Stanley Druckenmiller on Economy, Stocks, Bonds, Trump, Fed: Full Interview

[00:00:00] Speaker 1: People may be confused. They know Stan Druckenmiller, or at least they think of Stan Druckenmiller, as a hawk. You've been complaining for several years that the Fed wasn't raising rates fast enough or soon enough. And now, just as the economy is about to have its best year since 2005, you want the Fed to stop. Why? [00:00:23] Speaker 2: Excellent question, and I certainly think it's a valid one. Let's go back in time a little bit. The reason I started, I think you used the word complaining, four or five years ago was I became very concerned, particularly when they started QA3, that we hadn't learned our lessons from the past and we were going to create another, yet another bubble in financial assets, which would lead to yet another bust, which would lead to even more radical monetary policy and less discipline in terms of government spending and so forth and so on. It's almost a repeat of my schizophrenia that went on in the early 2000s. You didn't know me, Eric, but at the time I was a vocal critic of the last Fed cut in '03. I became particularly incensed in late '03 when the economy had clearly turned and was growing rapidly that they stuck a considerable period on there to ensure that we'd have escape philosophy and good economic growth. The only thing they ensured was a housing bubble, which then led to what we know became known as a financial crisis. Now, here's the contradictory part. If you knew me at the time, you would also know that I became very vocal in as early as '05 about the housing bubble, and by early '07 was very vocal about how the Fed should be cutting rates and reversing monetary policy. I still believe, could be wrong, we'll never know, counterfactuals don't seem to work, had Bernanke recognized what was going on when, to be fair, 20 to 50 money managers did in early to mid '07 that this was not a little $100 billion problem that was containable, but that it was a disaster looming. And had he cut six to nine months earlier, we would have had a recession, but I don't know whether we would have had a financial crisis, and we certainly would not have had the consequences we've had. So let's fast forward. And as you know, a few years ago, I started saying if you wanted to create a deflationary bust, I would do exactly what the Fed was doing. Since 2010, corporate non-financial debt has grown from $6 trillion to $9.6 trillion. Where I'm from, that's about a 60% increase. During that time, corporate earnings increased 27%. So, how in the world did the S&P earnings increase 60%? It's because all that borrowed money went to finance buybacks and M&A. So this entire trillions and trillions of dollars that, to my mind, were pushed, were as a result of investors being pushed by the Fed to go out on the risk curve, take more risk, resulted in a big debt built up, resulted in Donald Trump feeling comfortable doing more fiscal spending. Resulted in Barack Obama saying he did not want to balance the budget on the backs of old people. So there were no entitlement cuts. So essentially, the bond market, which would traditionally have been a vigilante from all this sort of behavior, market signals were canceled. We've developed yet another bubble. And we're now sort of in the position, potentially, and I want to say potentially, where we were in early '07. But I'm not calling for a cut. And that's why I say potentially. If you look at the coincident economic indicators, which I wish the Fed did, they actually look at lagging indicators. But if you look at the coincident ones, they all look quite good. GDP has a three handle, so forth and so on. If you look at the indicators I have historically used in my business, they're not quite red yet, but they are def -- I'm sorry. No, continue. They're not red yet, but what? But they are definitely amber, and they are setting off warning signs. What do you see? Okay. So the best economist I know is the inside of the stock market. And I'm sure you've heard Herrick the joke, and I heard at Bowdoin in my Economics One class, the stock market's predicted nine out of the last five recessions. I will say, with all humility, that's better than the Fed. They've gone 0 for 9, so nine out of five is not that terrible. But the best economist I know out there is the inside of the stock market. So the Fed, when they look at the stock market and they look at financial indicators, probably is just looking at the S&P. But the decline in the S&P, which is funny, when I was preparing for this interview, it was 10, it's now 13, is a bit of a mirage. Because if you look inside the stock market, the cyclical elements of the economy, particularly the front end cyclicals, show a completely different picture than the defensive parts of the stock market. The stuff that's more sensitive to the economy. To the economy. So auto stocks are down 30%. They're not down 10 or 11, they're down 30. Building stocks are down 35. Banks, which you would think might be a symbol of credit or something else, are down 25%. The Russell 2000 is down over 20%. Retail equities are down over 20%. So how in the world could the S&P only be down 10 or 11 when I was looking at these numbers? It's because utilities, staples, and pharmaceuticals, which are economically defensive, are actually up. And this is the same situation I've used cycle after cycle. So that's one of the things. The inside of the stock market, which is the best economist I know and which I've used every cycle when I've invested, is saying there's something not right here. [00:07:31] Speaker 1: And this is the same set of indicators that you've used to predict the past four recessions. The very same? Yes. [00:07:39] Speaker 2: You might say it's because I have a not so pleasant