🔴 The Kiril Sokoloff Interviews: Stanley F. Druckenmiller

hi I'm Ralph Powell and the CEO of real vision but it's my pleasure to personal introduce one of the most incredible conversations that I've ever seen or we've ever had a real vision and it's led by my good friend Carol Sokolov Carol is one of the most legendary people in the investment research business you can see by the quality of the guests that he brings to real vision that his contacts in the finance industry and the wider world are completely unparalleled and this time he'll is going to do something extraordinary for us in this episode he's going to interview one of the greatest investors of all time Stanly drama stan is perhaps the best 30 year track record in money management history his compounded over 30 percent returns and he's never had a down year over a hundred and twenty quarters he's only lost money in five when how is this even possible how has he managed to make money day after day year after year decade after decade that's a question that nobody's ever been able to answer that is until now you see Stanley Druckenmiller has never given an interview like this before and in this incredible conversation Stan tells Carol how he was able to build that track record how he operates in this new world of distorted price signals and the opportunities and risks that he says lie ahead it's a truly extraordinary conversation that every investor want to watch and then return to time and time again there's so much learning in this so now in the second episode by Carol sokoloff series please enjoy the full conversation with Stanley Druckenmiller [Music] [Music] stan is a great pleasure to have you here great to be here Karl I've enjoyed your work for many many years so I'm excited about the opportunity thank you well we are - we've been friends for 25 years both of us are very low profile people we avoid publicity and thank you for trusting in me to do this what I really want to drill down on is that incredible brain of yours that's created this phenomenal track record that is really the best in history 30 years performance nanchang outside money never had a down year 120 quarters only 5 or down 30% compounded over 30 years you know how did you do it and to try to understand the mindset the approach the intelligence that enabled you to do that and secondly to take that and bring it forward to today's complexity how you look at the world what challenges what opportunities how are you operating differently given the fact that algos are running the markets free money has destroyed price signals and third to discuss Stan Druckenmiller whose other passions your family your extracurricular activities and your philanthropy which which you do in a very low-key way which of course is the best way to do it so let me start off by asking you a question and your balance life people in our business tend to be very focused and very driven but I wouldn't say that not that many of them are happy and you're a happy man you've got a balanced life you're one of the great philanthropists in America you have a beautiful evolved spiritual wife or you love you've got three lovely daughters who are all successful and that is balanced life with this incredible performance and you're happy man how do you do it that's kind of you to say the balanced life is the key and in my case Fiona and I are both very private people so we don't really go out on the social scene in New York at all we might go to three events a year whereas I think most of my peers might go to three a week and that frees up a lot of time I had the benefit of a very highly intelligent creative wife who's now had four different careers she repots herself about every 10 years who after my children were born she gave up everything to raise those children and she did in a very intense creative way she just have this thing called special time where each child one day a week for two or three hours after school could go anywhere in New York can any activity with her because she thought it was important with sibling rivalry to have individual time with each so at all it all sort of starts with her and then I would really weigh in on the weekends and maybe because I married a little late with her which was when I was 35 I was successful enough at the time and had acquired enough knowledge that I was able to spend most of my time with the kids on on the weekends if it had been my 20s I think it would have been a disaster that's been a very very important part of the balance it's interesting where someone asked me Oh Fiona and I talked about the difference between men and women and their response to their children and you have to understand our children are 28 27 and 25 and even today when she has full-time jobs she's running a business she says the first hour of her day is spent thinking of all the things she's gonna do it for the children that day through texts and emails she's gotten and arranged it and it's the first thing she thinks about of course the first thing I think about is euro and the end and I love my children but it's just it's a whole different mindset and I've been a huge beneficiary of that and one of my early mentors said with children if you get the first five years right you were awarded the rest your life and if you get him wrong you're tortured it's on your life that you're Fiona extended the five to about 20 years but having a happy family provides a whole lot of happiness and a whole lot of balance so I think that's that's pretty much been the key and that's freed up the extra time to do some physical activities as well as the philanthropy you mentioned we're all worried about entitlement for our kids and we're always struggling with with that how did you deal with it you know that is such a fascinating question Fiona and I had a totally different philosophy on that she felt no holds bar in giving the kids material stuff and there was no reason to hide our wealth from them I thought she was crazy and this was gonna be a disaster but it was her area and I deferred to her I've never heard her say no to those kids on anything except video games it's the only thing that was really heavily discord and she said no to and I guess through osmosis or observing the parents values or whatever somehow strangely they all ended up being high achievers we never ever talked to them about philanthropy or charity or giving back and yet they've all done stuff very actively to help the disadvantaged I'm not sure how or why it all happened but I guess it starts again with the mother that was with them so much time and taught them values but it's bizarre because I'll never forget in the third grade we had a teacher review with our oldest child she wasn't there and the teacher wanted to know what Fiona had done because the other wealthy kids were all bragging how they had country houses and this and that and she said that Sarah our oldest daughter would never ever talk about any of that and want to know how we had school during that but it was never ever brought up so we'd never hid their wealth from them so Fiona kind of broke every rule in the book that you would read about in dealing with this subject but things have worked out extremely well I'll congratulations nothing like a happy man and a happy family so moving on to the world that we're living in this has been an especially volatile year we've got a new fetch here we have possible contagion in emerging markets we have a huge new fiscal stimulus in the u.s. it's distorting things and we have a very aggressive foreign policy and trade policy on the part of the United States so taking all that and whatever else you're focused on were you really thinking about what do you where's your focus right now yeah well since free money was instituted I have really struggled I haven't had any down years since I started a family office but thank you for quoting the 30 year record and I don't even know how I did that when I look back and I look at today