Interview on CNBC with Stanley Druckenmiller
JOE KERNEN: Recently you talked about the potential for a ’69 -- 1969 to 1982 potentially type situation for the next ten years here in terms of taxes being at the same level a decade from now.
STANLEY DRUCKENMILLER: Yeah. I will say this. The -- it’s conventional wisdom, which I agree with, that stocks go up over the long term.
JOE KERNEN: Okay.
STANLEY DRUCKENMILLER: The problem is we’ve become a little complacent about what does “long term” mean. If you bought the Dow in 1929, you got back to even in 1954. As you just pointed out, the Dow was in 1966 where it was in 1982. When I look back at the secular bull market started in ’82 -- let’s just take a trip down memory lane. We had a President who said government was the problem not the solution. We had a guy who fired all the air traffic controllers in the country when they wanted a big raise. We now have a President who is a union man who says he’s trying to beat inflation who cheers at 24 percent over three-year reward to the railroad unions. We have a President who thinks government is the solution, not the problem. Maybe more importantly, or I’d say in terms of what we’re talking about, if you look at valuations back then, the S&P was 50 percent -- I’m sorry. The stock market was 50 percent of GDP. It’s now 150, down from 225. That’s because five-years yielded 15 percent when I started Duquesne, so real rates were high. That’s why we were at 8 times depressed earnings. We’re now, what, 18, 19 times inflated earnings, that I have a very strong feeling are going to be down next year. Then you have the secular forces. You were right on the initial ramp of globalization, a fantastic thing. Building supply chains around the world increases efficiency, causes disinflation. That’s been a trend for 20 or 30 years. Going the other way now, we’re disentangling all that. That’s going to be inflationary. And then, finally, and we’ve already kind of alluded to it, the last ten years of the bull market, you put it all in hyperdrive with 30 trillion of QE and zero rates. Now the consequences of that are borne, and all those factors that cause a bull market, they’re not only stopping, they’re reversing. Every one of them. We’re going from QE to QT, unless you live in England this week. They’re really unfolding. So when I put all of that together, the one thing I bristle about when I hear people on your network, is they say: Well, I’m bearish, but I’m bullish for the long term. Look, you can have a period of 15, 20 years, 10 years where the market doesn’t go anywhere. That doesn’t mean you can’t make money. You could have made plenty of money in the ’70s. At various times we had two 60 percent rallies. I’m not saying, you know, go get another job when you can’t do stocks. I’m just saying we’ve had a hurricane behind us for 30 or 40 years, and it’s reversing, and I wouldn’t be surprised -- in fact, it’s my central forecast -- the Dow won’t be much higher in ten years than it is today.
JOE KERNEN: There was a time you went to college campuses and you talked about an equity and debt -- I think in this case it wasn’t necessarily Fed-induced, but it was entitlement induced.
STANLEY DRUCKENMILLER: Yeah.
JOE KERNEN: And it could come -- this was ten years ago, and I think you said sometime between, you know, Nostradamus --
STANLEY DRUCKENMILLER: 2020 to --
JOE KERNEN: He said 2020 and 2035.
STANLEY DRUCKENMILLER: Yeah.
JOE KERNEN: So it’s -- is it 2022? Is it happening?
STANLEY DRUCKENMILLER: We are in deep trouble. So everything I said at those colleges is worse in terms of the metrics, except for one thing. And what I miscalculated was I didn’t calculate zero rates; I used 4 percent rates. But the only thing Donald Trump and Hillary Clinton agreed on in 2016 was don’t cut Social Security, don’t cut entitlements. So nothing was done. Joe Biden has excoriated Rick Scott because he dared mention maybe we shouldn’t be increasing senior pays. But if you look at the reversal I just talked about and you use the CBO estimate, which is rates at 3.8 percent, which I think, frankly, is pretty optimistic given all the things we’ve talked about, by 2027, the interest expense alone on the debt eats all health care spending. By 2047, it eats all discretionary spending. So we’re now getting into fiscal dominance. By the way, by ’49, it eats all Social Security. We’re getting to the point now where the interest expense on the debt is so high that it’s going to eat up our ability to basically service the next generation, and I’m not even sure about the current one.
