For Stan Druckenmiller This Is "The Endgame" - His Full 'Apocalyptic' Presentation

Tyler Durden's picture

Several days ago, hedge fund legend Stan Druckenmiller spoke at the Sohn Conference, delivering what may have been his most bearish fire and brimstone sermon yet, and in fact according to some buysiders who were present, its somber mood and lack of faux optimism was downright apocalyptic. And how can it not be when Druckenmiller said that while the Fed and policymakers have no endgame, markets do - hinting that one is rapidly approaching - and suggested that everyone should liquidate their equity holdings and buy a certain 5000 year old shiny asset, which as we reported earlier this week, is Druckenmiller's "largest currency allocation."

And just so everyone can appreciate what is keeping up at night one of the most illustrious investing minds of any generation (with a 30% average return from 1986 through 2010) below we repost his entire presentation delivered at the May 4 Sohn Conference, titled appropriately enough...

* * *

The Endgame

When I started Duquesne in February of 1981, the risk free rate of return, 5 year treasuries, was 15%. Real rates were close to 5%. We were setting up for one of the greatest bull markets in financial history as assets were priced incredibly cheaply to compete with risk free rates and Volcker’s brutal monetary squeeze forced much needed restructuring at the macro and micro level. It is not a coincidence that strange bedfellows Tip O’Neill and Ronald Reagan produced the last major reforms in social security and taxes shortly thereafter. Moreover, the 15% hurdle rate forced corporations to invest their capital wisely and engage in their own structural reform. If this led to one of the greatest investment environments ever, how can the mirror of it, which is where we are today, also be a great investment environment? Not a week goes by without someone extolling the virtues of the equity market because “there is no alternative” with rates at zero. The view has become so widely held it has its own acronym, “TINA”.


Not only valuations were low back in 1981 but financial leverage was less than half of what it is today. The capacity of credit inspired growth was still ahead of us. The policy response to the global crisis was, and more importantly, remains so forceful that it has prevented any real deleveraging from happening. Leverage has actually increased globally. Ironically from where I stand, that has been the intended goal of most policymakers today.


Let me focus on two of the main policies that have not only prevented a clean-up of past excesses in developed markets but also led to an explosion in leverage in Emerging markets. The first of these policies has been spearheaded by the Federal Reserve Bank in the US. By most objective measures, we are deep into the longest period ever of excessively easy monetary policies. During the great recession, rates were set at zero and they expanded their balance sheet by $1.4T. More to the point, after the great recession ended, the Fed continued to expand their balance sheet another $2.2T. Today, with unemployment below 5% and inflation close to 2%, the Fed’s radical dovishness continues. If the Fed was using an average of Volcker and Greenspan’s response to data as implied by standard Taylor rules, Fed Funds would be close to 3% today. In other words, and quite ironically, this is the least “data dependent” Fed we have had in history. Simply put, this is the biggest and longest dovish deviation from historical norms I have seen in my career. The Fed has borrowed more from future consumption than ever before. And despite the US global outperformance, we currently have the most negative real rates in the G-7. At the 2005 Ira Sohn Conference, looking at a more muted but similar deviation, I argued that the Greenspan Fed was sowing the seeds of an historical housing bubble fed by reckless sub-prime borrowing that would end very badly. Those policy excesses pale in comparison to the duration and extent of today’s monetary experiment

The obsession with short-term stimuli contrasts with the structural reform mindset back in the early 80s. Volcker was willing to sacrifice near term pain to rid the economy of inflation and drive reform. The turbulence he engineered led to a productivity boom, a surge in real growth, and a 25 year bull market. The myopia of today’s central bankers is leading to the opposite, reckless behavior at the government and corporate level. Five years ago, one could have argued it was in search of “escape velocity.” But the sub-par economic growth we are experiencing in the 8th year of a radical monetary experiment and in Japan after more than 20 years has blown that theory out of the water. And smoothing growth over a cycle should not be confused with consistently attempting to borrow consumption from the future. The Fed has no end game. The Fed’s objective seems to be getting by another 6 months without a 20% decline in the S&P and avoiding a recession over the near term. In doing so, they are enabling the opposite of needed reform and increasing, not lowering, the odds of the economic tail risk they are trying to avoid. At the government level, the impeding of market signals has allowed politicians to continue to ignore badly needed entitlement and tax reform.

Look at the slide behind me. The doves keep asking where is the evidence of mal-investment? As you can see, the growth in operating cash flow peaked 5 years ago and turned negative year over year recently even as net debt continues to grow at an incredibly high pace. Never in the post-World War II period has this happened. Until the cycle preceding the great recession, the peaks had been pretty much coincident. Even during that cycle, they only diverged for 2 years, and by the time EBITDA turned negative year over year, as it has today, growth in net debt had been declining for over 2 years. Again, the current 5-year divergence is unprecedented in financial history!