personality. But at Duquesne, we always made, we did predict the last four recessions and our returns going into them. And as they started, we're always well above our average returns over time. So inside the stock market is one indicator. The second would be the yield curve. Again, amber, not red. But we've inverted, as you know, from fives and twos, just slightly. Two years are 269. Five years are 268. The 10 years, 285. So there's not only a big flattening going on. It's a very confusing bull flattening because it's not like we're looking at high rates to start with here. And the Fed has, you know, told us that there's going to be three to four hikes next year after this hike. And the market is just saying, no, no, no. Then the other thing we've looked at historically is credit tends to lead the economy. There seems to be a confidence that this cycle, we don't have the danger we had in the last cycle because the bad stuff, a la housing back then, has not infected the banks. It was more done in the high yield loan market. And to me, it's true. It's great that it's not in the banks because that would probably be a systemic problem and financial crisis. But the economy doesn't really care whether credit is in the banks or it's in the investment community with high yield loans. In fact, I would argue that if you're on the other side of it, you'd much rather work your loan out with a bank than you would with some hedge fund manager out there. So the fact that I'm sure you read the article in the Financial Times yesterday and the fact that credit is drying up to the extent that it is. And there are all sorts of warning signs there. I think the GECDS has gone from 50 basis points to 200 basis points since September 1st. IBM has gone from 30 to 80. High yield indexes are moving. Leveraged loans are down 3%. But more importantly, because we've had eight years of free money and the kind of excesses and pushing people out on the yield curves that's created, it's just a time for caution that you want this bubble to unlined slowly now. Because if you don't and let's say these indicators turn red, you may have to do a lot more crazy monetary stuff. And actually, it'll be more of a problem in terms of someone like me who eventually wants to normalize, wants to de-leverage. That's the train I've been on, I understand. But this is in an effort to let that bubble out slowly. Someone, I believe, used the term three or four years ago that this is a beautiful de-leveraging taking place. I have no idea what he was talking about. How do you have a beautiful de-leveraging with U.S. debt going through the roof at the government level and corporate non-financial debt growing at the rate it was? So what I'm asking for now is not a cut, just to take stock of everything I've said and wait and see what happens. And what I'd really like to think, my business, as you know, is risk-reward. So let's just talk about the risk-reward here. Let's suppose I'm completely wrong and three to four months from now, none of this stuff mattered. All the financial people were crazy and they were panicking because of some technical factor in the market. And let's suppose the Fed did not hike tomorrow. What is the cost? Okay. I'm not sure what the cost is, but there's got to be some cost to their credibility two to three months down the road when they start hiking again. Not a big cost, in my opinion. Let's suppose that these economic indicators, the stuff we're looking at, the forward-looking stuff, is right. And we have big potential problems brewing and that they could be even bigger than we think because there's stuff hiding out there we don't know about in terms of malinvestment. Think about the cost. If they hike tomorrow and if they continue to shrink their balance sheet $50 billion a month right when the ECB is not offsetting it. I mean, that cost to me is 5 to 10x. [00:12:34] Speaker 1: You really believe that that three-month period makes enough of a difference? In other words, by hiking on Wednesday, presuming that's what they're going to do, or hiking now in December instead of hiking in March, I think it's important that I understand how you're thinking. Is it because that in and of itself could turn those flashing amber signals to red? [00:13:02] Speaker 2: Well, the hike's already. It's baked in. A dovish hike is now baked into the market. By the way, the market doesn't seem to be very impressed with it as we sit here today. Confidence is a fragile and an important thing. I think the market is confused about a Fed that three or four months ago sort of let us know, well, we're going to continue to hike until something either starts to break or financial conditions tighten. Because they're not sure how far they can go. Yeah. And I remember when I was in my complaining period, as you call it, every time I'd talk, some in the audience would raise their hand and say, well, what would you do if you were at the Fed? Because I was complaining they weren't starting and then not going fast enough. And I would always say the same thing. I said I would sneak one in every time I could under booming financial conditions and hopefully get to 3% and then you're there. I don't call hiking rates on top of shrinking your balance sheet 50 billion a month when the S&P just went down 13% and all the cyclical stocks we talked about are down somewhere between 25 and 40%. I don't call that sneaking one in when financial conditions permit it. [00:14:29] Speaker 1: Those, though, who study the Fed and like you and maybe even consider themselves economists would argue that 25 basis points isn't enough to make a difference to anything. And that if, in fact, the Fed is making a mistake, that mistake was baked in. That whether it's December or March or perhaps even June doesn't make that much of a