Last week an old buddy asked me to zip off to NYC for the Grants Interest Rate Observer Conference. The lineup was impressive with Jim Chanos, John Hathaway and Martin Wolf being notable speakers, but for me, the real attraction was Stanley Druckenmiller. Unfortunately I couldn’t go, but my buddy was kind enough to send me his notes (for which I am grateful).
I want to chat a little bit about one of the points Stanley made, but first let’s review Druckenmiller’s pedigree.
…in 1981 Stan founded Duquesne Capital Management, which he ran until he closed the firm at the end of 2010. Thereafter, he has been running his family office. From 1988 to 2000, he was a Managing Director at Soros Fund Management, where he served as Lead Portfolio Manager of the Quantum Fund and Chief Investment Officer of Soros (1989-2000), and had overall responsibility for funds with a peak asset value of $22 billion.
Some don’t realize it, but Druck ran Soros’ money during the notorious period when George broke the Bank of England. He is about as close to hedge fund royalty as they come. What I love about him is that he did all of this without yapping away on CNBC. I don’t think he gave an interview until he retired from active money management. Although he does speak more publicly now, it is usually just so he can promote his latest philanthropic cause.
Most importantly, he is an old school macro hedge fund trader. When Druckenmiller makes a point, it isn’t some arrogant obnoxious 38 year hedge fund brat, but instead the voice of a cagey industry veteran who has seen a lot of markets. So when Druckenmiller says the following (and I am paraphrasing off my buddy’s notes), I listen:
…these markets remind me of nothing because the professors are in charge. They have never been in charge before. They are running experiments for which I have no mental historical model.
Stop and think about for a second. One of the greatest traders of the past few generations is saying we are in completely uncharted territory.
Not only that, Druck goes on to say everything since QE2 has been a mistake.
I am not sure exactly when it was, and wasn’t, a mistake, but I know the quaint notion the economy can resume to normal is a pipe dream.
All these pundits who think the Federal Reserve can normalize rates and somehow everything will return to the days of old are dreaming. We have piled on so much debt, expanded the Central Bank balance sheet by such a gargantuan amount, there is simply no way the previous economic rules apply.
I am not here to tell you I know how it will play out. I don’t think anyone knows with any degree of certainty. And I guess that’s my main point. When wise traders like Stanley Druckenmiller admit they don’t have a playbook because we are in such a unique situation, I think you should listen.
When the first climbers ascended Mount Everest, I am sure they thought it was just like any other mountain. But we now know the mountain is so high different rules apply during the final portion of the climb. It is infinitely more dangerous, and any climber that treats it like any other ascent learns the hard way about the “death zone.” This might be a little harsh, but our economy is in a “death zone” with the professors in charge of the Central Banks leading the way higher assuring us nothing is different.
Everything is different. I don’t have any answers. Nor am I suggesting we try to unwind their mess. That might make things even worse. All I am saying is to keep an open mind, and remember even Duckenmiller doesn’t know how this will end.
Thanks for reading,