for the exit sign.” It is with this thinking, along with Druckenmiller’s material, that I also share a great (short) piece on investing and risk from Ned Davis. Another grateful nod to NDR for allowing me to share it with you.
I hope you find the material helpful.
Included in this week’s On My Radar:
- Notes From the Bloomberg Druckenmiller Interview
- Speech at Lost Tree Club
Notes From the Bloomberg Druckenmiller Interview
He feels much like he did in 2004 and is more worried about looking down the road than the near term.
He sees no reason for zero interest rates:
- Why does the economy need extraordinary help.
- Retail sales are at an all-time high.
- Everything is booming except corporate capital reinvestment. That money is going into share buy backs and dividend payouts.
On where the Fed funds rate should be:
- In 2009, the Fed came up with a new version of the Taylor Rule. It said then that rates should be a -4%. Instead the Fed chose QE.
- Today that version of the Taylor Rule says that Fed funds rate should be 3 ½ %.
- If you use the traditional Taylor Rule, which said in 2009 rates should be -1%, today’s rates should be at 1.75%.
- We remain at 0%. Why?
- Strongly noting: The time has come to get us off the juice.
Every month that goes by we have more and more financial engineering. We are borrowing to buy stocks.
Stan’s fear is we won’t see a cut for 1.5 years. No confidence there will be rate hikes in June, September or by year-end.
- We’ve already met the metrics they set out.
- If you wait, the risk is worse.
- It’s a pay me know or pay me later scenario.
He is not predicting a crash or predicting doom. He is saying that as someone who practices risk reward for a living, the risk reward of the Fed moving early is better than moving late.
He was asked about Ray Dalio (Trades, Portfolio)’s belief that we are seeing 1937 happening all over again. Duckenmiller disagrees stating the two periods are quite different:
- In 1937, stock prices and household net worth were 20% below where they were in 1929.
- Today we are at new highs in stock prices and household net worth.
- From 1929 – 1937 we had a cumulative 18% deflation.
- From 2007 to now we’ve had a cumulative 16% inflation and the Fed’s favorite measure of inflation has never been below 1% since 2007.
- Unemployment was over 14% in 1937. It is currently 5.5% today.
On deleveraging he answers that there is NO deleveraging. We have re-leveraged from an already high 2008 level. World debt has grown $57 trillion – McKinsey Report.
- In 2000: World Debt to GDP was 245%
- In 2007: World Debt to GDP was 269%
- Today World Debt to GDP is 290%
- We are doubling down in terms of debt.
He was asked about corporate credit – the host speaking favorably about corporate balance sheets. Druckenmiller responds with a firm NO and adds:
- Corporate credit in 2007 was $3.5 trillion and is now $7 trillion
- We are not talking about good quality debt here
- High yield loans in 2007 were $800 billion and are $1.4 trillion now
- Covenant lite loans which were $100 billion then are $500 billion now at a $300 billion run rate
- 28% of debt back then was B rated. Now 71% is B rated
- The risk of a credit event is extremely high
His style of investing is he can change his portfolio within 24 hours.
Something he learned from George Soros (Trades, Portfolio): When you see it, bet big.
Big bets he sees today:
continue reading: http://www.cmgwealth.com/ri/on-my-radar-the-speech-at-lost-tree-club/