difference. [00:14:56] Speaker 2: Well, it seems to be baking in at a very rapid rate, doesn't it? Again, it's not even the level. It's the rate of change. And I think if you look back historically, I could be wrong on this. We in the U.S. have never hiked into a meltdown like this since Volcker. And he had a purpose and he had a goal. Inflation was 12% and come hell or high water, we're going to break it. What exactly is what are we solving for here? I don't I don't quite get it. And I got it three or four months ago. But now it looks like the markets are warning. And again, Eric, I'm not suggesting the Fed cut. I'm really not. Although who knows where my mindset will be in that six months. I'm just talking about not hiking rates. And by the way, we're sort of hiking rates. We're certainly tightening monetary conditions even if we don't hike tomorrow. Because of the roll off of the Fed's balance sheet. Because of the balance sheet. Now, some will say, well, it's just rolling off. They're not selling. That's not correct. If you have a budget deficit and you need to raise money every month, you know, that creates government bonds selling every month and it tightens liquidity. It's not a surprise. I know no one looks at money supply anymore. I'm a dinosaur. But M2 growth has gone from about seven and a half percent to four percent over the last couple of years. It doesn't take a genius to figure out why. Liquidity is tightening and it's tightening rapidly. [00:16:30] Speaker 1: So just to be clear, you want the Fed to pause, wait three months, perhaps even wait six months and then reevaluate. Is that right? [00:16:40] Speaker 2: Yeah, it doesn't even have to be three months. What I would really like the Fed to do is get out of the forward guidance business completely. I don't know what it does other than tie their hands. I really believe the Fed would have tightened quicker on the on the upside. But if you'll remember at the time, they guided after the temper tantrum to a specific schedule of QE rolling off. And then they guided that interest rates couldn't raise. And of course, the economy and financial conditions were booming, but they didn't want to lose credibility. So they stuck to that schedule what I would like them to do now. And of course, they're not going to do it. But if I was running the Fed, I would say something like we're pausing in terms of interest rates for now. We really do. We would like to normalize over time. But but when you normalize matters and I would say the same thing with the balance sheet. Our long term goal is to get the balance sheet down. But over the near term and the intermediate term, we will be data dependent in the way we actually do that. You know, I grew up in a world where the Fed didn't spoon feed you every day. You just come in and they turns out they've raised rates or they're just tweaking the repo rate or something. And we seem to do fine without the spoon feeding. You want them to go back to an era of best judgment. Best judgment. And I want them to untie their hands. Forward guidance tides their hand. And to be frank, given their record, it's kind of embarrassing when you forward guide and then you're stuck with a guidance that is not necessarily appropriate. You know, you asked me earlier what indicators am I seeing. Can I just say that the Fed, one of the things that's really puzzled me, the Fed's mandate, as you know, is maximize full employment over the longer term and stable inflation, stable price stability over the longer term. Okay. Think about that as a mandate. To me, the way you achieve those objectives is you do not do it with boom bust cycles. And we continue to do these boom bust cycles. And one of the reasons is somehow the Fed has confused what we're solving for, which is price stability and maximum employment with using employment as an indicator. Employment is in the lagging indicators. So just because you want to maximize employment doesn't mean when the unemployment rate is low, you can't back off. In fact, as you know, most recessions were preceded by a very low unemployment rate. [00:19:36] Speaker 1: That's what, that's where you do, you run out of capacity. Stan, you know what the cynics are going to say, right? They might even be saying it now. That this has nothing to do with the economy, that you as an investor want the Fed to pause because you want a Powell put. Or worse, some of those people might say that you're just giving cover to President Trump. [00:19:56] Speaker 2: Okay, on the Powell put, I just told you I have a demented personality and I've been able to make more money in bear markets and bull markets. So I have struggled, as I've said in some other interviews, which I know you're aware of, since we went into the QE business and suppressed all this volatility. So at least going forward, this is the kind of environment where historically, if they continue to ignore, to ignore the kind of signals I'm talking about would provide a fruit for one. And I do want to, I do want to address Trump because I know there's a narrative out there that the Fed will lose credibility if they cave into it, if they cave into Trump here. Look, I could not agree more that it would be horrific if the Fed were to pause because they were bullied by Donald Trump. I also want to say that it would be horrific if the Fed didn't pause because they were afraid people would think they were being bullied by Donald Trump. That would be just as political as the first outcome. Let me just say that. You're right. I know I'm right. Let me just say that a stop clock is right twice a day. Donald Trump is a permanently low interest rate guy. We know that because he's from the real estate industry. But just because Donald Trump thinks a dovish tilt relative where we've been as appropriate now doesn't mean