"Business Insider" has an interview/speech from The Felder Report with
the very successful investor, Stanley Druckenmiller. Here are some of
his opinions. They are surprising, at least. But they are also a year
old. What is interesting is that the consensus has unchanged but the prophesies have not come true.
“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” Interestingly, his further point in this regard was not the popular, “don’t fight the Fed.” In fact, it was just the opposite:
“80% of the big, big money we made was in bear markets and equities because crazy things were going on in response to what I would call central bank mistakes during that 30-year period.” He goes on to cite a specific time when the Fed made perhaps its most egregious error which led to some of the greatest profit opportunities of his career:
“Probably in my mind the poster child for a central bank mistake was actually the U.S. Federal Reserve in 2003 and 2004… we had great conviction that the Federal Reserve was making a mistake with way too loose monetary policy.” And “Too loose monetary policy” has severe repercussions:
“The problem with this is when you have zero money for so long, the marginal benefits you get through consumption greatly diminish, but there’s one thing that doesn’t diminish, which is unintended consequences.” What’s more, he says it’s happening again today:
“So that’s why, if you look at today… I’m experiencing a very strong sense of deja vu… If you look to me at the real root cause of the financial crisis, we’re doubling down. Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there and enabled those bad actors to do what they do.” The trouble is we only discover the consequences once it’s too late for the Fed to really do anything about it:
“I feel more like it was in ’04 where every bone in my body said this is a bad risk reward, but I can’t figure out how it’s going to end. I just know it’s going to end badly and a year and a half later we figure out it was housing and subprime. I feel the same way now.”
It could be even worse this time because the policies are that much more aggressive than they were back then:
“This is the first time in 102 years, A, the central bank bought bonds and, B, that we’ve had zero interest rates and we’ve had them for five or six years… To me it’s incredible.”
More aggressive policy creates even bigger potential problems:
“There are early signs… In 2006 and 2007, which I think most of us would agree was not a down period in terms of speculation, corporations issued $700 billion in debt over that two-year period. In 2013 and 2014 they’ve already issued $1.1 trillion in debt. 50% more than they did in the ’06, ’07 period over the same time period. But more disturbing to me if you look at the debt that is being issued in the last two years back in 0’6, ’07 28% of that debt was B rated. Today 71% of the debt that’s been issued in the last 2 years is B rated. So, not only have we issued a lot more debt, we’re doing so at much less standards.”
As a reminder, these are the words of the greatest money manager alive today. Since he gave this speech almost a year ago the corporate bond market has deteriorated significantly. And I’m fairly certain he doesn’t see the junk rout as being contained.
So how is Druckenmiller positioning himself to deal with the consequences of another “central bank mistake”? He recently made a massive bet on gold.
“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” Interestingly, his further point in this regard was not the popular, “don’t fight the Fed.” In fact, it was just the opposite:
“80% of the big, big money we made was in bear markets and equities because crazy things were going on in response to what I would call central bank mistakes during that 30-year period.” He goes on to cite a specific time when the Fed made perhaps its most egregious error which led to some of the greatest profit opportunities of his career:
“Probably in my mind the poster child for a central bank mistake was actually the U.S. Federal Reserve in 2003 and 2004… we had great conviction that the Federal Reserve was making a mistake with way too loose monetary policy.” And “Too loose monetary policy” has severe repercussions:
“The problem with this is when you have zero money for so long, the marginal benefits you get through consumption greatly diminish, but there’s one thing that doesn’t diminish, which is unintended consequences.” What’s more, he says it’s happening again today:
“So that’s why, if you look at today… I’m experiencing a very strong sense of deja vu… If you look to me at the real root cause of the financial crisis, we’re doubling down. Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there and enabled those bad actors to do what they do.” The trouble is we only discover the consequences once it’s too late for the Fed to really do anything about it:
“I feel more like it was in ’04 where every bone in my body said this is a bad risk reward, but I can’t figure out how it’s going to end. I just know it’s going to end badly and a year and a half later we figure out it was housing and subprime. I feel the same way now.”
It could be even worse this time because the policies are that much more aggressive than they were back then:
“This is the first time in 102 years, A, the central bank bought bonds and, B, that we’ve had zero interest rates and we’ve had them for five or six years… To me it’s incredible.”
More aggressive policy creates even bigger potential problems:
“There are early signs… In 2006 and 2007, which I think most of us would agree was not a down period in terms of speculation, corporations issued $700 billion in debt over that two-year period. In 2013 and 2014 they’ve already issued $1.1 trillion in debt. 50% more than they did in the ’06, ’07 period over the same time period. But more disturbing to me if you look at the debt that is being issued in the last two years back in 0’6, ’07 28% of that debt was B rated. Today 71% of the debt that’s been issued in the last 2 years is B rated. So, not only have we issued a lot more debt, we’re doing so at much less standards.”
As a reminder, these are the words of the greatest money manager alive today. Since he gave this speech almost a year ago the corporate bond market has deteriorated significantly. And I’m fairly certain he doesn’t see the junk rout as being contained.
So how is Druckenmiller positioning himself to deal with the consequences of another “central bank mistake”? He recently made a massive bet on gold.
No comments:
Post a Comment