but I promptly made about 70% of my money during that time in currencies and bonds and that's been pretty much squished and become a very challenging area both of them as a profit Center so while I started in equities and that was my bread and butter my first three or four years in the business I've evolved in other areas and it's a little bit of Back to the Future the last eight or nine years where I've had to refocus on the equity market and I also have bare itis because I made my highest absolute return for all in bear markets I think I was average of turning bear market was well over 50% so I've had a bearish bias and I've been way too cautious the last say five or six years and this year is no exception I came into the year with a very very challenging puzzle which is rates are too low worldwide you have negative real rates and yet you have balance sheets being expanded by central banks at the time of a trillion dollars a year which I knew by the end of this year was going to go to zero because the u.s. was obviously going to go from printing money and QE to letting 50 billion a month starting actually this month run off on the balance sheet I figured Europe which is doing 30 billion euros a month would go to zero so the question to me was if you go from a trillion in central bank buying a year to zero and you get that rate of change all happening within a 12-month period does that not matter if global rates are still what I would call any appropriate for the circumstances and those circumstances you have outlined perfectly you pretty much have had robust global growth with massive fiscal stimulus in United States or the unemployment rate is below four if you came down from Mars you would probably guess the Fed Funds rate would be four or five and you have a president screaming because it's at 175 I maybe because I have a bearish bias kind of had this scenario that the first half would be fine but then by July August she'd start to discount the shrinking of the balance sheet I just didn't see how that rate of change would not be a challenge for equities that other than Pease and that's because margins are an all-time record we're at the top of the valuation round any measure you look except against interest rates and at least for two or three months I've been dead wrong so that was sort of the the overcome overwhelming macro view interestingly some of the things that tend to happen early in a monetary tightening are responding to the QE shrinkage and that's obviously as you've cited emerging markets so the the cocktail I mixed up for here was to continue in this and going on for three or four years at my firm to continue on the disruptors that would be the cloud-based companies the internet companies to be short the disrupted which would be things like retail staples that kind of stuff and with regard to China to continue to own who I thought would be the winners in the Chinese internet it's been a below-average year mainly because the Chinese Internet's which were very very good to me the last two or three years have been pretty much of a disaster this year I gave an interview at Sun Valley not this year but last year and said that I thought the Chinese Internet's were at less risk of government regulation than the US Internet and everyone in the audience held would laughter and I said no I'm serious because they're partnering with the government because they have all this information that the handover the government the internet has been the greatest friend the Communist Party could ever imagine whereas 15 years ago I would have told you the internet was going to destroy them well at least on the gaming side with $0.10 I've been dead wrong and it's extended to drag that whole group down the other thing had happened two or three months ago mysteriously my retail and staple shorts that have just been fantastic relative to my tech Long's just have had this miraculous recovery and I've also struggled mightily and this is really concerning to me it's about the most trouble I've been about my future as a money manager maybe ever is what you mentioned the cancelling of price signals but it's not just the central bank's if it was just the central bank's I could I could deal with that but I'm one of my strengths over the years was having deep respect for the markets and using the markets to predict the economy and particularly using internal groups within the market to make predictions and I think I was always open-minded enough and had enough humility that if those signals challenged from my opinion I went back to the drawing board and made sure things were changing these algos have taken all the rhythm out of the market and have become extremely confusing to me and when you take away price action verses news from someone who's used for i-section news as their major disciplinary tool for 35 years it stuff and it's become very tough I don't know where this is all going if it continues I'm not gonna return to 30% a year anytime soon not that I think I might not anyway but one can always dream when the free money ends we'll go back to a normal macro trading environment well let's talk about the hell coasts we haven't seen the algos cell we see now goes by we saw a little bit of it in February when there was some concentrated selling we saw it in China in 2015 which was really scary most of the people weren't focused on that but I was I think you were too and their program to sell if the markets down 3% machines are running can't be stopped a huge amount of trading and money is being managed that way and we've been operating in a bull market and a strong economy what happens when it's a bear market and a bad economy and will things get out of hand so knowing that and knowing that weird risk of that any moment unfolding January February just came like this how are you protecting yourself and insulating you were you watching for if that might happen it's a little bit like after 9/11 waiting for the next terrorist act in which case you would have missed where a roaring bull market for the next six years because you're sitting there because Dick Cheney told your neighbor you're supposed to move out in New York I'm just gonna trust my instincts and technical analysis to pick up this stuff but I but I will say that and I proved it to my own detriment the last three or four years the minute the risk/reward gets a little dodgy I get more cautious than I probably would have been without this in the background but I want to be clear that the major challenge for the algos for me is not some horrible market event right I can actually see myself getting caught in that but I could also see myself perhaps taking advantage of it the challenge for me is these groups that used to send me signals it doesn't mean anything anymore I gave one example this year so the pharmaceuticals which you would think are the most predictable earnings streams out there so there shouldn't be a lot of movement one way or the other from January to May they were massive underperformers in the old days I'll look at that relative strength and I'll go this this group is a disaster okay Trump's making some noises about drug pricing their background but they clearly had chart patterns and relative patterns of suggest this groups a real problem they were the worst group of any I follow from January to May and with no change in news and with no change in Trump its narrative and if anything an acceleration in the US economy which should put them more toward the back of the bus and the front of us because they don't need a strong economy they have now been about the best group from May until now and I could give you 15 other examples and that's the kind of stuff that didn't use to happen and that's the major challenge of the algos for me now what you're talking about now that that might be a challenge for society and the investing public in general and yes I could get caught like anybody else in them but yeah there's probably some degree