it's actually not a good idea right now. If the only reason you're not going to pause is because Donald Trump is bullying you, you're being just as political if that's the reason you did pause. So we need to just take him out of the equation. [00:21:46] Speaker 1: But poor Jay Powell can't tell that story either way. If he pauses, he can't say whether it was or wasn't because the president asked for it. And if he doesn't pause, similarly, he can't say. [00:22:00] Speaker 2: I feel terrible for Jay Powell. I really do. And it goes beyond that. His predecessors have done him no favors. Janet Yellen said she was going to hike four times in 2016. And she did not hike until after Trump's election. This QE3, and I said it at the time, is now a noose around his neck as they try and unwind this balance sheet. He has a very, very tough road here. And you're right. Trump is making it a lot more difficult. And he should just shut up. [00:22:36] Speaker 1: Do you have any more confidence in this Fed board with the appointees that it has, many of which were made by the president? Any more confidence than you did in the Fed governors who were appointed by President Obama? [00:22:58] Speaker 2: The answer is I don't know. It's too early. As I just said, they've been built a very tough hand. I love sort of the humility and the common sense Chairman Powell has shown in his press conferences. I like his style. But, you know, to me, what's that line Keynes used? What do you do when the facts change? I change my mind, sir. Look, I know why they guided in September to hike in December. The S&P was exploding upward. Oil was $85 a barrel. The reasons they guided in December have all changed. Okay. We can't now go in December just because we say it's going to keep our credibility. To me, you build your credibility by being data dependent. And even the economic data. Okay. I understand the coincidence stuff is strong. But some of this leading stuff like autos and housing being this week with 2% rates has got to give them pause that maybe there's something to malinvestment and debt buildup and all that weighing down on the economy. [00:24:08] Speaker 1: Given what you know about some of these decision makers, about Jay Powell, about Randy Quarles, about Rich Clarida, do you have any confidence that they will be more respectful of financial markets perhaps than you think previous Fed boards have been? [00:24:25] Speaker 2: Again, I don't know. I'm waiting with bated breath and I'm going to watch. [00:24:32] Speaker 1: Stan, you've said that -- you've said it today. You've said in the past that most of the really big money that you made at Duquesne was because of central bank mistakes and the consequent impact on market liquidity. [00:24:47] Speaker 2: Correct. [00:24:48] Speaker 1: So why issue this warning? Why not let the Fed make a mistake if that's in fact what it's going to do? Position yourself accordingly. Sit back and make money by the boatload. [00:25:04] Speaker 2: Money isn't everything. I'm a very competitive person. I competed for 30 years. I retired seven or eight years ago. I kind of feel obligated at this point when I see others, particularly academic types, leading them down what I think is the wrong path. Let's not forget I'm an American. I've been lucky enough to be born in this country to make a lot of money. Making a lot of money because we're going into another financial crisis -- and I'm not saying we are, but that's the scenario you're laying out -- I don't see how that would really upgrade my life to see the rest of the country being miserable when I make another, you know, another killing. But that has happened in the past. Yes, and I don't -- I don't feel guilty about it. And that was my job. That's what I did. You had clients. I had clients. And to be frank, I warned at Iris Zone about the housing bubble in '05 with a year-and-a-half lead time, and I also met with the Treasury Secretary in '05 and laid out the whole thing. [00:26:22] Speaker 1: And not so long ago, in 2015, you predicted that the combination of zero rates and quantitative easing, which at the time you termed reckless monetary policy that was pushing everybody out on the risk curve, would end badly. [00:26:38] Speaker 2: Yes. And now I'm fearful, and I'm not predicting a recession, but there's enough stuff out there that I'm worried about a recession, and I think it's time for caution. [00:26:54] Speaker 1: Well, now that we're three years later, it's late 2018, we're that much further along into the cycle, and there's that much more debt, does the end look worse? [00:27:07] Speaker 2: It's about what I expected, and we haven't ended yet. A lot of it is going to be on A, whether this stuff continues, and B, how policymakers, and I don't just mean the Fed, respond to it as it unfolds. There was a gentleman on, I know he was on a rival network today, Mr. Navarro, saying the Fed is the whole problem with the markets here. Okay, that is really rich, really rich. We all know about smooth holly, we all know about trade wars, and we all know what all this nonsense is doing to business confidence. So, you know, that was something that really wasn't on my radar screen three years ago, which was causing or, like, initiating trade wars. So, there's all sorts of stuff going on, so I don't know whether it's going to be worse. It's going to be possible, but I have to see how things evolve. [00:28:16] Speaker 1: Is there any way for central banks to withdraw all the liquidity they've pumped into financial markets without triggering a bust? [00:28:28] Speaker 2: Um, I think the air can be let out of this balloon without causing another financial crisis. I think it's possible. Um, but it's hard to believe, um, at least markets will not have struggling returns the next three to five