Stanley Druckenmiller: "This Is The Most Unsustainable Situation I Have Seen In My Career"

Tyler Durden's picture

By Jody Chudley, originally posted on the Daily Reckoning

Simple Math Shows America Is Headed for an Economic Disaster

With so many voices streaming at us through our televisions and computers, a person can’t be blamed for tuning out.

For the most part, tuning out is exactly what we should do. But sometimes it is very important that we pay attention…

By listening to Jeremy Grantham, Jim Grant and a host of other investors, a person could have avoided and profited the crashing of the tech bubble of the late ’90s.

By listening to Kyle Bass, Michael Burry and Prem Watsa, an investor could have avoided and even profited from the crashing of the housing bubble in 2008.

Today is another time when we all need to be paying attention. This time, the man we need to be listening to is Stan Druckenmiller.

For 25 years as a hedge fund manager, Druckenmiller compounded money at an annualized rate of return of 30%. Incredibly, he did it without a single down year.

Druckenmiller has a dire warning for all of us. One that requires action.

There is nothing for Druckenmiller to gain from providing this warning. He isn’t talking his book or trying to gain investor support — he isn’t promoting anything. He doesn’t even have a political agenda.

He is spending his own time and money to try to bring this issue to light because he believes it is crucial for the United States.

Druckenmiller simply believes that America is heading for a disaster, and he is trying to use his high-profile position to get people motivated to stop it.

What you need to know about Stan Druckenmiller is that his incredible investing performance was rooted in his skills in making macroeconomic forecasts.

When describing how he was able to compound money at such a crazy rate and not have a single down year, Druckenmiller said:

How did we do it? Very simple. While others were focusing on the present, we looked and focused on the future in terms of analyzing unsustainable situations.

 

And when I look at the current picture of expected tax revenues combined with benefits promised to future generations, this is the most unsustainable situation I have seen ever in my career.

The disaster that Druckenmiller sees coming for the United States is all about changing demographics and entitlement spending. They don’t add up to a sustainable situation.

In 1940, entitlement payments, which include everything from disability payments to Social Security to Medicare, amounted to just over 20% of annual government spending in the United States.

Today, entitlement spending has swelled to nearly 70% of the annual federal budget.

Things are about to get a whole lot more complicated. The 20-year baby boom that took place after World War II is now beginning to result in a retiree boom.

For context, Druckenmiller points out that in 2030, the average age of an American citizen will be older than the average age of a resident of Florida today.

This demographic trend is going to create an entitlement spending catastrophe.

The way the system works, the current workforce provides the tax revenue to support the current senior population. A huge rise in the retiree population relative to the number of people working results in a funding dilemma.

Since 1980, the number of working-age people the country has had has outnumbered those age 65 and over by a count of 5-to 1.

The country has had enough workers generating tax revenue to support the number of retirees.

By 2030, that ratio is going to drop to 2.5-to-1.

By 2029, there will be 11,000 new seniors arriving every day and only 2,000 new adults being added to the workforce to pay for them.

There is just no way that the workforce at that time is going to be able to fund the entitlements of these seniors.

This is a problem because those are commitments that have been made and will have to be paid.

Corporations are required to disclose on their balance sheet the future defined pension obligations that their employees have earned.

Those are very real liabilities for companies that are going to have to be paid, so they should be included.

The balance sheet of the United States, meanwhile, doesn’t account for the future payments that it has promised to its senior citizens. Again, like defined benefit pension payments, these are very real obligations.

They should be recorded as liabilities of the United States.

Here is how much the U.S. debt would increase, assuming no change in tax rates, if those obligations were included:

Source: Stan Druckenmiller presentation

That chart makes the size of the problem abundantly clear. There are a lot of people already very concerned with the amount of debt the United States has. Imagine how they would feel if they were aware that with these liabilities conclude the number is 20 times larger.

This is a case of simple math.

Either tax rates increase in a massive way or the payments to seniors have to be cut significantly. The status quo doesn’t work. There just isn’t going to be anywhere close to enough money coming in to fund the payments going out.

The country can’t borrow its way out of a funding issue of this size.

This issue that Druckenmiller is so passionate about is a huge problem. One with no possible solution that will be popular with the American voters.

Either higher taxes or lower benefits. Likely some combination of both. Both very unattractive options for big percentages of the voter base.

You can hear the politicians kicking this can further down the road, can’t you?