of having one foot out the door the other eye whether otherwise might not have because I do know this is in the background you do know though I read I skim the article but there was something in the paper about how we're taking more measures to put in circuit breakers whatever they call those things to stop the phenomena you're talking about doesn't mean they'll be effective but so how are the algos operating why are they distorting the price signals well I'll just again tell you why it's so challenging for me I a lot of my style as you build a thesis hopefully that no one else is built you sort of put some positions on and then when the thesis starts to evolve and people get on and and you see the momentum start to change in your favor then you really go for it you pile into the your piling of the trade it's what my former partner George Soros was so good at and we call it if you follow baseball it's the slugging percentage that's supposed to batting average well a lot of these algos apparently are based on standard deviation models so just when you would think you're you're supposed to pollen and lift off their models must tell them because you're three standard deviations are where it's supposed to be they come in with these massive programs that go against the beginning of the trend and if you really believe in yourself it's an opportunity but if you're a guy that uses price signals and price action versus news it makes you question your scenario so they all have many many different schemes they use and different factors that go in and if there's one thing I've learned currencies probably being the most obvious every 15 or 20 years there's regime change so currencies traded on current account until Reagan came in and then they traded on interest differentials and about five years ten years ago they started trading on risk-on risk-off and a lot of these algos are built on historical models and I think a lot of their factors are inappropriate because they're missing they're in an old regime as opposed to a new regime and the world keeps changing but they are they are very disruptive if if price action versus news is a big part of your process like it is for me so how does that play out is is this going to get worse or does it blow up how do you see it I pray it blows up but I don't see that happening because money manager is so bad I assume they're gonna outperform and I need a 95% of the money managers I think you know I don't know whether you've read Kasparov book but he thinks like the ultimate chess player is not the machine it's the machine with a man and his intuition using the machine heavily I think there's always gonna be five or ten maybe not a lot more humans who the best machine in the world the alphago type thing will never beat that human as long as he's using the machine and they need to be used and they need to be understood I can't see me passing my money on their machine but I think I'd be an idiot not to know the effect these machines are having and frankly using them it's just one more input that I didn't have 20 or 30 years ago but you've got to understand when the signals are real and when they're driven by them and you got to understand the timeframes are using machines yourself I have money with a couple of machines it's very small amount of money it's just enough money so they send me signals when they think something dramatic is happening and I'm early enough on in the process that I don't know my conclusion but I assume a lot of these machines are on the same factors and if the machines start saying something is gonna happen they send me a notice and that's to use a football term that's under review I'm gonna watch this for a year or two and see if they're on to some or if they aren't and there seems to be correlations that have no make no sense yes for example the R&B and gold are trading very closely I mean it makes no sense you know and that's very dangerous and even day to day there's correlations that make no sense it's all messed up my great hope is a we get out of this ridiculous monetary regime and when we do that things start to make sense again I've always I've as you know maybe to a fault have been critic of the new monetary regime which is very academically run and I've always talked part of capitalism which you got to have a hurdle rate to investment right you can't just go on these silly inflation this and that right that if you're gonna make an investment it should have some hurdle rate and I think taking the hurdle rate away from investments and all this stuff is causing a lot of this stuff we're talking about I don't know that but that's my intuition and I'm hoping that a we go back to some sort of normal regime sometime in the next 20 years and then I'm hoping that the stuff you're talking about at least diminishes greatly but I don't know Carol I just don't know yeah like everything else I'm open-minded on it so summer of 2017 there was a hope that Kevin Warsh might run the Fed he worked for you for seven years I met him he was against qe2 as you were as I was and unfortunately that didn't happen he worked for you for seven years so he still works for me he still works and whatever what a fantastic opportunity to have him a Fed chair grounded in the real world for once so if you were running the Fed now what would you do and give the two challenges that you obviously know but for the audience if you if you don't raise rates you know asset prices continue to build and one of your major points in the past has been the way you caused a deflation is to deflate an asset bubble that went too high that's been a major concern of yours and of mine on the other hand because of the enormous rise in debt two hundred forty seven trillion ups eleven percent in the last year three times global GDP a lot of companies and countries would be bankrupt if interest rates go too high plus all the malinvestment that took place as funds were forced to lend money in ridiculous rates so how do we how do we regularize this is really a problem and you said i'm low care under the radar where to use but in every private talk i've given for the last five years I've answered this question the same way but it's a much much much more challenging situation than five years ago for the reasons you cite one of the more incredibly revealing things Trump said when he went after the central bank is we shouldn't be raising rates don't they know we have all this debt to issue I'm coming up but it's the chicken in the egg the reason that has exploded again there's no hurdle rate for investment and when you can borrow money at zero of course debt is going to explode so you're exactly right we have this massive debt problem if we don't normalize it's going to accelerate and cause a bigger problem down the road if we do normalize we're gonna have a problem and unfortunately we're gonna have a much bigger problem than we would have had if we had normalized four or five years ago so I'm gonna give you the same answer I gave it at dinner of four or five years ago is I would raise rates every meeting as long as I could and the minute you got 15 an shal disruption I would back off and the sad thing is since I made that statement oh my god we've had these just rip-roaring markets and what I was saying is just sneak one in every time you can just sneak one in yeah and they've passed up on so many golden opportunities but the problem now and you you articulated it beautifully is now the debt is so much higher particularly in emerging markets than it was five years ago you're not going to be able to raise that much more and we're already starting to see the consequences but somehow if I'm reading them correctly which is not easy they seem to have stumbled into what with chairman Powell pretty much the formula I would be doing now although I wouldn't be on this quarterly path it's way too predictable which is as I'm reading them by the way other people with just as big brains are reading in the