years. Possible, but how difficult? Oh, very difficult, which is why I didn't like the so-called insurance policy of QE3 to get escape philosophy in the first place. [00:29:06] Speaker 1: So, possible, difficult, and with poor returns. How poor? [00:29:15] Speaker 2: Oh, I, I could see the S&P returning between zero and five percent annually the next five years. Um, but Eric, the, the, one of the strengths of my investment returns over time was being open-minded. And, you know, I'm just throwing out answers to something that, uh, as my wife and others will tell you, you know, he believes something on Monday and two weeks later, uh, he changes his mind. But, well, are we in a bear market now? Well, of course we are. Um, we've been in a global bear market for about a year now. And for those, by the way, who say there's no correlation between the economy and the stock market, I'll just point out that the DAX and the China market peaked in January. I don't know if anybody's seen their economic data lately, but I'm not even talking about the insider stock markets. I think, I think we're in a bear market in the sense that most stocks globally have been going down for nine to 10 months. I think it's going to be hard to get out of this thing. Um, in other words, let me start over. I don't think it's clear cut to me, which a lot of people saying that this is a correction in a secular bull market. Because we had free money for eight or nine years, because we had a debt buildup, because we, I'm sure we had malinvestment. This could take three to five years either sideways or a big down with something else. But yeah, I think, I think the highest probability is, is we struggle going forward. And the bottom may be a ways away still. Maybe, or it could be right here. And we're just talking about sideways for quite a while. I mean, I, I will say this in terms of the current market, um, we've done a lot of de-risking. I went short the market in, in July because I saw a QT coming and I lost my butt, um, in July and August, uh, because I was three months early. You can't be, you can't think ahead in this market. Well, since that time, I'm torn because QT, I think, is still set to accelerate the minute the ECB stops. I'm talking global T, QT, which we pointed out in the article, peaked October 1st. Um, on the other hand, we've had a major adjustment in prices. Hopefully, uh, policy makers, and I don't just mean central banks are going to get the message. And with this adjustment in prices, and with this de-risking that's been done by a lot of investors, we could certainly have a favorable period ahead of the next six to eight months. But it's highly dependent on policy, not only from the central banks, but from the Chinese and the U.S. governments. What, to you, are the logical macro trades at the stage in the cycle? Uh, logical doesn't mean profitable, but, um, I -- Profitable, then. I -- it's funny, because when we talked about how I've done well in bear markets, I'd love to sit here and tell you I made it shorting stocks. It's always very difficult in a bear market. They don't trade with rhythm. You get these vicious rallies. You get squeezed out of shorts. People play all sorts of games. I always made it in treasuries, um, because treasury yields would go down dramatically. Not so easy this time, because, um, one of my biggest hits was in two years, in the fall of 2000, they were 604. Fed funds were six and a half. They went down to, like, one and a half or two. Um, now I'm starting with them at 268. But I'm long treasuries. I'm long two years. I'm long five years. And I'm long 10 years. And I have been for a bit. I don't like the level. But because of everything we've been talking about, I like the risk-reward. And if the Fed makes a policy mistake, it's not inconceivable to me at all that the two years back to 50 to 60 basis points in a couple years, because they're doing all this crazy nonsense again. QE. Um, you know, the whole gambit, uh, rates at zero, blah, blah, blah. So even at these yields, um, I like treasuries. Uh, within the stock market, and I've held this view for several years, and it was okay until recently. I love the secular growth stocks because in a period of slow muted growth, if you can find a 20 to 30% grower, um, it's really like a long-term cash flow. In some ways, it's almost better than a bond. Um, that trend got severely interrupted about six months ago. But the tax cut and the economy going to the extent they were created a lot of cyclical companies whose earnings grew at 30%. And when they were nine times earnings, and my companies were 25 or 30 times earnings, and now they're having the same earnings growth. Obviously, those companies became in favor. It's hard for me to see. If we don't go into a recession, which I don't think we're going to, and growth slows down to one and a half, and the Fed changes, how companies. Let's let's just take these cloud companies, which to me look like sort of mobile 10 years ago. They've got maybe they're in the second inning of a nine inning game. They're not the same as corporate corporate America and corporate everything has to convert to the cloud. You're talking about Microsoft and talk about Microsoft. I'm talking about ServiceNow. I'm talking about Workday. These are companies you still like. I do like them. Um, Salesforce, that kind of stuff. Okay. Um, they're very high priced. Um, but to me, if we're going to go to a one, one and a half, 2% growth rate, and interest rates are going to be benign. They're worth more They're worth more in that environment. They are in a three and a half percent environment because they're going to grow the same rate either way. And you could argue that if we get in a mild recession, demand for their product goes up because it's a way to cut costs is obviously trade