And if this wasn’t disturbing enough, take a look at the use of that debt in this cycle. While the debt in the 1990’s financed the construction of the internet, most of the debt today has been used for financial engineering, not productive investments. This is very clear in this slide. The purple in the graph represents buybacks and M/A vs. the green which represents capital expenditure. Notice how the green dominates in the 1990’s and is totally dominated by the purple in the current cycle. Think about this. Last year, buybacks and M&A were $2T. All R&D and office equipment spending was $1.8T. And the reckless behavior has grown in a non-linear fashion after 8 years of free money. In 2012, buybacks and M&A were $1.25T while all R&D and office equipment spending was $1.55T. As valuations rose since then, R&D and office equipment grew by only $250b, but financial engineering grew $750b, or 3x this! You can only live on your seed corn so long. Despite no increase in their interest costs while growing their net borrowing by $1.7T, the profit share of the corporate sector peaked in 2012. The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness. And we are paying 18X for the asset class.

A second source of myopic policies is now coming from China. In response to the global financial crisis, China embarked on a $4 trillion stimulus program. However, because they had engaged in massive infrastructure investment the previous 10 years, and that was the primary stimulus pipe they chose; this only aggravated the overcapacity in the investment side of their economy. Not surprisingly, this only provided a short term pop in nominal growth. While we were worried about bank assets to GDP in 2012, incredibly, credit has increased by 70% of GDP in the 4 years since then. Just to put this in perspective, this means that since 2012 the Chinese banking sector has allowed credit to grow by the amount of the entire Brazilian GDP per year! Picture the entire Brazilian production in new houses and infrastructure. Incredibly, all this credit growth has been accompanied by a fall in nominal GDP growth from 15% to 5%. This is an extremely toxic cocktail for companies that have borrowed at 10% expecting 15% sales growth. Our strong suspicion therefore is that a large part of this growth is just credit flowing to otherwise insolvent borrowers. How else to explain the lack of NPL problem in heavy industries hit by lower prices and sales growth?

As a result, unlike the pre-stimulus period, when it took $1.50 to generate a $1.00 of GDP, it now takes $7. This is extremely rare and dangerous. The most recent historical analogue was the U.S. in the mid- 2000’s when the debt needed to generate a $ of GDP increased from  $1.50 to $6 during the subprime mania. Two years ago, we had hope the Chinese were ready to accept a slowdown in exchange for reform. Unfortunately, with the encouragement of the G-7, they have opted for another investment focused fiscal stimulus which may buy them some time but will exacerbate their problem. They do not need more debt and more houses.

As the chart shows, this will remove a major cylinder from the engine of world growth.

I have argued that myopic policy makers have no end game, they stumble from one short term fiscal or monetary stimulus to the next, despite overwhelming evidence that they only produce an ephemeral sugar high and grow unproductive debt that impedes long term growth. Moreover, the continued decline of global growth despite unprecedented stimulus the past decade suggests we have borrowed so much from our future for so long the chickens are coming home to roost. Three years ago on this stage I criticized the rationale of fed policy but drew a bullish intermediate conclusion as the weight of the evidence suggested the tidal wave of central bank money worldwide would still propel financial assets higher. I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself.

If we have borrowed more from our future than any time in history and markets value the future, we should be selling at a discount, not a premium to historic valuations. It is hard to avoid the comparison with 1982 when the market sold for 7x depressed earnings with dozens of rate cuts and productivity rising going forward vs. 18x inflated earnings, productivity declining and no further ammo on interest rates.

The lack of progress and volatility in global equity markets the past year, which often precedes a major trend change, suggests that their risk/reward is negative without substantially lower prices and/or structural reform. Don’t hold your breath for the latter. While policymakers have no end game, markets do.

On a final note, what was the one asset you did not want to own when I started Duquesne in 1981? Hint…it has traded for 5000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest rates. Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation.


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Looney's picture

Sorry, Stan, no rate increases for you (or anybody else).

Now, go get yourself a lollipop and a happy face sticker to ease your pain.  ;-)


remain calm's picture

I think Stan is a good man. And he is telliimg me that 5-10% allocation to Gold is not enough in todays Macro enviroment. That today unprecedented envioroment needs an allocation to 50% AU. GOLD Mother Fuckers, everything else is just gambling that CBers know what they are doing, don't hold your breath

no ita lever's picture

There will be (unfortunately) another metal that will be even MORE valuable! The light at the end of the tunnel is another train coming at us.


Calmyourself's picture

Stan and the boys know something we don't.  Their predictions of apocalypse  always come from them them while wearing a custom made suit in a 5 star resort hotel at a tony conference eating canapes..  I wonder if they really believed it they would make their pronouncements from a farm  or a gun range learning to run and gun..  If he is correct his world is not sustainable is my point, what are his preparations if he is serious?