Fixing this is going to require some real sacrifice by the American people. That doesn’t sound like a very appealing platform upon which to get re-elected.

The finances of the entire world are run by short-term thinkers. Central bankers have been dead set on trying to inflate economies for a decade now using more and more aggressive easy-money policies.

To try to make the short term a little better, these central bankers have been perfectly willing to roll the dice on the long term.

The issue that Druckenmiller has raised will have to be dealt with. I’m sure it will be dealt with far later than it should be as politicians do kick that can down the road.

By doing that, they are only going to make the corrective actions that the country has to take more severe.

It is crucial that all of us realize that our long-term financial well-being really needs to be taken care of by one person. That one person is the man or woman you look at in the mirror in the morning when you are brushing your teeth.

We have to make sure we protect our wealth diligently and invest in assets that will retain their value when the consequences of all of this short-term thinking arrive.

Because eventually, they will.

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the not so mighty maximiza's picture

time to arrest and execute the ones that made these bad promises

Arnold's picture

How far back are you going Boss?

Some of them have gone to the side walk cafe in the sky already.

Escrava Isaura's picture

 

 

Talking About Marxism.

Mr. Druckenmiller, you sir, are in total denial. You are part of the problem. Part of the 1% that created this kind of class division and economic oppression, lecturing the masses.

JonNadler's picture

and he just realized this now? 

Escrava Isaura's picture

 

 

Probably. Keep in mind that, these type of people, to a large extent, are totally disconnected from reality.

You see, there are two types of indoctrination. For the educated class, say 20% of the population, they must believe in capitalism and that capitalism can do no wrong.

For the 79.5% the indoctrination revolves around distractions (sports, tabloid news such as conspiracies, TV) or easy fixes (religion). These type of people are supposed to be spectators. Not to get involved.

And there are the 0.5%. These are pain in the butt because they don’t follow either type. Because they question everything. Some Hedgers fit that, but most here belong to the 20%, in my opinion.

SmackDaddy's picture

"Capitalism" - 2nd most misunderstood and misused word in the English language (after Fascism).  When "capital" can be created out of thin air and everything bought up and consolidated.....  Well then you have corporate collectivism.

The occupation has brought us great material wealth.  But also hollowed us out morally and spiritually as we've become dependent.  Decentralization is in order.  But a life of leisure it will be not....

remain calm's picture

So Stan what are your solutions? What is your advice to help the common man? Thanks Stan 

FEDbuster's picture

Age targeted pandemic?  They will come up with creative solutions to their math problems.

Whoa Dammit's picture

"Fixing this is going to require some real sacrifice"  of or by the American Elite.


Surviver22's picture
Surviver22 (not verified) Whoa Dammit Apr 3, 2016 11:20 AM

Trump Got It Right Again. This Is the Undeniable Proof... I can't believe this is really happening. Watch this: 

http://howtogetrichsuccess.com/the-final-bubble

Four chan's picture

just print more money, the human sheep of today are groomed to believe that not only will this work but its the good and their right. 

MalteseFalcon's picture

Stanley would have you believe that austerity is the only answer. 

Either raise taxes or cut benefits. 

How about on-shoring work and having an expanding work force pay the freight out of their wages.

Of course it would mean that historically high profits would come done considerably.

Tough shit, Stanley.

NidStyles's picture

How about not using political language for once faggot?

 

Step 1: Martialize the public into pushing out all non-citizens from the territory. This means deputizing responsible people whom have already proven their loyalty to the US.

Step 2: Eliminate welfare by instituting a welfare to work program for the poor. This includes the subsidies to corporations, foreign aid, and money to the UN and NATO.

Step 3: Bring all of the troops home from the nations whom refuse to pay tribute to the US for access to her military.

Step 4: Be ready for war, because the enemy, The Tribe Inc., will be gunning for us for cutting off their free money train.

Theosebes Goodfellow's picture

Yeah Nids, because I got the "We're fucked" part from Druck, I just missed the "Here's the solutions" part.

Step 5: Convert the transportation fuels from gas to CNG. Put a fueling station in every garage. Build cascade stations (fast fill). Buy and use only oil and gas from the US and Canada.