moving into the cloud for for employment. Um, by the way, that view worked out beautifully and then was really bad in October. I was I was wondering if I was wondering if you were able to do that. Um, I was wondering if I was looking at the company between 20 and 30% short the stock market the entire month of October and managed to lose a percent. You'd think it was mathematically impossible. Uh, and when you go from nine times sales to seven times sales, uh, even though your earnings aren't missing a beat, uh, it's a problem. But I look at them now and they're selling for quite a bit less than they were in, uh, say September. And again, I just described to you why I think they'll be OK over the longer term. What about a stock that's had, uh, the crap ticked out of it like G. Yeah, that's a difficult one. Um, that one. I just don't know. I'll just say this. Um, we were not big fans of M.O. We made very good money shorting that stock. Um, Culp looks very impressive on paper. Mm-hmm. I have to believe he was on that board for four or five months. I don't think he went in there looking for a job. Everything tells me he didn't. I assume he knows where the bodies are buried, but I just don't know, but I sure as hell wouldn't be shorting it at seven and a half. Would I take a punt on it here? I don't know. Not in the kind of environment we're talking about. [00:37:44] Speaker 1: Have you bought anything since the beginning of the decline in the last two months? [00:37:50] Speaker 2: Well, yeah. Fortunately or unfortunately, yes. Like there's a whole bunch of cloud companies that I had limits in. Most of them didn't get hit till October. Um, I looked like a genius to myself at least, um, until a couple of weeks ago and now they've come back down. But it's very interesting what's happened in the last three or four weeks. If you look at the November low, um, Salesforce was like 112. I think it's probably, I didn't look today and it was a big day as you know, I think it's probably a 130 now or something. Workday bottomed at 117. I think it's like, I don't know, 150 could could be higher. I didn't look at the market. We're just after the close. But all those names are 15 to 20% off their November lows. Whereas if you look at the banks and the cyclicals, they're all way low below their November lows. Now it's a little dangerous saying this because these cloud names may have gone down. Those names may have gone down a lot more than I think today. But, but the relative performance. They really suffered because of their beta in October. In November, even though they have these high betas since November, at least on a relative basis, they've started to show, I think, rational behavior. [00:39:18] Speaker 1: So you've never been afraid of macro shorts or single stock shorts. [00:39:23] Speaker 2: Yeah, I don't really like to talk about individual stock shorts. It just creates a lot of controversy. I learned my lesson years ago on your network after a Robin Hood conference. I talked about IBM and I could have done with all that without all that publicity. But there's plenty of shorts. And they have tended to be, at least in my book, centered around the cyclical and the value area for all the reasons I've told you. And frankly, in tech, we've been long the disruptors and short the disrupted, which has worked beautifully over two years. Again, has some real hiccups when the market's plunging and the value guys come in and start buying the disrupted companies, which are 10 times earnings and selling the 30 times earnings ones. But we have not changed that theme. We've been short all the financials because to me it was very simple. Why in the world would you buy a group that needs rates to go up to own it? Because the last time I checked, banks are equities and equities don't do well with rates going up. You're still short financials? I am. On the other hand, let's say rates go down. I assume my cloud names will do much better and I don't want to own something because it's going to go down less than a down market. So yeah, we're short financials. I would also say I didn't mention earlier indicators. The fact that AIG AIG is down from 65 to 35 and it's the number one, what I would call closed on credit fund on the planet and that's since January and the banks are down what they are. How can you look at that unless you have just no respect whatsoever for the market and not see that's at least a warning light that there's there's a problem out there. Blackstone, which is a great, beautifully run company with a run company with a great management. I mean that thing's down 25% in like a month. I mean how how can you look at that and not say again credit dependent that is not sending a warning signal out. Is it time to short credit. Oh I've been short credit for a while but it's easy to short credit for long treasuries because again if rates are going up I don't want to be short credit because they're interest rate instrument. And if I'm I make money in treasuries is because the economy fell apart. And there'll be a lot of good there'll be a lot of good credit short. So five or six percent. Absolute nominal yields for stuff that normally would be eight or nine in an environment like this. The risk awards just terrible in credit. Oil. Oil I don't know other than to say if I was the Fed I'd be watching it. You'll notice our article this morning how many times inflation was mentioned zero but if you're looking at inflation which they seem to care about not just oil but all the commodity indexes are down dramatically in the last four or five months and it's inconceivable that that doesn't flow through. How much [00:42:55] Speaker 1: more do politics play into your investment process in the Trump era. A lot and I stink at it. I mean I was [00:43:05] Speaker 2: I learned