"The Fed’s objective seems to be getting by another 6 months without a 20% decline in the S&P and avoiding a recession over the near term."  NEWS FLASH STAN, we have a Black President not sure you noticed but nothing bad can happen while he is in, it could make our SJW's feel bad..

eatthebanksters's picture

Stanley, don't you know that Obozo's bankster masters have instructed him to make sure Yellen does everything in her power to maintain the status quo so that they have a chance of getting their candidate, Hillary, elected?  This shit will continue as long as banksters can make money at it, then they'll take their assets, disappear and let the world implode.  I only hope that these corrupt bastards realize that they and their families will be found.

Dame Ednas Possum's picture

With all due respect Mr.D... I hope you have some real, physical gold and not just those bullshit ETFs?

Those lies won't be worth the paper they're printed on... unless of course you're planning on cornering the market for toilet-paper in Venezuela.

Me, I'll keep stacking the phyzz. and enjoying my fishing trips...

Pinto Currency's picture


Short-circuiting the bond market and blowing serial bubbles started in the late 1980s.

Now Druckenmiller is warning us.

A bit late:



Manthong's picture

Well, the good news is that on a long enough timeline the survival for everyone drops to zero.

Five.. four.. three.. two………………….


Time is the great equalizer.. in cosmic atrophy, everyone will  assume the same temperature..


..just think.. you, George Soros, Barry Soetoro and Hillary “the Witch of Mena” will all be the same someday.  


WordSmith2013's picture
TRUMP: The NWO Cabal’s Nuclear Option—To Declare U.S. Bankruptcy

Max Hunter's picture

Does this mean ZH will be down? That's pretty apocalyptic.

PTR's picture

How would it be different than the bankruptcy that some state (say) was declared in 1933?  (On that note, has anyone *seen* evidence of the declaration?  So far, all I've heard are the accounts that "in 1933, the federal government under FDR declared bankruptcy."

richinSpirit's picture

I won't vote now, maybe you know me a bit at this point, but if you recall (my appologies) some inherit this rock with the iron-like core that spins, usually.

Survival...'s for the fittest!

Kirk2NCC1701's picture

Yes, they can be found in the usual Zip codes in the US, and select cities around the globe.

richinSpirit's picture

For many, there is only one city, and that descends out of heaven at the proper series of moments. That's a bit personal.

This post is intended 'through-you style'...


...I get absolutely no results when I do that, personally.

Can I get a 'lol'?

Stuck on Zero's picture

Historically, Puerto Rico may just mark the stepping off point.

zeropain's picture

Greece is heating up this week. And municipalties will be defaulting in mass as tax will be less than estimated. Then theres japan. Bet italy start crackin too.

hongdo's picture

Yeah.  Think about what happens if munis are toast.  Hint: the issuers are not running surpluses.

CheapBastard's picture
Once high-flying pharma Valeant burns University of Texas’ $24B endowment


The University of Texas is the latest investor to reveal it was burned by Valeant Pharmaceuticals International Inc., the once high-flying pharmaceutical company that is under scrutiny for its billing practices.


UT should stick to buying solid gold like it's done in the past, looks like.

Blankone's picture

Is Kyle Bass an advisor for UT?

zeropain's picture

UT probably bought gold when it was $1900.  bag holders is as bag holders does.

FinalEvent's picture

Wrong, bitcoin is not a metal

Dame Ednas Possum's picture

Did the penny just drop for this one?

38BWD22's picture



no ita lever

I learned something new today: YBIC

Thanks, that seems just right today.

no ita lever's picture

Amen my friend, the truth shall set you free.


Chandos's picture

«I learned something new today: YBIC

Thanks, that seems just right today.»


What are the odds that two guys from the Youth Beef Industry Congress would meet on Zerohedge?!? ;)


Seriously, I learned something new today as well.

no ita lever's picture

IT's okay Chandos, I still love ya brother. On the battle field we will still stand side by side for the least I hope you agree with me on that?

If you are an ally, you could call me whatever you want. You can hurl insults at me all day, won't make a difference to me. :-)


stacking12321's picture

i've never heard it either, i looked it up on urban dictionary, says it means "young bitches in charge"

well, then, party on, bitchez!

no ita lever's picture

It is just my way of saying, I am your brother, and we are all under Christ, if we choose to listen, truly listen, to your inner heart, it all will become so obvious and simple.


stacking12321's picture

under christ?

isn't he that dude that got nailed to a cross a couple thousand years ago?

in what sense are we under him?

i'm looking up and i see some clouds, but i don't see no dead guy nailed to a cross up there.

or you mean he's some sorta extraterrestrial and shit?

and yeah i do listen to my inner heart, and you're right it is simple, but it's not telling me anything about no dead guy nailed to a cross floating up in the sky.

maybe your heart has some funky way of communicating with you, hey, who am i to judge, whatever works for you, man.

party on, bitchez!