NidStyles's picture

The main issue is that you can't speak about any of this shit without them throwing their contrive vague terminology at you about it. They do that without defining their terms as well, so that they can change it as they go along. Time to start nailing their feet down and punching them in the face when they start using their political terminology.

gustolehe's picture

Well, here's the main issue:

 

The poor & those on welfare don't get used to such a promise unless it is offered to them to begin with. And it has been, over and over again, even as the lifeblood of the system was sucked away and relocated overseas, leaving a hollow shell where a proud, honest, hard working people once lived.

Hollow out the economy, do it to education etc and watch the spiral begin. Then, to regain your power, do something stupid like the War On Drugs, criminalising a metric shedload of people and destroying any productive capacity they may have had post incarceration.

Meanwhile, the upper class continue to lobby and maintain power, transfer the wealth of the middle class to themselves, crash the system, get the plebs to fund your mistakes and continue on your merry way, avoiding taxes offshore, backing opaque treaties under the auspices of free trade.

Then blame something ridiculous like Jews. Christ Almighty, pardon the pun, but the average Jew in Israel gets ripped off harder than anyone. The one thing I'll say about you "The Tribe" is that it isn't a religious class - the real tribe does not give 2 greasy bucks about your faith. They care about your money and your power. All this rubbish about Jews and Muslms is just the left hand distracting you from the right hand stealing the world out from under us.

Ham-bone's picture

Since '00, the US core population of 25-54yr/olds has risen by 4.6 million (4%) and full time jobs among them have declined by a half million (-0.5%).

Since '00, the population of 55+ Americans has grown by 27 million (+45%) and full time employment among this segment risen by 10 million (+93%).

What about those deemed "not in labor force"?  Clearly, a large portion of this 24 million (+35%)surge is coming from the worst possible source, the 25-54yr/old core of the population...not just boomers retiring.

Since '00, the growth in new homes has been nearly equal to the number of full time jobs created (a complete reversal from the previous 40 years)...and based on the above chart, on a net basis, none of the growth in homeownership has been among the 25-54yr/olds.  That means all the 11 million new homes (net) have been purchased by the 55+yr/old growing population / growing full time employment base.


http://econimica.blogspot.com/

TuPhat's picture

Your numbers may be correct, but, Ham it has actually been unsustainable since 1913.  Even Trump won't be able to straighten it out.  It will crash badly.  Expect it and prepare.

ebworthen's picture

Yes.  There was plenty of money to bail out the S&L's, and then the banks/corporations/insurers.

Druceknmiller made 30% because the FED was always backstopping the casino for card-counters.

The Elites and the FED and the Treasury have plenty of money; no shortage anywhere.

What is lacking is the will to give it to citizens instead of Wall Street parasites.

Escrava Isaura's picture

 

 

It ain’t’ gonna happen. The discrepancy will only get larger from here.

Ignorance is bliss's picture

Age targeted pandemic = GMO foods, atmospheric aerosols, sugar in everything, sodium in everything, epidemic diabetes, epidemic cancers, epidemic heart disease, foods that are carcinogenic, a healthcare system that bleeds your wealth and never delivers a cure, endless taxation. I'd say TPTB are hard at work resolving the financial crises drunk Miller is worried about.

indygo55's picture

You got that right Ignorance is Bliss, and what about war? We kill lots of those young tax earners and are left with an aging dieing population that is sicker by the day and all the family wealth is funneled into the health care system. No cures just treatments. And expensive and unneeded ones at that. The ideal situation would be a person working 35 to 40 years and just as they get to 62 or 65 they die. And if they dont die they suffer the effects of diabetes or cancer or some other malody that will strip every penny they and the supportive families that try to save them provide.

But the wealthy people near the spigot of free .GOV money thrive with free high quality health care and high paying jobs for them and their friends and family members. All on debit that is saddled onto the ever stupified populace. People are waking up and we just might get a 1776 moment after all. I'm hearing a lot on the street everywhere and Trump is providing a focal point for the frustration and anger.

These are interesting times for sure and the best thing you can do is get physically healthy, turn the fucking TV off, have a plan B and prepare to sustain yourself financially and physically for at least two years. 

 

 

Beam Me Up Scotty's picture

"The ideal situation would be a person working 35 to 40 years and just as they get to 62 or 65 they die."

Sounds kinda like Logans Run.  At least you get to live to 62 instead of 30.  People need to realize there is no security in Social Security.  Dumbest idea ever, to let someone else "take care" of your money and give it back to you later in life.  Too bad they stole it.