opposite they're gonna go every opportunity they have until you have a dramatic tightening and financial conditions and because of the debt out there that's how I would play it right now you can't just say okay I'm going to three and a half or four no you just sneak one in see if they handle that well when I say they handle it I'm not talking about a five or ten percent correction I'm talking about though all all the various measures out there that we need to look at that's that's what I would do but but it's just kind of ridiculous with unemployment rate at three eight here and conditions where they aware are everywhere to have rates at this level and probably the most egregious has been the ECB and one can't even imagine the rot that must be in those banks from malinvestment ah well I remember back in 96 I think we were both in the same place that the contagion and emerging Asia and I was arguing is going to spread to all emerging countries and they come back to the United States which it did but it fueled all that money came in to the u.s. and fueled the u.s. bubble much worse than it would have been so the question is if we keep raising rates is that same scenario going to happen putting our market more at risk of higher evaluations I don't think that last blast off in the now stuff and that was because of higher rates I think it was because if you remember we cut in September of 98 then when they'd their inter meeting cut in mid-october and then with the market a new high Greenspan did one final cut at the end of October and I remember having been bearish that summer and then doing an about-face thinking we don't need to be easing there's nothing at all wrong with the American economy and this this money is probably going to flow into the US so I think the phenomena you described has already been been happening right so I think we're somewhat well on the way it's interesting you bring up that period because one of the more disturbing things that Powell said in Jackson Hole was his praising of Greenspan in the late 90s in my opinion and by the way it's all over the media what a genius he was for not hiking and letting the thing run my opinion that was the original sin when the Nasdaq went to 125 times earrings at a dot-com bust and then because of the dot-com bust we offset that with it with the housing thing so that started the whole thing so I have a very you hate to have a different opinion with the central bank consensus because you're not into the central bank they are but so no I think the phenomena you're talking about is already happening that money is flowing in here and we have a you know in a practitioners basis we have a lottery ticket in in Brazil and in South Africa because as we've seen back in the 90s and again now these things can move 5060 percent and your risk is probably not much more than the carry I don't know whether I'm going to get paid but with the monetary tightening we're kind of at that stage of the cycle where bombs are going off and until the bombs go off in the development markets you would think the tightening will continue and if the tightening continues the bombs will keep going off I would think in emerging markets because there was no more egregious recipient of free money than emerging markets because you had the double whammy a all the vanilla money managers poured money into the place B you had no market's constraints on the political actors I mean the stuff that was going on even a year or two ago I think in you imagine that Argentina issues a hundred year debt a hundred years at 7% I can't even remember a government surviving for five or ten years much less on arrears so you've been intact big tacky you've been right for the right reasons how do you navigate the phenomenal oligopolies that they are profit and machines that they are with what looks like a regulatory tidal wave coming at them and how do you decide when to get off that that investment perhaps I should have gotten off of a few weeks ago and I miss my window Karla's hard to figure out I guess let's just take Google okay which is the new bad boy and they're really a bad boy because they didn't show up at the hearing I have an empty chair because they only wanted to send their lawyer but it's 20 times earnings it's probably fifteen times earnings after cash but just say it's 20 times I just forget all other stuff and they're under earning in all these areas and losing money they could turn it off and then I look at Campbell's Soup in this stuff selling it 20 times earnings and you know they're they're the leaders in AI unquestioned leaders in AI there's no one close they look like they're the leaders in driverless car and then they just have this unbelievable search machine and one gets emotional when they own stocks when I keep hearing about how horrible they are for consumers I wish everyone that says that would have to use the Yahoo search engine I'm 65 and I'm not too clever and once her why her I hit the wrong button and my PC moves me into Yahoo and Jerry hangs at close friends so I'd say this but these things are so bad and to hear the woman from Denmark say that the proof that that Google is a monopoly and that iPhones don't compete with Android is that everyone uses the Google search engine it's just nonsense you're one click away from any other search engine I just I wish that woman would have to use an on Google search engine for a year just okay fine you ain't Google don't use the product because it's a wonderful product but clearly they are monopolies clearly there should be some regulation but at 20 times earnings you know and a lot of bright prospects I I can't make myself sell them yet right now one thing the Chinese Internet's are proving outside of $0.10 they're just reminding us if and when we get in a bear market it doesn't matter what your fundamental learning is our fight you could argue $0.10 okay there's an air pocketing games and we all know what's going on there but Alabama has beat every estimate just none stop and the stocks gone from 210 to 165 it's just a reminder that all these estimates where they project out earnings three or four years from now and then they project price to sales based on today's prices sales you know some of these cloud companies are selling at ten times sales if they're selling it six times sales which is not crazy in a normal market by the way I own these things in three or four years I've lost money so it's a challenge it's a challenge I completely missed Apple because I'm not really a value investor and I just looked at that enterprise I don't even think the phone is going to be the medium in five or ten years I don't know it's gonna be in your contact lens or some hologram would so I completely missed that one when you worked with Soros for 12 years one of the things that you said you've learned was focus on capital preservation and taking a really big bet and that many many managers make all their money on two or three ideas and they have 40 stocks or 40 assets in their portfolio and it's that concentration that has worked maybe you could go into that a little bit more how that works how many of those concentrated bets did work when you decided to get out if it didn't work do you add when the momentum goes I was up assuming algaas don't interfere with it that's the disclaimer if you're gonna make a bet like that it has to be in a very liquid market even better if it's a liquid market that trades 24 hours a day so most of those bets for me invariably would end up being in the bond and currency markets because I could change from my mind but I've seen like guys like Buffett and Carl Icahn do it in the equity markets I just never had the trust in my own analytical abilities to go in an illiquid instrument which inequity is if you're gonna bet on that kind of size on you just you just have to be right and for all the hoopla around mr. Buffett from 98 to 2008 that's a ten year period Berkshire Hathaway that was down 40% nobody talks