JOE KERNEN: Okay.
STANLEY DRUCKENMILLER: I brought some cyanide if you’d like one.
[LAUGHTER]
JOE KERNEN: Well, no, no, I’m thinking about that, and I’m thinking maybe we’ll be okay, but --
STANLEY DRUCKENMILLER: Yeah, because we’ll be dead.
JOE KERNEN: Yeah, that’s what I mean.
[LAUGHTER]
JOE KERNEN: But I worry about, okay, let’s bring it back to how hard -- Okay. It’s going to be a landing. Is it going to be a nice, smooth like 3-point landing? Is it going to be a little bumpy, or is it going to be one that you hope to walk away from right now?
STANLEY DRUCKENMILLER: Well, I --
JOE KERNEN: Or don’t walk away from.
STANLEY DRUCKENMILLER: Let me just say this. I will be stunned if we don't have a recession in '23. Don't know the timing, but certainly by the end of '23. I will not be surprised if it's not larger than the so-called average garden variety, and I don't rule out -- not my forecast, but I don't rule out something really bad. Why? Because, if you look at the liquidity situation that has driven this, we're going to go from all this QE to QT, we're following an asset bubble. We've been doing all this running down the SPR, which is now -- that's the Strategic Petroleum Reserve. It's now below '84 levels, even though obviously oil consumption is much higher. We've had a bunch of myopic policies that have actually delayed the liquidity shrinkage. QT has been almost entirely offset by Janet Yellen running down the Treasury savings account. By the way, pretty amazing policy. She could have sold ten years for under 1 percent during this time. Instead, she runs down the Treasury savings account. So all of that has mass liquidity shrinkage, but it really comes into full gear, and she can continue this for a while. We can do the SPR for a while, stimulative stuff. But by the first quarter of '23, it kind of goes the other way. So our central case is a hard landing by the end of '23. But I don't know, I've been wrong on a lot of things. I could be wrong on this, but since I do it for a living, that's our forecast, which is a recession in '23.
JOE KERNEN: Recently you talked about the potential for a ’69 -- 1969 to 1982 potentially type situation for the next ten years here in terms of taxes being at the same level a decade from now.
STANLEY DRUCKENMILLER: Yeah. I will say this. The -- it’s conventional wisdom, which I agree with, that stocks go up over the long term.
JOE KERNEN: Okay.
STANLEY DRUCKENMILLER: The problem is we’ve become a little complacent about what does “long term” mean. If you bought the Dow in 1929, you got back to even in 1954. As you just pointed out, the Dow was in 1966 where it was in 1982. When I look back at the secular bull market started in ’82 -- let’s just take a trip down memory lane. We had a President who said government was the problem not the solution. We had a guy who fired all the air traffic controllers in the country when they wanted a big raise. We now have a President who is a union man who says he’s trying to beat inflation who cheers at 24 percent over three-year reward to the railroad unions. We have a President who thinks government is the solution, not the problem. Maybe more importantly, or I’d say in terms of what we’re talking about, if you look at valuations back then, the S&P was 50 percent -- I’m sorry. The stock market was 50 percent of GDP. It’s now 150, down from 225. That’s because five-years yielded 15 percent when I started Duquesne, so real rates were high. That’s why we were at 8 times depressed earnings. We’re now, what, 18, 19 times inflated earnings, that I have a very strong feeling are going to be down next year. Then you have the secular forces. You were right on the initial ramp of globalization, a fantastic thing. Building supply chains around the world increases efficiency, causes disinflation. That’s been a trend for 20 or 30 years. Going the other way now, we’re disentangling all that. That’s going to be inflationary. And then, finally, and we’ve already kind of alluded to it, the last ten years of the bull market, you put it all in hyperdrive with 30 trillion of QE and zero rates. Now the consequences of that are borne, and all those factors that cause a bull market, they’re not only stopping, they’re reversing. Every one of them. We’re going from QE to QT, unless you live in England this week. They’re really unfolding. So when I put all of that together, the one thing I bristle about when I hear people on your network, is they say: Well, I’m bearish, but I’m bullish for the long term. Look, you can have a period of 15, 20 years, 10 years where the market doesn’t go anywhere. That doesn’t mean you can’t make money. You could have made plenty of money in the ’70s. At various times we had two 60 percent rallies. I’m not saying, you know, go get another job when you can’t do stocks. I’m just saying we’ve had a hurricane behind us for 30 or 40 years, and it’s reversing, and I wouldn’t be surprised -- in fact, it’s my central forecast -- the Dow won’t be much higher in ten years than it is today.