this business to solve economic puzzles and try and think 18 to 24 months ahead when the president. When the president can't seem he's so myopic that he thinks like one or two days ahead at the most. It's it's very hard. And obviously it doesn't take a rocket scientist. So you got to do is watch for a few days. They have a powerful impact on markets. And it's tough because. Economic signals and economic. Puzzle solving is something I've done for a long time and I have some confidence in it. How all this politics is going to play out. I'm not so sure. I happen to think the China thing will work itself out because both sides. I think desperately want to deal. Both Trump and she. But I don't know. I don't have the kind of confidence in that forecast as the economic stuff that I've been doing for 40 years. So it plays a big part. But the major part is quite unnerving. Does it matter if the government shuts down. I don't think so. That's that's a lot of nonsense. It'll reopen again. I mean it's. It's discouraging to see the theater and it's just. More of the same. It's just one. More of the same is a great term for it. [00:44:31] Speaker 1: Stan no one forgets how you and George Soros. Broke the Bank of England so to speak in nineteen ninety two when you bet against the pound. Is there a Brexit trade for you now. [00:44:42] Speaker 2: There is one but I don't know what it is. I could see the pound. Going to one thirty five if the markets are convinced there's no hard Brexit and we're going to muddle through here and particularly if the Fed starts easing. That would be obviously months down the road if that were to happen. But if the politics back to your earlier question plays out the wrong way and Jerry Corb Corbin gets in the mix. You know then you could see a big downside. So it's so. It could go either way that it's just not so binary. It's not something I want to play the beauty of the pound trade that you mentioned was a one way bet. It was either going to be flat or we're going to make fifteen or twenty percent. This is not so appealing. You can either make ten percent or lose ten percent since I can't figure out which it is. You have to have to. I'd rather look elsewhere. Yes. [00:45:43] Speaker 1: If in fact it goes so to speak the wrong way if there's a hard Brexit and to your point Jeremy Corbyn becomes a stronger contender to succeed Theresa May as prime minister. Do you think we see the pound testing and perhaps dropping through that post Brexit vote low of one eighteen. Possible. I don't know but it's possible. I've heard you complain stand on at least two occasions that the market doesn't generate the same kinds of signals that it used to. What do you mean by that. [00:46:20] Speaker 2: Yeah I'm not really complaining I'm more whining. There's a difference. Someone said the other day you've been very critical of these algos and I said well I'm not critical of the algos. They just made my life very inconvenient. I don't it's not that they're doing anything wrong. So what I meant by that Eric is a big part of my process and you've already kind of heard it throughout the interview is taking signals from markets. I've always believed markets are smarter than I am. They sent out a message and then if I listen to them properly. No matter how powerful my thesis if they're screaming something else it's telling me you've got to reevaluate you've got to reevaluate and you go back to it and it's still all right fine but you've got to be open minded. About. I don't know maybe six or seven years ago. Combination of central banks canceling the signals. But maybe more importantly the algos coming in with very very sophisticated models based on historical events and maybe stuff they're picking up on the Internet about who's shopping or this kind of stuff and also on standard deviation away from price have come up with their own methodology of how to predict price movements and how to behave. Well I grew up with someone fundamentally likes the security and they buy it from somebody who fundamentally doesn't like security. And somehow the invisible hand spit out a very good answer and it was predictive over time. And I also learned that things would change and when the trend started to go up that's what I'm supposed to plow in. Well the algos machines trading they tend to have different motivations like they're not nearly as momentum oriented and just when the trend may look like it's going up. It may be just some algo who's got some standard deviation or or something going on. And it is severely inhibited my ability to read the signals. So my first mentor Spiros Drellis back in Pittsburgh used to say 100 million Frenchmen can't be wrong and that was his saying that that the voice of the market was always correct and I need to listen to it. And it was true if a company was reporting great earnings and everybody loved it and the stock just didn't act well for three or four months almost inevitably. Something happened that you didn't foresee six months down the road and I'll never forget about two or three years ago Facebook had ported great earnings stock was like 122 opens at 131 after hours and like three days later it's trading at 116. So the analysts come in and they're giving this and I said nothing's wrong it's great it's great I said no kid you're wrong something's going to come out you just don't know it yet something terrible in the next three or four months. Anyway a year later the stock was like 220 so that didn't mean anything. Conversely I can remember so many examples when a company would report bad earnings it goes down 5% on huge volume then closes up on the day. Almost invariably three to six months later that stock was higher doesn't mean anything anymore other than some hedge fund may being a wise guy or somebody's doing something