Escrava Isaura's picture

 

 

Money won’t matter later on because most won’t have. Then, there will be this problem of following orders. As the say goes: If I can’t feed my family, you can’t rule me.

robobbob's picture

uncle sugar didnt just pick 65 out of thin air for SSI to kick in. back then that was the natural fire break

now that society in general has breached that line, and actually expect they get paid what they were promised, whats the elites to do but step up and do their part in creating a new break point. its for the good of us all dont you know.

bloofer's picture

My understanding is that by far the most significant item among entitlements is health care. De-fanging the health care and health insurance racketeering would make quite a dent in this problem--along with all the other suggestions on this thread.

The "welfare-to-work" idea would probably be more costly than welfare. The reason why welfare moms have problems working is because day care costs consume all their income. You can put the moms to work only if government pays for the day care--which means it would cost more to put welfare moms to work than to pay them to stay home.

While some states have made strong efforts to get the "baby daddies" to pay up, this too is probably a losing deal for less affluent demographics. There is probably no cost-effective or humane way to force dads to support their kids.

adanata's picture

 

 

Ignorance is bliss    +10

Katos's picture

My question is,  why are the trillions of taxpayers dollars that are spent on wasteful, pointless,  wars that have produced nothing but the need for more,  not mentioned in the possibilities for expe n see reform? Why are the billions we give to Israel, not mentioned. Why is the hundredsof billions we spend on NATO, TO DEFEND ANOTHER COUNTRY  (EUROPE) not mentioned? Why are we paying to keep tens of thousands of troops in South Korea, Germany, and the other 1000  bases around the world that produce nothing here in the US. All of these ESTABLISHMENT ELITES HAVE the same agenda, change nothing,  just continue to milk the poor out of every penny they can get. It's the PALESTENIANISATION, OF AMERICA. SEEING HOW LITTLE WE CAN EXIST ON AND STILL EXIST.

Adahy's picture

Welcome to the reservation.

Kirk2NCC1701's picture

Rx =

1. Keep raising the min. Retirement Age for Benefits

2. Let the bacterial suoer-bugs cull the herd at >75. It's gonna happen in the next 10 years anyway.

3. Top 20% needs to get down to some serious baby making. Sex, it's what's for desert and night cap.

Alas, it's the other way around: the Bottom 20% (Mexicans, Ghetto, Muslims) that's over-breeding, and they are not the Inventors or Job Creators.

We're so screwed!

John_Coltrane's picture

But raising the pension or retirement age must be done slowly.  Here's my suggested formula.

Increase the retirement age by 1 second on the first day, then 2 seconds on the 2 day, then k seconds on  the kth day, until just one month or 30 days is reached.  Then it can be safely freezed at 2^30 ~ 10^10 seconds in perpetuity.  Sounds much better than just raising it by 34 years doesn't it?   Note only will this very incremental increase be well tolerated by the math challenged american voter but it will teach the increbible power of the exponential function!   

Raging Debate's picture

Remain Calm - Exercise 4-5 times per week, keep weight down. Stay away from sugar and excess carbs. Supplement with Omega 3, vitamins and pro biotics. Be moderate of habits. 

 Preventative health and medicine can keep you alive and out of the hospital and nursing homes where services will become God awful. 

 As America is now a Caste system of 1% wealthy, 20% upoer middle class and 79% working poor, decide how to live. If one pursues wealth doing your homework on where the money is. If not, pursue the path of enlightenment, work part time, be outdoors more. 

 I recommend a vasectomy if your a guy. Kids are expensive and interfere with either type of plan but to each there own. 

 In a Caste system one of the most stable ways as you acquire wealth is becoming a slum lord in the property rental business. I see another lost decade at least probably two until the Boomers die off. I imagine estate taxes will rise and claim much of what the social healthcare system doesn't. Getting an attorney to shelter it will be wise and even more important then than now. 

 It doesnt mean life has to suck, but I am not counting on anybody for old age, I have had to look in the mirror a lot based on this advice and reign in some things. It feels better being more productive than just being drunk. I did hedge and was doing far too much of that. 

OldTrooper's picture

Not bad advice, RD.  The one point I'll take issue with is: "I recommend a vasectomy if your a guy. Kids are expensive and interfere with either type of plan but to each there own."

This is only an issue if you plan to dip your wick in whatever crosses your path.  Avoiding paternity is not required if you select a high quality mate with due care.