about that if you had a hedge fund you couldn't have a hedge fund down for ten years forty percent they would have been out of business in here three four somewhere in there but to answer your question I'll get a thesis and I don't really I like to buy not in zero inning and maybe not in the first thing but no later than the second inning and I don't really want to pile on in the third or fourth or fifth inning so I guess examples are the best one that I made was which was the gift that kept on giving it was after a funny incident with Soros I had been there six months wasn't clear who was running the fund well it was clear it was him but he was trading very badly and I was trading very badly and I had come from a environment and honestly where people thought I was some kind of superstar and no one had ever questioned me and I flew to Pittsburgh because I had Duquesne at the same time and he blew out my bond position while I was on the plane I'd had total autonomy anywhere I've been my whole career so I basically called him up on a payphone that's what we use back then and resigned when I came back he told me he was gonna go to Eastern Europe for five months and that he wouldn't be trading and maybe we were just in each other's hair and he couldn't have two cooks in the kitchen and and let's see whether that was a problem or or if I was really was inept his words not mine so while he was in Eastern Europe the wall came down and I had a very very strong belief that Germans were obsessed with inflation I know that most of them thought Hitler would have never happened if the von Maur Republic thing hadn't happened and when the wall came down and it looks like they're gonna merge with the East Germany the world's thesis was this is gonna be terrible for the deutsche mark my thesis was the Bundesbank is the most powerful institution in germany the public's is obsessed with inflation and they will do whatever it takes on the right side to keep that currency strong and there's no way that deutsche mark is going down in fact the place is going to grow like a weed with all this laborer from eastern germany so while he was gone this happened and the deutsche mark gets killed the first two days now here we are in zero inning and I went in very very big right away because the market gave me an opportunity I can't remember what it was down was down three or four percent I thought it should be up ten percent out and then that of course led to this recurring devaluation started with Italy but obviously the pound let's not go over there that's been beat to death Sweden all these things we kept playing and then and there going on and on but there's a case where we never really averaged up and in fact we couldn't because we were dealing in those instances with fixed currencies so you don't there's no price momentum you're betting that something's gonna break but in the even against the dollar it's all in right away normally I'll wait for I'll go in with say a third of a position and then wait for price come from and when I get that when I get a technical signal I go I had another very pleasant experience with the successor the deutsche mark which was the Euro I can't remember I think was 2014 when the thing was at 140 and they went to negative interest rates it was very clear they were in a trash at currency and the whole world was long in Iran there we go another years I'd like to say I did it all at 1:39 I did a whole lot but I got a lot more brave when it went through 135 and that that's a more normal pattern for me yeah then there would be the strange case of 2000 which is kind of my favorite and involves some kind of lock I had quit quantum and Duquesne was down 15% and I had given up on the year and I went away for four months and I didn't see a financial newspaper in saying so I come back and to my astonishment the Nasdaq has rallied back almost to the high but some other things have happened the price of oil has gone up the dollars going way up and it's rates going up since I was on my sabbatical and I knew that normally this particular cocktail had always been negative for earnings and the US economy so I then went about calling 50 of my clients they stayed with me during my sabbatical who were all small business men I didn't really have institutional clients I had all these little businessman and every one of them said their business was terrible so I'm taking this is interesting and the two-year is yielding 6:04 not that I would remember and Fed Funds were six and a half so I start buying very large positions in two and five year US Treasuries then I explained my thesis to Heinemann and i thought that was the end of it and three days later he's run aggression analysis with the dollar interest rates in oil what happens to S&P earnings and it spit out a year later S&P earnings should be down 25% and the street had them up 18 so I keep buying these Treasuries and Greenspan keeps giving these hawkish speeches and they have a bias to tighten that and I'm almost getting angry and every time he gives a speech I keep buying more and more and more and that turned out to be one of the best bets I ever mayne again there was no price movement I just had such a fundamental belief so sometimes it's price sometimes it's just such a belief from the fundamentals but for me I've never trusted myself to go put 30 or 40 percent of my fund in inequity I mean I did it when I was managing eight hundred thousand dollars which is what I started with but not a nun in the illiquid position one of the great things I understand you do is when you've had a down year normally fund manager would want to get aggressive to to win and win it back and which you you've told me that you do you you take a lot of little bets that won't hurt you and to get back to the to break even it makes the tremendous amount of sense maybe you could just explore that a little bit with me yeah one of one of the lucky things was the way my industry prices is you price on in at the end of the year you take a percentage or whatever profit made for that year so at the end of the year psychologically and financially you reset to zero last year his profits are yesterday's news so I would always be a crazy person when I was down in a year but I know because I like to gamble that in Las Vegas 90 the people that go there loose and the odds are only 33 to 32 against you in most of the big game so how can I have sent lose it's because they want to go home and brag that they won money so when they're winning and they're hot they're very very cautious and when they're cold and losing money they're betting big because they want to go home and tell their wife or their friends they made money which is completely irrational so and this is important because I don't think anyone has ever said it before now one of my most important jobs as a money manager was to understand whether I was hot or cold life goes in streaks and like a hitter in baseball sometimes a money manager is seeing the ball and sometimes they're not and if you're imagining money you must know whether you're cold or hot and in my opinion when you're cold you should be trying for months it shouldn't be swinging for the fences you got to get back back in a rhythm so that's pretty much how I operate it if I was down I had not earned the right to play big and the little bets you're talking about were simply on to tell me had I reestablished a rhythm and was was I starting to make hits again the example I gave you of the Treasury bet in 2000 it's a total violation of that which shows you how much conviction I had so this dominates my thinking but if a once-in-a-lifetime opportunity comes along um you can't sit there and go oh whoa I have not earned the right now I will also say that was after a four-month break right my mind was fresh my mind was clean and I will go to my grave believing if I hadn't taken that sabbatical I would have never seen that in September and I would have never made that bet it's because I had been freed up and I didn't need to be hitting singles because I came back and it was clear and I was fresh and so that's kind of it was like the beginning of the season so I wasn't I wasn't hitting bad yet I had flushed that all out but it is really really important if you're money manager to know when you're seeing the ball yeah it's a huge function of success or failure huge so when you made that that trade you just described there was a huge amount of conviction and and historical proof that this had always worked so today as we look at the US equity market that's gone up four to almost ten straight years and our performance has been dramatic what would you need to see to give you the conviction to want to go short well unfortunately I have gone short several times this year and at least I'm alive but I regret having news so I looked seasonals in july/august and I looked at the background of the I had no precedent for a balance sheet rate of change going down a trillion dollars from where I've been but that gave me the conviction to go short on top of the fact that seasonally I had a trustee period that also sort of rhymed with right when the slope of the curve of the QE was shrinking it didn't work I got a bloody nose and you know and now we contemplating my future but everything for me has never been about earnings it's never been about politics it's always about liquidity and my assumption is one of these hikes I don't know which one it's going to trigger this thing and I am on triple ran alert because we're not only in the timeframe we're in the part and maybe markets don't anticipate the way they used to I thought markets would anticipate there's no more euro ECB money spilling over into the US equity market at the end of the year so this is a good time to take a shot clearly it wasn't if we get a blow off in the fourth quarter which seasonally tends to happen particularly in Nasdaq talk markets particularly if these bombs keep going off in emerging markets I could see myself taking a big shot somewhere around year-end but you know that's a long way off on I'll cross that bridge when I come to right now I'm just licking my wounds from the last shot I took well we have JG bees which have been the most amazing vehicle I'm we're back in the in the late 90s everybody's favorite short was JG bees and I think I found it jumped on the bandwagon at one point but the thought was that the jgb was the outlier but the jgb was really the leader absolutely that was that was what we all missed but then we when I figured that out so we got to minus 30 I think on the tenure on the jgv which I thought had to be as short but it would have been I mean it was a year or two I would have been dead money now it looks like yields are breaking out of the jgb I don't know if you agree with that it looks like something is going on Kuroda is accepting perhaps that it's not working and they need to change and them having been the most egregious of all the central bank's is that a really important change for the world it's part of the puzzle I'm talking about in and of itself I don't know but since it looks like it could be happening by the end of the year if not sooner and it looks like at the same time the ECB will stop buying bonds but it looks like at the same time we'll be shrinking our balance sheet 50 billion a month it's an important all these pieces fit together for reckoning I'm not in the business of making a fortune if something goes from ten basis points to 20 basis points that really that's not something I'm gonna make a big bet on I mean I might have a short on don't use myself for something like that right but I do think it's very important in terms of this overall narrative it's also instructive why they're doing it right because it looks like Temari they're not doing it for economic reasons they finally understand that it's killing their banks which is the blood and the oxygen you need to run the economic body right and that's causing a political problem I sure hope we don't need 25 years of that kind of evidence before we normalize right but I think I Carol I think it's very important but only as a piece in an overall puzzle they're all lying in the same direction which is why I made the bet short in July and you know was wrong at least on a trading basis but psychologically I'm still there it's going to be the shrinkage and liquidity of the triggers this thing and frankly it's already triggered at in emerging markets and that's kind of where it always starts where I haven't seen it yet and where I think should happen for the equity and God knows talk about a crazy price market is the credit market and it's amazing then probably since the 1880s 1890's this is the most disruptive economic period in history there's hardly any bankruptcies so whatever that buffett line about swimming naked with the tide there's probably so many zombies swimming out there and there's going to be some level of liquidity that triggers it who knows it might start with Tesla I don't know but it's I mean could this Tesla thing have happened in any other environment in history I don't think so it's just ridiculous what's going on there in the last few weeks but I don't look at it so much as Tesla it just describes the environment to me it's nuts right and all the the malinvestment and the trillions of dollars that were spent without a cash return and you just can't imagine how many zombies there really are out there and a corporation's buying back their stock to the tune of five trillion running down their balance sheets and then you go to the high-yield market where it's covenant light and a huge amount of issuance what happens when interest rates start to reflect credit risk you know intuitively you can make a case that we're gonna have a financial crisis bigger than the last one because all they did was triple down on what my opinion costed Bernanke and I have a big disagreement over what caused that crisis but to me the seeds of it were born in a three-room we had nine percent nominal growth in the fourth quarter and we had one percent rate which wasn't even enough he had that stupid considerable period thing attached to it and you had serious serious malinvestment you know for three or four years subprime was pretty easy to identify if you had the right people showing you which I was lucky enough to have had them come in I don't know who the boogeyman is this time I do know that there's zombies out there are they going to infect the banking system the way they did last time I don't know what it what I do know is we seem to learn something from every crisis and this one we didn't learn anything in my opinion we tripled down on what caused the crisis and we tripled down on it globally tried to solve the problem of debt with more debt exactly which is what we did in the 20s and that didn't work out with Wall Street just cheering them on cheering them on well we've got this huge entitlement issue which you've read a lot about 100 trillion of unfunded liabilities Medicare Medicaid Social Security five times US GDP just as bad in the rest of the world worst demographics in 500 years dependency ratios rising you're going to have a battle between creditors and debtors at some point up to now the creditors have been winning but they're starting to lose lose a couple and when that plays out we're gonna have some really tough times which brings me to this whole idea of a populism and I want to kind of bring them all together so I started following populism back in 2011 that's when I felt it was coming then we had Raziel I came back from Beijing in October 2012 and was clear to me that the new leadership we didn't know about she that he'd be appointed but we we knew what they were planning to do which was to clamp down on the corruption to save the Communist Party and the word was that we used to describe it as given give a little bit now rather than a lot later having studied in French and Russian revolutions unfortunately an America that that didn't happen so it's just gotten more wealth disparity so populism some people think is represented by Trump and other people have it in different theories my feeling is populism is really about wealth divided and an unequal sharing in in the economy so for 30 years the the worker didn't get a real wage increase now you're starting to get some of it but it's being taken away through higher cost of living so when we look at this whole debt situation we also have to look at it in in the context of populist sentiment and credit redditor versus debtor and I may be ahead of myself here but how do you how do you see all that working out first of all I think you nailed the cause of it because the the previous populist periods we have required much worse aggregate economic statistics to set them off but when I was running Soros a year end for the first few years we had a fixed system as a percentage of the profits and the rage where the high performers felt about the low performers even though they were all ridiculously overpaid taught me that Envy is one of the strongest human emotions and when you look at the wealth disparity today which by the way in my opinion the biggest accelerant of has been QE it's it's not even like that it's kneadable and then you have the internet broadcasting this disparity through millions of bits of information on an ongoing basis I personally think Jeff Bezos deserves every penny he has I think it's one of the great companies ever but you know there have been 20 articles in the last 48 hours I promise you on that he's worth more than a hundred and fifty billion dollars I mean how does it how does a normal citizen look at that and he's not contemplated exactly so I think that is the seed of it it's not some economic malaise it's it's it's the disparity but the disparity has never been worse and probably one of the most disturbing books I've ever read was Charles Maurice coming apart yes and I read that and I said oh my god this is gonna get worse and it can't stop it's just built into this system the irony being what really set it off is when these universities became meritocracy as I said an old boy network and then you sort of have inbreeding between the men and I'm going to Harvard and they all live in the same zip codes and I'm looking at this so I'm going oh my god this is my family and you know it comes home so I don't see what stops this until you end up with some major major dislocations politically and economically because of it you know the Trump comment it's interesting because had Bernie Sanders won the nomination every poll that spring had Hillary running about even with Trump just no one believed it they all had Bernie Sanders 18 points ahead of try and Bernie Sanders was not losing Michigan and Pennsylvania and all those units and Bernie Sanders was also a populist so I agree with you it's not about Trump Trump is clearly a populist don't get me wrong yeah but and it's too global and it's happening everywhere and McCrone was probably a a short-term response to Trump but other than McCrone there's just been surprise after surprise after surprise to the elites on these elections and you wonder why they're surprised anymore well you know my theory on Bernie Sanders is that he was they used sort of internal politics to deny him the nomination that he should have won and had he won the nomination he would have beaten Trump so we would have had that shift already this leads me to the what's going on now and that is America's shift towards nationalism at least under Trump the rest of the world is focusing on maintaining multilateral alignments Japan is just signed the biggest trade free trade deal with the EU Mexico has TPP is powering ahead we have the China's one belt there's a lot of controversy about it but I think it's a tremendous vision I think it's real and I understand why they're doing it yes which is destined to win in the end the answer is I don't know probably the most destructive thing Trump has done in the global trading system is once he figured out how powerful a weapon the US banking system was and how powerful sanctions are but he doesn't understand that that weapon was created and is so powerful because from the Marshall Plan on we have been the only country that all the others no matter how they might bad novels are that trusted to do the right thing we're we're the only nation in history that handled success the way we did and yes you should use this weapon once in a while but when you start just shooting it all over the place and you're now shooting at it you know it Canada Europe and here there that's a lot different than shooting it at Iran or Russia exactly and he's like a little kid that found this water gun and he's just wearing on going all over the place with it and the the biggest danger I see is we lose that trust that America is good and in the end they're going to do the right thing I don't think it can be lost in four years I really don't know but if Trump is re-elected or maybe even worse if another populist on the very hard left is reelected and they they use the weapon the same way I think by 24 which by the way is exactly when the teittleman thing will start to get crazy this thing could be very bad I'm quite open-minded let's see who the Democrats put up let's see if Trump's in office but I don't think the world will give up on us in four years I think I'm open-minded to Trump having been a one-off and the trade system can survive this but it's a it's not like that's an 80% probability job it's just well it's probably somewhere between 40 and 55 that it works out it's sad for sure the whole supply chain issue is phenomenally interesting and complicated and I'm concerned that the administration doesn't understand the complexities of it and by trying to pull out all of the sensitive components from China and relocate them to the US or to Vietnam or whoever else is so immensely disruptive and dangerous and then you start a process so I was in during the worst part first part of the the first meetings between the Chinese Americans others and Beijing I was also in in South Korea and I met with Samsung and already China was moving very aggressively to create its own semiconductor industry was investing 150 billion which of course has ramped up 10 times faster and I asked him some what are you going to do with the Americans forbade you to sell semiconductors would you continue to do so and I was told that they would but they would also help China build its own industry even though it's going to cannibalize them so I see these trends that are taking place that won't be reversed and Europe which would normally be an ally of America to try to hold back China's advances is now being forced more towards China and these aren't things that are going to shift back because once you start to take these positions is really you know you're not going to reverse yourself I agree with you on the semiconductors and again it emphasizes of what you talked about earlier which is sort of now policies even if they worked and I can make an argument that it won't even work because if you just disrupt supply chains everything's gonna blow up yeah but you've now you've absolutely put in force the creation of Chinese semiconductor industry that didn't need to happen the time frame that's going to happen I think there's been enough frustration with the Chinese that the Europeans could look at this as a one-off and be right back with our allies as our allies again but know that you're right there are a lot of other things that are set in force that we're not going back to and I think you can make a good argument that some of the aspects of the China situation are a fight worth fighting you can also make an argument that not but they're not a fight worth fighting without Europe and Canada and all these allies we would have had that that's just if you want to take on China and again fair people can debate on on whether that should be done if you want to take on China you can do it with a united front you don't do it by alienating all your partners as the process gets underway especially when the u.s. is a net debtor to the tune of a trillion is running fiscal deficits that are close to what they were in 2009 I think we have full employment at full employment and I mean III if we're in a recession that thing could go to two trillion and a heartbeat that's when deficit explodes yeah sorry to interrupt if we have a recession yeah and I think we're we're rolling over if I remember correctly something like 10 trillion of nominal and new each each year we sold a hundred and thirty billion in in July which is a record since two thousand eight or nine and so the whole owners of our of our dad are the very people that were having a trade war yes it seems a little ironic to me well it is what it is you know so let's move over to your philanthropy and your passions there and what you're most interested in and and what's happening that's exciting and you're neuroscience and stem cell work you know in general Fiona and I didn't want to give to the arts we don't have anything against the arts we think they're wonderful but they seem to be extremely well supported relative to the utility society gets out of them so our our big areas and I'll get to your question specifically were at-risk youth education the environment and health and the neuroscience and the stem cell are both Fiona's original idea not mine we both think that the brain is sort of the last frontier in terms of rapid advances with the body and it's been extremely frustrating so far with the autism and Alzheimer's and Parkinson's and we're both convinced me by Fiona Fiona by a lot of research that this problem with the right funding can be solved over the next say 20 years and great advance is going to be made not dissimilar or what started going on with cancer 7 or 10 years ago so that's pretty much the thought on neuroscience and stem cells we've non anonymously we've we've funded the neuroscience Center and obviously NYU and a lot of the basic research and we've also funded anonymously some of the more applied research and others too but we find them both very exciting and why you seemed like the perfect place because they have a great aggressive leader in Bob Grossman that's sort of a necessary requirement as anything we invest in I mean I don't think it's an accident that that place has gone from like 40th to third in medical school rankings since Langone got involved in broad grossman awards just ridiculous I mean the only people out of them now are Harvard and Johns Hopkins and I think they were considered average as late as 15 years ago and then of course stem cells are another great hope in all these areas and I know Fiona was very enthralled with Susan Solomon and what they were creating in the bang for their buck so in both cases we went for an area that we thought showed great potential in terms of progress and we picked institutions which we thought was very strong innovative leaders who couldn't who could execute on the proposition frankly if some other institution solves the problem I'll be thrilled I don't really care I'm sure you saw what NYU did with the medical school I would also be well it wouldn't be the greatest outcome for NYU I think even the people who run in weiu our dream would be that starts an arms race because the brain drain going out of medicine and to less productive things like my business and and and the tech world social social media and things has been horrendous because by the time these kids go through four years of premed medical school residency and then fellowships they usually don't start earning money until their mid-thirties and they got 500,000 dead and now you can be making 2 or 3 million a year and my business with a lot less preparation at the age of 27 or 28 so I really hope Harvard with their 40 billion endowment or whatever it is and the others decide that they can't they can't let my you just grab all the great medical students so in terms of defeating Alzheimer's and dementia have you've gotten far enough along to know what what the formula is - I had on yeah I have there's all sorts of theories out there and some of the drugs right now that that attack amyloid I mean I mean I know Biogen had a resurgence and this company we actually own in switzerland caught on on you and those drugs would be a bridge the ultimate solution i think would have to be something different and Fiona knows a lot more on the subject than me and she's pretty optimistic that they're gonna solve this thing in twenty years more and more of our friends are showing up in the dementia even at young ages yeah and you watch how debilitating it is and it's incredibly depressing we've seen it it didn't happen before we started the neuroscience Center but we've seen it up close and personal and uh it's tragic just tragic and very very very painful really hoping and even though you're seeing in younger ages we're all living longer so it's manifesting itself more and more just simply because humans are living to age of say they used to and every part of the body has seemed to have kept up with the progress except the brain is that they're not going to be doing brain transplants so we got to fix this directly how would you like to be remembered what's the most important thing when you look back in your life is this is how I want people to remember me I don't know how important that is to me but since you asked the question I just I've been so blessed being an industry with just crazy financial renumeration relative society's benefits and obviously I was given a gift on I was a good student but there were certainly smarter kids in me I I just have a gift of compounding money I'd like to think that I made a difference with that and I guess if people are remembering things I'd like to be remembering as as not some loud ostentatious overly consumptive person in the mean time but I think I thank God I married Fiona because she wasn't from a lot of money but she had old money and she taught me to behave in a way I probably wouldn't know from the get-go when I see some of my peers and I'd like to avoid that stamp of a sure sure now we have a president who seems to have exceeded that culture just so I guess that would be it just that I made a difference in live at least a life for some humility well you surely have and I think you've gonna help a lot of people with your insights today and thank you very much for joining us here giving us your time fun it was really a lot of fun Stan Druckenmiller is the most requested guest in the history of real vision myself included we've all wanted to see and learn how he does things because his track record is extraordinary and the brilliance of the man is something that doesn't come across enough in television because there's never an in-depth interview you just don't know that much about him but I'm so pleased that Kiril managed to flesh out what makes Stan Stan what makes him think in how he does things there is so much learning for all of us in this and it's truly an honor for us to have had Carol conduct an interview and I really hope you enjoyed it as much as I did and I cannot wait to see also who Carol brings next to real vision it's going to be somebody legendary you you

Channel: Real Vision Finance

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Keywords: Investing videos, finance videos, finance interviews, real vision app, real vision tv, real vision videos, stanley druckenmiller, stanley druckenmiller 13d, 13d publications, 13d global strategy, 13d strategy and research, 13d, druckenmiller, druckenmiller interview, stanley druckenmiller interview, stanley drckenmiller real vision, stanley druckenmiller trading strategy, stanley druckenmiller documentary, Stan Druckenmiller, investing, stock market, how to invest

Id: G-MlrpoMig0

Length: 84min 39sec (5079 seconds)

Published: Tue Nov 13 2018