Druckenmiller: Things are going to break and equities are not the place to be

Paul Tudor Jones and Stanley Druckenmiller are two of the greatest stock market traders ever.

They have a collective net worth of around US$14 billion and have made some of the most famous and profitable calls on markets over the past 40 years.

Tudor Jones famously called the ’87 crash and just months before it happened, was featured talking about the pending crash in a documentary called Trader – I highly recommend watching it.

Druckenmiller is famous for breaking the Bank of England by shorting the pound. And for anyone who thinks that is a George Soros story, here’s food for thought from the book Inside the House of Money:

Stan may be the greatest moneymaking machine in history. He has Jim Roger’s analytical ability, George Soros’s trading ability, and the stomach of a riverboat gambler when it comes to placing his bets. His lack of volatility is unbelievable.

What is most interesting to me about the breaking of the pound was the combination of Stan Druckenmiller’s gamesmanship – Stan really understands risk and reward – and George’s ability to size trades. Make no mistake about it, shorting the pound was Stan Druckenmiller’s idea. Soros contribution was pushing him to take a gigantic position.

I started my career as a trader and these two guys sit at the "hero" level in my mind, so when they both sat down together recently for an interview (Tudor Jones interviewing Druckenmiller) at the J.P. Morgan Robin Hood Investors Conference, I was all in.

Below is a summary of the most interesting parts of the conversation, as well as Druckenmiller's short bites on a handful of other topics.

The United States' ballooning debt problems

Druckenmiller, having talked about this issue in the past, explained that what he saw was simple math.

“We had taken entitlements in this country from 30% of budget outlays to 60% over the previous 30 years and we had a demographic problem staring us right in the face. 

"My generation, the baby boomers, were going to turn into a grey boom starting around 2020, and we were going to have less and less workers and more and more retirees for about a 12-15 year period from 2020 to 2035”.

And while Druckenmiller could see the math clear as day, even he admits he could “not see the horror show that occurred between then and now”.

Instead of becoming fiscally responsible and putting money away for a rainy day, we all know what has happened in the US – the frequent debt ceiling negotiations and subsequent government shutdowns (due again in November) are a constant reminder.

Druckenmiller adds that "It really started with Donald Trump running a full employment deficit of over $1 trillion," said Druckenmiller. "If that wasn't enough, Biden came in and we got Covid. He doubled and tripled down on Federal spending. What's amazing is he's still at it."

With US debt at more than US$33 trillion, it places enormous pressure on the economy.

“The numbers are so obvious, and so right in your face, but I guess because we’re the reserve currency [USD] and for now you can get away with it, we’re still spending”.

On Janet Yellen and her decision not to refinance US debt with long bonds when rates were low

This part of the conversation was very spicy. It's not often you get someone of Druckenmiller's standing speaking so honestly and so pointedly. 

"When rates were practically zero, every Tom, Dick, Harry, and Mary in the United States refinanced their mortgage. Unfortunately, we had one entity that did not…and that's the U.S. Treasury," said Druckenmiller. "

"Janet Yellen, I guess because of political myopia or whatever, was issuing two years at 15 basis points when she could've issued 10 years at seventy basis points or 30 years at 180 basis points.

"I literally think if you go back to Alexander Hamilton, it was the biggest blunder in the history of the Treasury. I have no idea why she has not been called out on this. She has no right to still be in that job after that."

On the coming consequences

"When the debt rolls over, by 2033, interest expense is going to be 4.5% of GDP if rates are where they are now," said Druckenmiller. "By 2043, sounds like a long time but it's really not - 20 years, interest expense as a per cent of GDP will be 7%. That is 144% of all current discretionary spending."

"The politicians that are telling you and think they're not going to cut entitlements, it's just an outright lie," said Druckenmiller. "The numbers absolutely don't work. It's a fantasy."

At some point, there is going to be some serious pain required to get the math to work again but, as Druckenmiller points out, “no one wants to sacrifice”.

On how Druckenmiller’s view has changed over time

During the interview, Druckenmiller explains that the one rule he had, over 30 years of trading, was never to let his obsession with the debt (since 1994) interfere with his trading – “because it never, I felt, would have market impact”, said Druckenmiller.

Now, when he looks at the numbers, he’s thrown out the playbook of not letting the debt interfere with his trading.

“The crisis I was worried about in the 2025 to 2035 period, way back in 2011, the numbers are much worse. I was worried about Medicare and social security. Folks, I just gave you the interest thing (covered above) – that wasn’t even part of my equation”.

And what he is doing about it when it comes to his portfolio and, in particular, stocks

Whilst acknowledging that the energy transition, the Inflation Reduction Act (IRA), and artificial intelligence are areas of opportunity, Druckenmiller was less than excited about stocks in general.

When it comes to the IRA, Druckenmiller added that the stimulus will add to inflationary pressures and cause “all kinds of other things in the stock market to break”.

On his recent market activity, over the past two to three months, Druckenmiller said, “Every sale I made I’m happy about and every buy I made I’m not thrilled with”.

As for the longer-term, Druckenmiller points out that he has previously been on record saying that the S&P 500 would go nowhere over the next 10 years.

Why does he hold that view?

He goes on to point out that there has been a bubble, a quantitative easing (QE) period for 10 years, and “we need to make an adjustment fundamentally and price-wise”.

“If you look at the market in the non-QE world, 15x earnings was about right. We’re at 20x earnings. I don’t know what we’re doing at 20x earnings”.

Druckenmiller continues that he doesn’t think earnings will go up next year, describing them as flat at best.

“So it’s hard for me to get excited about the long side of the overall market, forget individual stocks," he said.

"With the market, say, 20% above its normal valuation. When you have the fiscal recklessness problem, you have supply chain problems, you have the worst geopolitical situation I’ve seen in my lifetime. ’78 and ‘79 was bad, but for the first time, it’s a very low probability but you've got to put the potential outcome of World War on the table."

Not exactly an environment that excites me about paying 20% to 30% above the multiple for equity prices", said Druckenmiller.

Short bites

• On the US’ reserve currency status: "Because of our reserve currency status, we’ve gotten away with a lot."
• On the US dollar: "I have nothing productive… I just think, as a money manager, it is boring. I like fat pitches and I don’t see a fat pitch in currencies right now."
• On rising average US mortgage rates: "Looking out to 2025, but maybe in 2024, you have to be open-minded to something breaking."
• On the stock market right now: "I just find the market, on the whole, not that interesting."
• On shorting: "We have not lost money on our shorts this year. It shows you how narrow the market has been."
• On the economic outlook: "Things are going to break."
• On fixed income: "I’m long fixed income for the first time since 2020. But to be clear, I’m short bonds and long the front end."
• On gold: "I’m 70 years old… I own gold."
• On Bitcoin: "I was surprised Bitcoin got going but it’s clear the young people see it as a store of value. 17 years, to me it’s a brand. I like gold because it’s a 5000-year-old brand, but young people have all the money. So, I like both. I don’t own any Bitcoin but I should."

If you want to watch the full interview, it is available here: