Somewhere, Albert Edwards is doing a victory lap. Little by little, the SocGen strategist's "IceAge" thesis, which sees US 10Y Treasury rates eventually catching down to Bunds and JGBs by hitting 0% and going negative thereafter as a deflationary singularity grips the entire world, is materializing.
On Monday, the market found a newfound appreciation for Edwards' gloomy perspective, as September eurodollars soared 14.5 ticks following Bullard comments greenlighting a Fed rate cut. The EDM9-EDZ9 has plunged, more than doubling in just a few days as low as -0.485 bps today, in a move that shocked rates traders and left them speechless as the market is now pricing in a 60% chance of two cuts or more by September.
But it's no longer just Albert who sees a deflationary tsunami flooding over the US. The grouchy permabear was joined by billionaire Stan Druckenmiller, who said he could see the Fed funds rate going to zero in the next 18 months if the economy softens, and that he recently piled into Treasuries as the U.S. trade war with China escalated.
"When the Trump tweet went out, I went from 93% invested to net flat, and bought a bunch of Treasuries," Druckenmiller said Monday evening quoted by Bloomberg, referring to the May 5 tweet from Trump which threatened an increase in tariffs on China and which sparked the most vicious bout of trade-war related selling yet. Explaining his decision, Druck said that it's “not because I’m trying to make money, I just don’t want to play in this environment."
Incidentally, for those confused what going from 93% invested to flat means, the answer is he liquidated his entire equity book.
In an interview by Key Square Capital Management founder Scott Bessent at The Economic Club of New York, Druckenmiller went against conventional, and Beijing, wisdom which believes that Trump will capitulate ahead of the 2020 elections, and said that at the moment he doesn’t see Trump giving China room for negotiation because the president sees tariffs as a winning strategy for the 2020 election. That, of course, could change if the economy and markets get weaker, he said.
"If you can analyze Donald Trump more power to you. I've been more wrong footed by this guy, and shame on me", Druckenmiller summarized his feelings toward Trump.
At the same time, as we noted earlier when we pointed out that several of Druckernmiller's key warning indicators are flashing an "amber alert", while the former chief strategist for George Soros wouldn’t say whether the U.S. is headed for a recession, he said he sees "many warning signs" adding that he was concerned that Trump may have broken a fragile economy going into the next election and assumes he won’t be re-elected in 2020.
Looking at other asset classes, Druckenmiller said that while Treasuries have become less interesting amid the furious rally in recent days, they remain "the best game in town" if the economy deteriorates, and certainly if rates tumble another 2% to zero or below. “Gold’s not bad either,” he added.
As we reminded readers earlier today, last December Druckenmiller warned that trading conditions could worsen, and that while the indicators he historically used were not red yet...
... they were deep inside amber territory. Alongside former Fed governor Kevin Warsh, Druck also urged the Federal Reserve not to raise rates in December, and while central bank did not follow his advice that time, it has since kept interest rates steady and may cut rates as soon as the June meeting which is suddenly seen as "live."
Below, courtesy of Bloomberg, are some other highlights from the interview of the hedge fund legend whose average returns of 30% over three decades, speaks for itself:
- No impeachment: It would “be crazy” at this point to try to remove Trump through impeachment or the 25th amendment, because it would take too long and “the country would go through hell. It doesn't make sense"
- Major shake-out in the hedge fund industry is coming: “There’s probably five to 10 people, women and men, who are worth more than their fees now,” he said. “There are still going to be superstars, but we need to get back to maybe 200 or 300 from 4,000” funds.
- Staying away from bitcoin: He wouldn’t be short or long Bitcoin, as he doesn’t understand why it’s a store of value. “I don’t think I’m a neanderthal, which is what I’ve been called when I’ve said I didn’t want to own Bitcoin.”
Here are some of Druck's more memorable quotes:
- "Coming out of the crisis... I was very fearful that the emergency days were over and that we were going to have a misallocation of resources.”
- "We are in the most innovative economic period since the late 1800s.”
- "There’s this belief at the fed that if you’re near the zero bound, you’re near inflation... But I’ve never seen an inflation because you’re near the zero bound.”
- "It’s very clear to me that you need a hurdle rate for investment and that if you don’t have a hurdle rate for investment, bad things happen.”
- "When I got in the business it became clear to me that macroeconomic statistics of precocity the economy, they’re really great at telling where you are and where you’ve been. The best economic predictor is the inside of the stock market. The inside of the stock market right now isn’t saying we are gonna be in a recession but it is saying you better keep your eyes open."
- "Those who believe the conflict between the U.S. and China is inevitable, you want the [economic or military] conflict to happen now... My impression is that Trump doesn’t want tariffs [with China.]”
Druckenmiller's parting words were the most memorable. Responding to a question from the audience if the Fed is going to use negative rates, here's what Druckenmiller said:
"They're going to do the works. Stuff that I thought was brilliant in 2009 and should be used once every 50 years is now being discussed as part of the toolkit even for like a recession. I can easily see 2 Years easily going to zero, and I would say the odds are very high they would cut 50 to a 100 bps in the next year. Everything I see out of central banks globally is radical policies ahead."
His full interview is below.