Dame Ednas Possum's picture

The Church of the Flying Spaghetti Monster... now there's something worth believing in.


Chandos's picture

I would never want to insult you Revelation....I'm close to you on most counts...I just never heard of YBIC, after all my first tongue is French.

Peace brother

El Vaquero's picture

Lead and brass, housed in either stainless or chromoly. 

Manthong's picture

Pb w/ Cu.Ni  works,,

especially with technicolor tips.. green,  black/ silver, red.....

the red ones are pretty to watch going out.

the black/silver ones are cool to watch when they hit.

no ita lever's picture

Bingo! I weep while my guitar gently plays.


Manthong's picture

"while my guitar gently weeps"

and  75 clicks of elevation and a dot or so holdover windage to do a precise delivery.

no ita lever's picture

Ta' my friend. Apple a day...


The Real Tony's picture

Like platinum, we should see a huge spike in the price of platinum before gold makes a big move to the 2,000 dollar level and beyond. The smart money will be buying platinum soon not gold in the short term.

SilverDOG's picture

In regards to platinum and palladium, err on the side of caution.
Not based upon affinity, absence of so by the majority.
Increase in nominal terms does not grant fluidity upon the street.
As rare and rarely known, is a double edged sword.
Even if one has the best steak for sale, a vegetarian will not be a consumer.
Smart currency is purchasing any and every promptly, before inflation.
Even metal "money" which has never been.
Look towards the disrespect the majority grants its known family.
Caution only said, unless young.
Got manufacturing ?

The_Dude's picture

We'll either be manufacturing modular homes


or bomb shelters...not sure which

sessinpo's picture

no ita lever    There will be (unfortunately) another metal that will be even MORE valuable! The light at the end of the tunnel is another train coming at us.


I'm afraid you are correct. I don't think many realize how bad things will get. Quite a few think they can simply stack PMs, hide it and in a decade, come out on top as the new wealthy class, having, hopefully preserved their wealth or increased it while everyone else loses their shirt. I think the reality may be that quite a few of us if not the majority won't even survive, myself included and I've been stacking lead for years.

Winston Churchill's picture

The right allocation for LONG  TERM savings is 100%.

Your age and circumstances defines what % of your portfolio  long term savings.

Just substitute gold/silver for the bond portion of bonds/stock ratio..

5-10% is never enough at any age.

Manthong's picture

“The right allocation for LONG  TERM savings is 100%”


Well, that’s a cool perspective for a yute.

But as one gathers age and wisdom it becomes more difficult to move all of the green and red boxes around.

Invest in a hydraulic lift table and crane while they are still affordable.


Manthong's picture

.and I have said this several times before on this site which really focuses on charts and dynamics that mostly displays info on the banker’s digital fakery ..if you can move your important metal around on a two wheel dolly.. you do not have enough.

So.. the problem is that with the Jeep and the trailer, when bug-out time comes  I have to figure whether the  missus or the dogs go in the far back..

:: - D  just kidding...   I lreally love the missus...     it’s just the secret misogynist in me coming out.


..just wait a few moar weeks..  Trump is going beat hillary like a baby seal.. it will not be pretty.

..this is going to be moar fun than a romp in a Nevada whore house with a million dollars FRN fake Bernanke money.

Recall.. Bernanke swore to Congress that "gold is not money".. except if Jim Rickards is correct.. there is an 8.000 ton gold certificate of deposit on the Fed's "balance sheet" .......    How F'n convenient.


oh.. and when the baby seal blood is spewed all over the mall, the dems will dump the old, wrinkled, gagging, dried out twat crook  so fast it will make your head spin.

my guess is that the loser this year will ve Biden.. just like his coke-head living son.


Oh.. Oh.. Oh It's  NOT money ... it's" a reserve for when really bad things happen".......

Fasten your seatbelts.  make sure your tray tables are in the up an locked position .. if you are skinny enough..  assume the crash position, put your head between your knees and kiss your ass goodbye.


Is your jetliner crashing into the ground a "bad thing" enough for you?

Perimetr's picture

And the story is actually much, much worse,

because Stan is using the official data for his constructs.

Rodders75's picture

Actually it's much, much, MUCH worse because he doesn't mention unfunded pension or medicare liabilities. 

jay35's picture

that 5% unemployment rate tho... lol, gets me every time.

creeper's picture

Got notice yesterday that my pension is now funded to 104%.  Hot dog! I thought.  That's up from 84% last time.  Then I read the fine print.  They've changed the way they figure the funding.  Under the old method it's still 84%.


Lie much, feds?