Discover more from Tidal Wave
Transcript: Druckenmiller [April 2023]
This is a lightly edited transcription of the interview that Druckenmiller did at Norges Bank's Annual Investment Conference on April 24, 2023. The video for the talk can be found here for reference (h/t to adrivalue), the emphasis below is mine.
Interviewer: So when you put your investing hat on, what's at the top of your mind?
Druckenmiller: I would guess the top of my mind is just how uncertain for me trying to analyze the environment is going forward. I've been doing this for 45 years. I've studied a lot of economic history, but I've never had a situation where you had free money for 11 years, a very broad asset bubble followed by jacking up rates 500 basis points in 12 months.
So for someone like me who likes to look at history and come up with potential scenarios. This is a particularly difficult period. Two years ago wasn't so difficult when you had two years at 15 basis points and money's probably growing at 30. It didn't take a genius to figure out that was a good risk-reward.
These days things are a lot more complicated, but you just mentioned about everything on our mind; generative AI, inflation, asset bubbles, currencies, all the stuff we usually think about.
Interviewer: So, so how do you navigate it then?
Druckenmiller: Well, luckily I don't have any clients, so I don't have, uh,
Interviewer: You see, I have one client and it's pretty big...
Druckenmiller: It's really big. I don't have to, I don't feel performance pressure. So historically I deal in five or six asset buckets, which tends to keep me out of trouble in terms of playing in an area where I shouldn't be playing at a particular time.
And I think it's one of the most important things to do is not to play when you don't see a fat pitch. I don't see a fat pitch. In fixed income is extremely complicated because I'm in the hard landing camp. Probably be sometime later this year.
But again, this is so complicated. I'm not willing to place a big bet and even if I believe in a hard landing, which I do, what do you do with two-year Treasuries at sub-4% with Fed Funds at five and a quarter, I better be right on my hard landing if I want to own fixed income. And then in the longer end, historically this is easy if I believe we're hard landing, I'm supposed to own bonds, but they're not exactly a screaming bargain. [The] 10-year is at three and a half in the U.S., particularly with a Fed that has certainly shown some mettle in the last year. But, historically, I wouldn't say Jerome Powell is a profile in courage.
So if we get into a hard landing and he moves aggressively, I could see bonds and inflation, coming back with vigor from what I expect to be a lower level than right now.
I will say that, the response to Silicon Valley unnerved me a little because in four days, they printed enough money, [that] they basically wiped out the entire reduction of the balance sheet they had done, for five or six months.
So if I'm trying to look ahead and anticipate I don't have a lot of faith in these guys, should we get into a hard landing that they're gonna hold the line and not do something maybe worse than Arthur Burns?
Interviewer: And, and where does it leave equities?
Druckenmiller: I think equities are really complicated. I think within the equity market, if put a gun to my head, I'd be short the economy to the extent I should [short] something pure like Russell 2000.
Obviously, I don't wanna go into individual short names, but names, like that old economy, economically sensitive stuff. But, let's just say we're gonna have a hard landing and a bad recession in the U.S. What does that mean for Nvidia? I don't know.
I mean, oils and chemicals went up in '73 and '74. Staples have gone up in bad recessions in the U.S. historically.
What do I do if with a company, if you have a bad recession in the U.S. but it's growing wildly throughout that period because we have an arms race going on in its space? It's not clear to me, it goes down.
So I think the equities are complicated. I mean, I'd say the one area, the way that I, I feel reasonably comfortable in is, I'm short the United States dollar. Currency trends tend to run for at least two or three years.
We had a long one here, over 10 trillion - something like 13 trillion - came into the U.S. dollar during the previous decade. I will say full disclosure, I missed the dollar, probably the biggest miss in my career in, in currency trade. I missed the last nine months’ run-up in the dollar. I just couldn't bring myself to own Joe Biden and Jerome Powell.
But, I think now that on a relative basis, the tightening in the U.S. going forward will not be as much, as the foreigners now that we've weaponized the dollar. And you've got people like Lula, running around asking why we need to be trading in U.S. dollars. By the way, it's not a bad question.
Historically, we could be trusted. We had a rule of law, a lot of things. So the only space I have any risk on right now is in the US dollar. Don't run out in short dollars, I could change my mind in a week. But, that's where I am right now. And I'm also long gold obviously for the same reasons.
Interviewer: So you say you haven't seen it as problematic for 45 years and it's really complicated and so on. So what do you do then? Do you sit in cash?
Druckenmiller: Oh no, I'm too, I'd like to, I'd like to say I had, I sit in cash, but I'm too much of a junkie. I'm always doing something. I'd say, our equities were about 3% net short, which is nothing.
But again, I've got, there's always equities we like versus other equities. Our fixed income position is minimal except in JGBs where I don't know whether I'm gonna get paid or not. But I think the risk award is, is ridiculous. It, reminds me a little, just a little of the two-year, two years ago. They have an inflation problem, but again, I'm dealing with government action.
So it's not cash. We got stuff going on, but, I'd say my P&L doesn't move generally more than 30 or 40 basis points a day. That's how buttoned down I have what I'll call our matrix here. Our matrix is the buckets I talked about in the investment within those buckets.
Interviewer: You'd be pleased to hear that I'm, I'm joined by roughly 200 junkies, here in Oslow, who also think it's difficult to not do much.