JOE KERNEN: There was a time you went to college campuses and you talked about an equity and debt -- I think in this case it wasn’t necessarily Fed-induced, but it was entitlement induced.
STANLEY DRUCKENMILLER: Yeah.
JOE KERNEN: And it could come -- this was ten years ago, and I think you said sometime between, you know, Nostradamus --
STANLEY DRUCKENMILLER: 2020 to --
JOE KERNEN: He said 2020 and 2035.
STANLEY DRUCKENMILLER: Yeah.
JOE KERNEN: So it’s -- is it 2022? Is it happening?
STANLEY DRUCKENMILLER: We are in deep trouble. So everything I said at those colleges is worse in terms of the metrics, except for one thing. And what I miscalculated was I didn’t calculate zero rates; I used 4 percent rates. But the only thing Donald Trump and Hillary Clinton agreed on in 2016 was don’t cut Social Security, don’t cut entitlements. So nothing was done. Joe Biden has excoriated Rick Scott because he dared mention maybe we shouldn’t be increasing senior pays. But if you look at the reversal I just talked about and you use the CBO estimate, which is rates at 3.8 percent, which I think, frankly, is pretty optimistic given all the things we’ve talked about, by 2027, the interest expense alone on the debt eats all health care spending. By 2047, it eats all discretionary spending. So we’re now getting into fiscal dominance. By the way, by ’49, it eats all Social Security. We’re getting to the point now where the interest expense on the debt is so high that it’s going to eat up our ability to basically service the next generation, and I’m not even sure about the current one.
JOE KERNEN: Okay.
STANLEY DRUCKENMILLER: I brought some cyanide if you’d like one.
[LAUGHTER]
JOE KERNEN: Well, no, no, I’m thinking about that, and I’m thinking maybe we’ll be okay, but --
STANLEY DRUCKENMILLER: Yeah, because we’ll be dead.
JOE KERNEN: Yeah, that’s what I mean.
[LAUGHTER]
JOE KERNEN: But I worry about, okay, let’s bring it back to how hard -- Okay. It’s going to be a landing. Is it going to be a nice, smooth like 3-point landing? Is it going to be a little bumpy, or is it going to be one that you hope to walk away from right now?
STANLEY DRUCKENMILLER: Well, I --
JOE KERNEN: Or don’t walk away from.
STANLEY DRUCKENMILLER: Let me just say this. I will be stunned if we don't have a recession in '23. Don't know the timing, but certainly by the end of '23. I will not be surprised if it's not larger than the so-called average garden variety, and I don't rule out -- not my forecast, but I don't rule out something really bad. Why? Because, if you look at the liquidity situation that has driven this, we're going to go from all this QE to QT, we're following an asset bubble. We've been doing all this running down the SPR, which is now -- that's the Strategic Petroleum Reserve. It's now below '84 levels, even though obviously oil consumption is much higher. We've had a bunch of myopic policies that have actually delayed the liquidity shrinkage. QT has been almost entirely offset by Janet Yellen running down the Treasury savings account. By the way, pretty amazing policy. She could have sold ten years for under 1 percent during this time. Instead, she runs down the Treasury savings account. So all of that has mass liquidity shrinkage, but it really comes into full gear, and she can continue this for a while. We can do the SPR for a while, stimulative stuff. But by the first quarter of '23, it kind of goes the other way. So our central case is a hard landing by the end of '23. But I don't know, I've been wrong on a lot of things. I could be wrong on this, but since I do it for a living, that's our forecast, which is a recession in '23.
