Druckenmiller on How AI is Dominating His Long Portfolio

[Applause] okay now I actually want to start with you not with the presidential elections we'll get there but I do want to start with you on the U.S debt limit because this is something where we're out of the clear on the surface but you have been very very clear you've recently revived a presentation you did 10 years ago with students at USC and you've told them that the economic storm that's Brewing from U.S spending is worse than you had imagined I also want to bring up on the screen some of the charts that you showed them kind of the pace of entitlement spending in the United States I want to ask you what are the consequences now that we're kind of past the initial pains in Washington what is the country and the economy and investors what are they ignoring thanks chanoli nice to be here um I don't think the entitlement situation is something you should be trading on in the next three to six months what I've been focused on actually for over a decade is the long-term picture and the long-term implications so the last thing you should do is run out of this conference after I say something about entitlements and think there's a trade to be made on it uh that's not that's not the situation okay I need to go back a little bit but um way back in the 90s somebody sent me a paper outlining how the birth rate in the 50s was so high and it had shrunk and that we're going to have this demographic storm hit sometime in the 2020s and you could pretty much map it because the demographics of public information this was on top of the fact that since Medicare and Medicaid joined Social Security as entitlements in the 60s the seniors share of government spending had already grown dramatically safe from 30 to 58 percent of outlays during that time and I was concerned way back then when that sometime the 2020s sort of like the Pig and the python when when the Baby Boomers became seniors already with them a high percentage of government spending your growth of seniors would be dramatic and by the time I was looking at it the the birth rate for the current generation was below two so you're going to have this huge increase in seniors at the same time that you had a reduction in workers in the way our system works you take the taxes of current workers to pay for seniors um it really looked bad to me in around 2011 or 2012 so much so that I thought I go out and see if I could move the needle on this issue I was really successful the only thing Donald Trump and Hillary Clinton agreed on was that you shouldn't touch entitlements in other words nobody listened to me um it's um it was a tough situation then and looking out it was really scary but when you just use the term worse than I ever imagined what I didn't know is the next 10 years we were just going to have a proliferation of government debt even outside of outside of entitlements and then when covet hit it was just sort of the cherry on top it's it's hard to believe looking back during those 10 years with interest rates near zero you had two big economic booms one going into 18 under Donald Trump supposedly a republican uh supposedly with the party that cared a lot about spending and with three and a half percent unemployment we had something unprecedented we had a trillion dollar deficit usually when the economy is roaring tax revenues go up in the deficit shrinks we then had a post covet boom in 2021 which was also accompanied by wild increases in in Tech and in Tech stock prices so much so that we had capital gains 600 billion dollars above the average capital gains for a year we sold 100 billion in Spectrum sales we had 10 percent nominal growth because of inflation so you might ask yourself since the last tech boom in 99 under Democratic Administration by the way we had a surplus how big was the Surplus with all these anomalies in 21 again I've LED my own question we had over a trillion dollar deficit we didn't even get to less than five percent of GDP so what I was worried about 10 years ago you now have an enormous amount of debt on top of it the zero interest rates kind of suppressed what I would say is the concern about this obviously a lot of debt you're not pay any interest on it who cares but now once the inflation hit interest rates are going to go up so the punch line I'm rambling on here more than I wanted to the punch the punch line is if you take the current situation and you ask yourself why should I actually say something else the current the debt went from saying um 20 trillion to 35 I'm sorry 15 trillion to 31 trillion over that time that debt and this is important because most people don't understand it um assumes he'll never be another Medicare or Social Security payment made 200 trillion is the present value as you've calculated for the students not me credible people Larry cutlickoff and others so if you assume we're never going to have another social security or medicare payment the debt is 31 trillion but if you did your accounting like any Corporation and you assume those payments going to be made yeah the present value is probably around 200 trillion dollars so you know I should also say that the big type is U.S exceptionalism at risk is it yeah I think it is um America is an amazing country with an amazing system and if you look at the innovation in this country just look at what's happened since 1980 we LED in the in the PC Revolution we led the development the internet we led the development of cloud we led to development mobile maybe it's not good that we let in crypto who knows um and we're obviously leading in in generative AI so we've been the leader throughout but we've also been the reserve currency and we've been eating so much Seed corn presently that I worry about the future if if you were to take economists have this only economists come up with this term it's called fiscal Gap what is fiscal Gap that's how much you would have to raise taxes today to guarantee the benefits you've promised seniors in the future it's 7.7 percent of GDP what is 7.7 percent of GDP mean to actually paying for the entitlements we promised in the future you'd have to raise all taxes 40 percent today forever or cut all spending 36 percent today forever so what what I'm looking at here is this stuff is borrowing from the future you're going to crowd out private Investments you're going to crowd out the kind of investment that made us a leader on all those kind of things but again this is a long-term worry but but the statement by both parties that entitlements are off the table it's like 70 percent of the federal budget and rising and now that interest rates have come up it's a fantasy in fact it's a lie we are definitely going to cut entitlements it's just a matter we're going to cut them today or in the future and the longer we wait the more it piles up a year or two ago um or right now the interest expense is about one or two percent of GDP it's about six percent of outlays the cbo's estimate not mine interest expense is 27 percent of outlays by 2050 and just entitlements and interest expense just though two things alone no defense no running the government no money for the disadvantage will be 117 percent of taxes by 2050 and it'll be more than all taxes by 2040. but again for investors in the room this is just stuff to worry about in the long term I like to think in the long term but for trading it doesn't impact your your original question the way you put it to the students it's the tsunami that is 10 foot out on the horizon but you know the other the other thing here is you know it's I think it's pretty safe to say you've been pretty critical of fiscal and monetary policy the question here and I want to put one more chart on the history of bubbles that you show the students as well because the question I have for you there is do you believe that there are still many shoes to drop as the Central Bank stays tight uh that's my central case um ideal in the world of of risk reward there's a 500 year history of asset bubbles well documented in a book that you had some issues with the price of time uh and basically it documents and I had already known this about the last hundred years but it's going out for 500 years every time you've had a significant asset bubble economic trouble way ahead but yeah when you had 11 years of free money um people do stupid things all you have to do is look it up there about how the stupidest is somebody paid 80 billion dollars for Dogecoin which was invented as a joke I mean that can only happen in the world of free money it also suppress people worrying about the kind of stuff I just talked about two or three minutes ago because you keep rates at zero but the fact that this was arguably the most disruptive economic period we've had since the late 1800s and there were no bankruptcies apparently they've started in the last few weeks tells me there's a lot of stuff under the hood when you go from this kind of environment the biggest broadest asset bubble ever and then your jack rates up 500 basis points in a year I think the probabilities would suggest that Silicon Valley Banks Bed Bath and Beyond they're probably the tip of the iceberg nothing's guarantee I've been wrong a lot I've been right a few times but um yeah our Central cases there's more shoes to drop particularly in addition to the asset markets economically what are you most worried about we'll definitely get to the opportunity on the fat pitches that you see on the horizon but before we even get there what starts to sink um I could see corporate profits down 20 to 30 percent normally I would say 40 or 50 in a hard Landing but this recession is so anticipated I don't think a lot of corporations are going to be caught with their pants down which is how normally lose a lot of money as you're not prepared for something that happens um commercial real estate and you know I'm not informing anybody in this room with something they don't know but office is a problem it would have been a problem anyway but but change of Lifestyle in covid makes it even bigger problem financing rates going up and I get a problem I'm worried about credit tightening the next six to nine months obviously the banks are going into an economic period that if in fact we get a recession their balance sheets are already impaired not from where they usually lose money which is loans um from the fact that the FED convinced them that they're going to keep rates to zero until 24 so they bought a bunch of treasuries yielding one or two percent and now they're carrying them at five so so their balance sheets are impaired but if we get in a recession then the real losses comes which is stuff like credit cards commercial real estate that kind of stuff so those would be my my worries um you asked me my worries that's different than my predictions I well the predictions you've been talking about I'm so tired of being a bear and being labeled there but to the bearish point of view we haven't seen it we have not seen that hard Landing yet and there's going to be many people after you today that are predicting a soft landing and so to the extent you still believe that a hard Landing is ahead of us when does it come what does it look like do we see it anymore yeah um a lot of people because we haven't had an economic decline start yet have changed our forecast from a hard Landing soft landing and a lot of others have changed it from soft Landing to no Landing I haven't changed mine at all the fact that it hasn't happened yet doesn't change the probability if it does happen of the depth of it I mean basically 10 trillion dollars 5 trillion monetary 5 trillion fiscal was put in during covid what has happened is that created this giant giant stock of liquidity I think Jamie Diamond said a couple years ago there were two and a half trillion access demand deposits we've been working at liquidity off slowly that liquidity Interruption liquidity shrink was interrupted when Bank of Japan changed ycc they went in and they bought 400 billion dollars worth of bonds to defend their bond market very odd situation they raise rates but then liquidity exploded on it and then obviously the debt ceiling um secretary Yellen Drew down the TGA that's basically the treasury savings account from 700 billion to practically nothing last week that also ended up in non-issuance of government debt so that was a big boost of liquidity all that is set to change now actually the TJ is going to go the other way she's already stated she wants to build it back up to normal levels so you're going to have probably about 800 billion in treasuries issued between now and Year End the Fed will be continuing on with QT you've got the student loan thing which I think has kept consumption up that's all changing in September they're going to have to actually God forbid the United States somebody actually pays interest on a loan so to me the probabilities haven't changed it's been pushed out relative expectations but in no way does the fact that it hasn't started yet change the probability of whether it's going to be hard or soft I would actually argue since it's taken so long the FED has ended up with a higher terminal rate and in fact inflation gets stickier the long it stays in the system that it increases not decreases of probably of a hard Landing by the way after the 87 crash I was convinced we're going to have depression so I've been wrong before and if I'm wrong on this I'll I'll adjust but I have to weigh the probabilities and do what I do in my process and right now that's where we are and when uh I have been I think September is the first time when I was sort of a boom afraid of booming economy inflation guide to I'm more worried about growth that I am about inflation and originally I was fourth quarter of 23. I temporarily maybe lost my mind or maybe I was ripe when the Silicon Valley thing happened and got anecdotals and stuff that is traditionally LED like trucks and Retail move that up to now I think I'm probably wrong and I'm going to go back to the end of 23 but the real answer is I don't know so recession or no recession though one thing that's interesting and you included a lot of people are very encouraged by certain areas of the market particularly the AI boom there's always stuff to do we had a hard Landing in 74.75 and chemicals and oils and that stuff did great I'm sorry go ahead answer well do you think that all of AI makes it through this recession or do you think that some areas of the market particularly in AI start to look like they're in bubble territory well all of AI is not going to make it through whether we have a recession or not because they haven't separated the wheat from the traf shaft yet but I do believe um unlike crypto I think AI is real it's probably it could be as transformative as the Internet it's a huge thing and I think I've argued publicly that if Staples can go up in price in a recession why can't a company like Nvidia if they go up if they go up if their orders and earnings go up 70 percent in a hard Landing which is what I think would probably happening it's not clear that me that Nvidia goes down despite the Loft evaluation level history has proved if you do if you have very good earnings in a recession and they're sustainable if they're not the market somehow figures it out those stocks will do just fine so um we have some Longs we have some shorts and the AIS have sort of dominated the long portfolio for five or six months how do you think about and shortened this Market our shorts have been fine this year except my index shorts which have been a disaster but we always short the same way I just try and look at the current situation and then I try and think of a situation 12 to 18 months from now based on my forecast and I think if I think the security prices are going to be less um then I short them frankly I'm not sure I've ever made money if I took back the last 40 years I'm afraid to look I've never had a down year but I'm not sure I've made money in shorts I like it it's fun but you can get your head handed to you and it's a game that really only professionals and the mass against you if you're if you're dead wrong on a long you can lose a hundred percent if you're dead wrong on a short you can lose 10 times your money and in when I was at Soros I shorted 200 million dollars worth of Internet stocks in March of 99 and in three weeks covered them at a 600 million dollar loss I lost 600 million dollars on a 209 investment in three weeks I was short 12 stocks they all went bankrupt every one of them don't try that at home well I mean to that to that point when you look at the AI kind of Boom here are there lessons to be learned from the.com Bubble bubble yeah uh there are lessons they're definitely lessons to be learned don't get emotional don't get crazy but I will I will say this about the AI Nvidia bottomed in October in the low 100s it's true it's 380 or 390 it's a nosebleed territory if this is a secular move if this is if this thing is real you just don't have 10 month moves that's not how it works even the dot Tom bubble lasts in the two two and a half years for many of for many of the guts of the internet it lasted four years the Cisco is the sun micros so could Nvidia go down materially in the short term from any point yes but I would be I would be surprised if I'm right on AI and the impact on it I mean it's already making the top coder seven to eight times seven to eight times more productive than they were five months ago if it's as big as I think it is Nvidia is something we're going to want to own for at least two or three years not for 10 months and maybe longer certainly the topic du jour there's another thing that a lot of investors are talking about it's the promise of China this idea and you know it's time to get your global view here because so many people rely on you for for the macro perspective The View here is that the GDP in China will expand faster than the United States and a lot of investors are kind of shaking off geopolitical tensions on the back of that theory do you see the same promise that the China Bulls are seeing I do not um I was in love with China until about six or seven years ago you go over there and the energy in Shanghai was like New York on crack I mean just it's just fantastic energy the entrepreneurs were exciting they were into it um and then Xi Jinping did his thing and if you look at China in the rise of China I think it all sort of happened you had this internal capitalist system with a bunch of people that act like crazy New Yorkers building new businesses in a dynamic economy um but he has proved he's not a capitalist he's definitely not a monopolist there's only room for one monopolist in China in his mind that's him anybody that gets their heads stuck up and I honestly think he other either either doesn't understand why China grew and succeeded the way they did or frankly he doesn't care because in terms of staying in power but I would be looking out 10 or 15 years I just don't see it I unless there's a change in power there at the top I think that's going to be a very undynamic economy it's not so much a geopolitical concern I will say this that if I'm right it makes me more fearful of military action because that's when dictators become more dangerous is when they've got a divert attention from the immediate problem so what they're doing now is very stimulative we're expecting a sugar high and some kind of robust growth there maybe for six or nine months but looking out I'm I don't I do not look at them as a big challenge in the United States in terms of economic power and growth there's equally been a lot of investor questions about the future of Japan as well how do you think about the opportunity set and how to invest well when I went to Soros Japan like set me off like a rocket ship because I I assure the Nikki at the top I had everything and then I think every trade I made like five years later on I've lost money in Japan it's been the biggest value trap in history but I will say right now I I haven't checked this but it's it's by far been the the deepest breadth and the best Market uh this year yeah our Market's up I think you said 12 but it's like seven socks and everything else is not even up that's not the case in Japan the breadth is tremendous there you have a couple things going on they look um they look like they're solving deflation plus so you're getting nominal growth they've also it's more than just talk they're really into the whole shareholder value thing and then you got a guy running monetary policy and he sounds like Jerome Powell two years ago I mean inflation's taking off there and he's saying we haven't quite achieved our golient even though he's like doubled his goal that has stated so you put all that together um for now you have a dynamic Market but given my record trading Japan now the last 15 years should do the opposite of what I sing mathematics so we're going to get there uh you know because the fiscal will overtake the the monetary pretty soon as well especially as we look forward to a 2024 election cycle in the United States and when you look at the wide range of Republican hopefuls who are either challenging or May challenge Donald Trump Nikki Haley Chris Christie Mike Pence Ron DeSantis Tim Scott Glenn youngin who has your money and who has your vote um I love Tim Scott I'd like him to be the next president whether he has the name recognition whether he's too nice a guy for this fight I don't know but um I'm not really into dividers I'd like to see the country United I think um from that party he's the one that could probably most accomplish that um I'm kind of excited about Chris Christie taking on Donald Trump the other's kind of like dance around the subject they don't even use his name I think somebody needs to hit him in the mouth with the way he hits people in their mouth and Chris Christie could be very good at that I was very disappointed the way he handled the 2016 thing for those who don't know it on National Television I said that Donald Trump had the um economic understanding of a kindergarten of the U.S economy on national television with John Kasich and then he came a year later and said I overestimated his economic standings it just just just so you were now oh not but anyway um I don't think Chris Christie can win but I'm excited that he's getting in the race because I think he can maybe expose Donald Trump and he really needs to be exposed so what do you think about some of the other candidates especially Ron DeSantis uh you know the way that he has approached corporations in Florida in particular what do you think that means for him as he enters the race I actually think until recently he did a great job in Florida if if you look at the record um he's very smart um not that broad in terms of the people around him he'd have to build that going in um but despite his intelligence it seems like his calculus is to go after the Trump voters I don't think the Trump voters care about policy I don't think they can be moved and by going after the Trump voters he's alienating the other 30 to 40 percent of the pie particularly women and others that care a lot about the social issues he's not my he's not my favorite but um frankly if he ran against Joe Biden I vote for him enthusiastically I wonder you define yourself is there anyone in the Democratic party that excites you well I'd love it if Gina raimondo would run but apparently we're going to put an 80 year old who's going on 100 on the ticket I I don't understand what the Democrats are doing I voted for two Democrats out of the last five elections I'm not like some partisan crazy person but what are they doing um so you know I don't know I don't know there doesn't seem to be anybody other than Bobby Kennedy who's willing to take him on Bobby Kennedy is a little nuts but mark my words he's going to scare this guy because when people go to the polls particularly a year from now because Joe Biden is a moving puck I wouldn't be surprised if if Bobby Kennedy doesn't get more support than any of us could imagine you know democrat or republican the kind of trajectory you pointed at at the very beginning of this higher spending no matter what no matter what scenario we're in in the next couple of years in the United States do you think investors will be facing much higher taxes eventually I'll set for a hedge yeah the only the only way out of this is I mean given what I talked about earlier taxes are going to be much higher in 20 years if it's a Republican president can they hold out for a few more years I assume so but taxes are going up it's either that or you know 30 or 40 inflation which I don't think is going to happen so before I let you go I know you won't perfectly answer me on this with a lot of specificity you've been saying I know I had any perfect answer well what is the fat pitch you've been saying that you have been kind of cautious when it comes to markets at what point do you start to get in and you start to have a conviction trade that is much bigger I think my record is as much knowing not when to play as when to play and because I deal in five or six different asset classes I've had the luxury if there's uncertainty inequities usually that's a good time for bonds and currencies they're doing crazy things when the world's blowing up so there's a lot of volatility there and I I would love to answer your question but this is the most complicated non-road map unanalyzable situation I've ever seen in terms of having a lot of confidence in an economic prediction going forward so I honestly and I hate not to answer questions I honestly don't see a fat pitch right now what I do think is given the change in liquidity giving everything I've outlined some really fat pitches are going to emerge in say the next eight to 24 months and I don't want to blow my cash and being being a horrible mental state being down eight percent making a big bet on something that I didn't have amazing conviction on when I think the road map is going to be good so um you talked to me about this interview in January I probably wouldn't have accepted it if I knew that I was going to be as messed up in the head as I am right now in June but uh I also thought it would be bad to cancel [Laughter] so I don't have a fat pitch but I hope I hope I've imported something to your audience yeah absolutely we will ask you again in eight months you said appreciate it

Channel: Bloomberg Live

Views: 238,153

Keywords: Duquesne Family Office LLC, Sonali Basak, Stan Druckenmiller

Id: 53wThFFuOqU

Length: 32min 14sec (1934 seconds)

Published: Wed Jun 07 2023