Now, tomorrow we are releasing a podcast with Steven Schwartzman from Blackstone, and he has one of his 25 rules " Not to lose money". And so I mentioned to him, I said, he's not a bit of a lame advice. It's a bit obvious, but you are kind of in the same camp, aren't you? I mean, I think you never had a down year.
And you are super keen on not losing money. Why is that so important? I mean, again, again, it's a lame question, right? But it's actually not that lame. But, let's listen to you.
Druckenmiller: It's just mathematics. If you go down 50, you gotta go back a hundred to get it back to even. And I've always thought the way to build a long-term track record is when you really see the ball, swing really big. And when you don't see the ball, don't swing.
And if you can build a record and when your terrible years, you're up zero to five, and then throw a couple of fifties and sixties in, the numbers look pretty good over time. If you make a bunch of 30s and then you lose 55 or 60%, you got a long, long way back. It's just the way the numbers work.
And also I'm a sore loser. I don't like to lose so that kind of helps out too.
Interviewer: Just remind us of your compounding.
Druckenmiller: When I had clients, which is the only audited record, it was just a little bit over 30% net a year for 30 years.
Interviewer: Well, that's pretty good.
Druckenmiller: But again, the top year was 99%. I had a lot of five and seven in there. I didn't like, like 20, 30% every year. It was a matter of never losing and then throwing some big numbers in there, maybe 10 times.
Interviewer: Well that sounds like a plan for the fund here as well now.
When you invest, how important is the analysis and how much is now gut feel or pattern recognition?
Druckenmiller: Yeah. I don't know who, but I heard a saying with analysis comes paralysis or Soros used to say, "Invest and then investigate", which I was already doing before I met him.
But, it's more important now, even than it was then. We're in such a fast-moving world with all the new communications that if I get an idea and I think it's attractive and for whatever reason, that security price will be higher in a year or two, I generally go ahead and buy it, and then tell the analyst to look into it.
And if it turns out I was wrong, after they analyze it, I get out. I don't like to wait around.
I've a lot of my best ideas, I'm not that smart. So if I see it, whatever's going on to cause that idea to happen, someone else might see it. And by the time we get done analyzing, I will miss 30 or 40% of the move, and then I'm paralyzed because it just went up 30 or 40% and I don't have the guts to buy it, even if I think it's going higher.
So we're more in the camp of if we got a strong feeling, we'll cut the analysis short and then, by all means, do our analysis thoroughly and then just unload it if it turns out my thesis was wrong.
Interviewer: Do you depend more on this type of pattern recognition than you did in your early days?
Druckenmiller: No. I started in the seventies and my mentor. Turned out to be a chartist. And, I still use that (a) to find things others may not be looking at because we use rate of change, stuff that tends to lead. And (b) it's, if I do take a big position, it's a great check on me not falling in love with security or falling in love with my idea.
You can always find 20 [stocks] that have a good chart and a good fundamental story. So if either one didn't fit, I wouldn't do it.
So, the technical provides a discipline on the fundamental and the fundamental provides a discipline on the technical.
Interviewer: Now, I believe, that one of the hallmarks of a great investor is to have to be stubborn, but at the same time, agile and being able to change your mind, and you have that incredible combination.
Now, how do you question your own beliefs?
Druckenmiller: Price action's important. I try to have young people around me who are not afraid to speak their mind to me and argue with me. If somebody's here too long and they agree with everything I say, they're not here that much longer because, you know, I need healthy debate. But you know, we're constantly following the news. We're following the fundamentals and also the price action.
I will say since the algos and everybody got involved in factor investing and whatever's going on these days, price action is not what it used to be 20 or 30 years ago. 20 or 30 years ago, if a company reported a horrible result and it opened down, say 10%, and ended up on the day, you could almost guarantee that stock was gonna be higher in three months.
It's not the case anymore. Everybody seems to know these tricks. I've seen that action and then a month later the, the stock's right back down again. So a big part of my process, which is price action versus news, I obviously still watch it.
If I've got a thesis and it's really bullish and it's playing out and the stock's not going anywhere, makes me go back and check the thesis over and over.
But price action versus news is not what it used to be 20 or 30 years ago probably because the competition has learned the same game. Whereas when I got in the business, you didn't have that many people that had it as that big a part of their process.
Interviewer: Is that the passive capital going into the ETFs, or is it actually the algo traders and so on?
Druckenmiller: I don't think it's so much the passive, I think it's very active hedge funds that learned the same stuff doing it. And obviously these, these factor investors, algos and quants, they'll really mess up, what used to be historical price action versus news and its message.
A lot of people in my position have complained about them. I, you know, to me it's just a new world I gotta deal with. People gotta deal with me. I might as well have to deal with them.
Interviewer: Lastly, Stan, if you were to leave us with some good advice here, how are we going to make the most money for the next two years?
Druckenmiller: Oh, boy.
I said something that the press ran with eight months ago, maybe it was a year ago, that, I wouldn't be surprised if the stock market was not higher in 10 years. I still believe that, but I do think like the '68 to ' 82 period, we'll have some big swings. So I think the way to make money in the next two years in the equity space is to be patient because I do think we have possibly some rough roads ahead. And I do think the central bank will respond in some crazy way that will give you a period like '70 to '72 where you can make money, or '76 to '78 when you could have made a lot of money. And also for me at least, I think the currency markets are very interesting, but I think this is a movie I've never seen anything.
So I'm gonna be very careful not to dig myself in a hole when I don't have a strong belief to come out because I think the opportunities are gonna be amazing as this movie unfolds in the next year in macro and in equities.