My wife is very helpful and always a comfort, never a burden.  She takes care to keep me fed, cleanly clothed, well rested and makes our home a sanctuary in troubled times.  My children are a constant source of motivation, inspiration and wonder, I'm constantly reminded just what I am working toward and, more than once, the love of and/or for my children has pulled me back from the brink.  My life is impoverished when I'm on the road, but there is always the hope, the promise of something better if I do well.  It is the future generations that really inspire.  Yeah, I don't want to die before my time (well, I never want to die, but some things are inevitable).  Some people may not have the urge to have children (though apparently this urge is so great that they are willing to mutilate themselves to indulge in a symbolic act without consequence).  To them I say, "Good, you shouldn't reproduce.  You are clearly too self-centered to properly raise the next generation.  It's just as well that you will not pass your aberations to another generation."

I'd say to a young man that he should take care and ruthlessly examine each potential mate.  Don't stick your thing everything that presents itself.  Look for the mate that will stay the course, that you trust with what you cherish most (money, children and future), that will be a help and not a burden.  You won't be disappointed, and you won't have to sterilize yourself.  Hold potential mates to a high standard, judge them honestly and don't yourself devolve to meaningless encounters and you will be in a very nice place.  This used to be enforced by the community - now it's entirely up to you.  If you err, learn from it and do (much) better next time.  I did, so I've got to think anyone can.

 

 

MANvsMACHINE's picture

Did he just finish a remedial math course?

When people tell me that the government would never let things get too bad, among the many things I tell them is, "it's math you idiot."

Yes We Can. But Lets Not.'s picture

Barack Obama has been apprised of, has been fully aware of this situation for years.

He punted.  Actually, sharply exacerbated the problem.  That's how the dude rolls.

The Saint's picture

Everybody has punted.  Remember when Bush suggested putting some SS retirement money in a self directed account and the Democrats cried and cried about it until it was defeated?

Druckenmiller looks like he has been telling this story for many years.  His data chart is dated 2012 with 2011 data.  I guess that makes this article 4 years old.  Here is a more inclusive chart that shows we are already deep into the bowels of this unsolvable problem. 

https://academeblog.files.wordpress.com/2013/12/gundlach-chart-02.jpg

 

 

Yes We Can. But Lets Not.'s picture

Everyone has punted, agreed.

Would Trump punt?

Vote to punt - vote Establishment©

The Saint's picture

Will he have a choice? Can he change the course of the country?  Seniors and the ill will revolt if bennys are cut.  Workers will revolt if taxes are raised significantly.  The wealthy don't have enough money to get us out of this entitlement problem even if we took every dollar of their income.  What to do, what to do?!

I think we do know that every one of the other Republican and Democrat candiates are 'can kickers.'

JoeSoMD's picture

What to do?  Keep printing.

Whoa Dammit's picture

All self directed SS would do is let Wall Street get its greedy little fingers in it. It would be just like 401Ks replacing pensions, so now the majority of the people have hardly any money to retire  Do you honestly believe you would get that SS money back either way?

The Saint's picture
The Saint (not verified) Whoa Dammit Apr 3, 2016 10:38 AM

You can put it in gold, stocks, etc. or you can let the government have it just to spend.  I would say the former would have been a better idea than the latter.

Winston Churchill's picture

Could that be any worse than the govt. and the lockbox scam.

Uncle Scam stole it all,not just a skim,everything.

Whoa Dammit's picture

Ya'll don't seem to get it. All of the 401K money that poured into Wall Street was precisely what gave them the power to 1) Form global megacorporations, and 2) Buy off politicians world wide. The only way to save yourself is to starve the beast, not to give it even more of your money.

Winston Churchill's picture

I've been starving the beast for a very long time. Its had no effect on its growth at all.

38BWD22's picture

 

 

We are not enough, Winston.

Mr. Universe's picture

Not so much a disconnection from reality, but the folks in charge are peddling a fiction of reality. As for Capitalism (your favorite whipping boy)...

You Keep Using That Word, I Do Not Think It Means What You Think It Means”

PT's picture

Well, as long as we're quoting The Princess Bride :

And now we fight, sportsmanlike ...

... It's not my fault I am bigger than you and stronger than you.  Do you know I don't even work out? ...

TheReplacement's picture

Escrava Isaura has to be a bankster disinformation agent.  There is no other explanation for its constant misuse of the word capitalism even after being corrected innumberable times. 

Who is paying you Escrava?

Not My Real Name's picture

You give EI too much credit. He just doesn't know what he's talking about.