Stan Druckenmiller thinks the US economy is teetering on the edge of a recession, predicting a "hard landing", and warning that "there's a lot more bodies coming" with regarding regional banks and corporate bankruptcies.
The billionaire founder of Duquesne Family Office said Tuesday during the 2023 Sohn Investment Conference that it’s a really hard time to come up with an accurate economic forecast, slamming "Jerome Powell's Fed" for having its "foot on the gas" even though the risk of inflation was apparent amid the recovery from COVID.
Druckenmiller has been a big critic of what he calls the Fed’s too-easy monetary policy and continued that today. He noted that there have only been a few soft landings since 1950, and the odds of that happening are tough, highlighting Bed Bath & Beyond’s bankruptcy and warning that there could be more to come (specifically mentioning the struggles in the CRE space and that regional banks are a big lender to the space.
"...when you have free money, people do stupid things. When you have free money for 11 years, people do really stupid things. So there's stuff under the hood, it's starting to emerge. Obviously the regional banks recently, we had Bed Bath and Beyond.
But I would assume there's a lot more bodies coming."
He also criticized US fiscal policy.
“We wasted all our bullets” in an economic expansion, he said, worrying about the fiscal situation.
“It’s a scary cocktail that we’re being presented with.”
He added that he wouldn’t be surprised if the “bean counters” a year from now find that the recession started in the second quarter.
“I don’t know that, but I do this for a living and I’ve got to have a forecast,” he says.
Druckenmiller took a shot at the talking heads endlessly repeating that this is nothing like 2008, pointing out that he doesn’t remember them predicting the crash then either.
“It’s naïve not to be open-minded to something really bad happening,” Druckenmiller says.
"This constant repeating that this looks like nothing like '08 or '07. First of all, those who are saying it, I don't remember them predicting in 2007 what was ahead of them & I don't remember people saying the banking system was that weak going in..."
It’s part of his “matrix” but not his forecast, adding that he doesn’t want to see headlines that he’s predicting a 2008-style crash.
So what is he doing about it?
For a start, Druckenmiller says he sees no “fat pitches” now, noting that Treasuries are off the table, and he is short the dollar, though it isn’t a “massive” position.
Druckenmiller says copper is in the “tightest position” compared with any environment he’s ever studied.
Druckenmiller says he’s afraid to have a position in copper during a hard landing. But coming out of a hard-landing scenario, he says it’ll be a huge beneficiary of the EV boom. Again, he says a hard landing is not a foregone conclusion.
"I'm in gold & silver right now. They historically have not done well. In hard landings...
...I'm betting for the time being against the history of silver and gold in hard landings. Could be wrong...
...I could change my mind in a week or two folks"
Druckenmiller says the “AI thing” is real and has the potential to be just as transformational as the internet.
"I actually think there is a very very real possibility and could be every bit as impactful as the internet literally going forward.
And it could be a beautiful opportunity in a hard landing, just like in 01, 02 were a beautiful opportunity when the tech bubble burst, going forward for companies who have benefited from the internet, Al could be there...
My firm has only been able to participate in Al by owning Nvidia and Microsoft..."
AI could be as impactful productivity-wise as the PC, he says.
Druckenmiller says he’s not positive on the stock market.
“If I liked the stock market, I would be exposed to it, and I’m not exposed to it.”
"When I look at the market at 20X earnings. When I look at margins as high as they are. When I looked at the fiscal challenges...it's hard for me to envision stocks being higher in 10 years"
But he believes a hard landing will create unbelievable opportunities for long/short managers.
“Just make sure to preserve your capital until they present themselves,” he says.
Druckenmiller says the debt ceiling debate is “depressing,” and he thinks a technical default would be “stupid” and a market event. Specifically, the billionaire asset manager warns that the debt-limit debate misses the bigger issue with US government spending.
“We are absolutely going to cut entitlements in this country. It is a lie and it is a fantasy to say we don’t have to cut entitlements. The problem is we are either going to cut them now or we’re going to cut them later,” and later would be a lot more expensive.
Perhaps his clearest insight was his comments that if there is a hard landing, will we finally allow for capitalism to do its thing and for there to be destruction of companies.
“Even Gen Z will think maybe they’re supposed to work,” he says.
Specifically, he highlights the idea that the US central bank may need to inflict economic pain in the short-term to bring down inflation.
Druckenmiller brings up how in 1982, Federal Reserve chairman Paul Volcker jacked up interest rates so high and “intentionally” sent the US economy into a recession, but then “20-30 years of prosperity” followed in the US.
Finally, on geopolitics, Druckenmiller says that the Biden administration has made a terrible mistake isolating Saudi Arabia’s Crown Prince Mohammed Bin Salman. He’s 37, very popular in the Middle East and appears to be building an autocratic bloc within the region. In the same stream of consciousness, Druck pointed out that being the reserve currency is an “unbelievable privilege,” but it can lead to myopic policies.
He ends by saying that he hopes the next president is not Donald Trump or Joe Biden, and talking about raising his children with his wife.
“In terms of parenting, forget quality time, it’s quantity time.”
Finally, while we do not have a recording of Druck's commnents today, the following is a recording (no video) of his USC Marshall Center Keynote address from a week ago...
Druckenmiller spoke about his concerns regarding the financial crisis that may occur in the 2025-2035 period due to the demographics and entitlements of the Baby Boomers.
He discussed the current fiscal recklessness and the level of indebtedness of the US, which is comparable only to that of the US over the last hundred years.
Druckenmiller criticized the Federal Reserve for fueling asset bubbles and for its continued creation of a false illusion that it can help the country's fiscal problems.
He praised the younger generation's focus on the long-term implications of climate change and urged them to take action against the abuse of the country's seed corn at the expense of future investment and growth.
So very similar to his comments today...