all the time I've seen that and a month later the stock's actually lower. So the price signals that I learned how to read and how to listen to are broken. They certainly don't work the way they used to. I still like price action versus news but it used to be a very very important part of my process now it's a much diminished part of my process and frankly as many I don't want anybody crying but it's made my job much much more difficult. And I'm thrilled I got rid of my clients eight years ago. Are the markets more or less efficient as a result. I think the message over eight or nine months is still great and like here I am telling you what the auto stocks are doing and this I just think over a week or two you're getting noise that used to mean something and now it doesn't mean anything. So maybe they're maybe they're not efficient and they're noisy over a week or two but they're still pretty darn good predicting predicting ahead. I mean the the classic recent example was the night Trump was elected. Bonds got murdered you know they they opened up five points in the middle of the night ended up down on the day stock market was down like some crazy amount overnight. Ended up that day you know predict and all the cyclical stocks we're going back to this they predicted this whole thing by the way and it's only the last year they've turned the other way. So the market was just laughing at all the pundits market doesn't laugh but you know what I mean the market was predicting a big economic recovery and an acceleration under Trump whereas all the talking heads were saying this was Armageddon and the end of the world and the market was right. And now the market's kind of going. [00:52:09] Speaker 1: Do you find yourself similarly inconvenienced by passives as you do algos and quants. [00:52:20] Speaker 2: I don't know the answer to that. I'm just you've bought ETFs. Yeah I've bought them I'm price action versus news in general I don't want to blame it on passives or an algos or whatever but price action versus news which was a big part of my process doesn't work as well as it used to. And I'm going to learn have to do more fundamentals than I have historically. I presume you're not doing as well as you used to as a result. Yeah I as you know made 30 percent a year for 30 years we ain't even in the same zip code much less the same state as those kind of returns. [00:53:04] Speaker 1: So Stan the reversal of quantitative easing and the return of volatility to financial markets was supposed to be just the elixir that hedge funds needed hasn't worked out that way. Why do you think. [00:53:20] Speaker 2: Well first of all it's early days and if the trend just changed sometimes it takes them a while to adjust. Secondly I remember everybody always at some point in my career saying boy this volatility must be great for you. And I said volatility is only good if it's part of a trend and it's giving you entry points within a trend. We're getting volatility particularly with Trump with no trend so when you're going up and down but there's no real trend that's a nightmare to our earlier point about price action versus news. You might think something that's a volatility move is the beginning of a trend and get yourself whips on. So have you ever seen anything like that before. Like this not to this extreme no no I would also say and. I think I predicted this on your network five years ago. 9000 hedge funds charging 20 percent of what it was this was going to happen anyway. I mean when I started Duquesne there were about eight of us and. We were expected to make 20 percent a year year in and year out no matter what the environment. Well when you and by the way I was like the only guy at Bowdoin that went into this so the competition wasn't so hot. You mean the only person in your graduating class. Yeah because we've been in a bear market for 10 years. Okay by 2000 the average IQ coming in this industry at least 30 or 40 points higher than mine. So you know the markets become more efficient. It's become more difficult. Every time you buy something somebody's selling it to you. And if the competitors have gotten that much smarter it's tougher. So I'm not surprised at all by the hedge funds not doing well because well to be frank I kind of predicted it five or six years ago. But certainly this environment is aggravating it. This no trend and and a lot of volatility. Yeah well maybe some there was a trend. And I think they didn't do that well on the upside because of all the competition. And because frankly there wasn't enough volatility for entry. And now the competition tends to be diminishing but we're in this new crazy highly volatile world. Does the fundamental discretionary hedge fund manager still have a future as a species. Yes I think so but you know I think it'll there's probably going to be 10 to 20 of them that are great. And the rest of them sure as hell aren't worth 20 percent a year and they're probably not worth 15 percent a year. [00:56:22] Speaker 1: There's still three trillion dollars of hedge fund money. [00:56:25] Speaker 2: Yeah. [00:56:26] Speaker 1: Chasing a defined amount of alpha. Is that too much money. [00:56:31] Speaker 2: Yeah I think so. Yes. Should be what. I don't know less. [00:56:38] Speaker 1: By definition. You've been called. Grumpy. Yes. Is that how you think of yourself. [00:56:50] Speaker 2: I like I enjoy being grumpy but. No I don't think of myself as grumpy at all. I have a fabulous family. I was born in a great country. I have a job that doesn't particularly provide much to society that has this crazy remuneration associated with it. I mean. So I'm not sure what the term grumpy means but I'm one of the happier people. I know I just I enjoy having a persona that's a little grumpy. [00:57:25] Speaker 1: Do you think grumpy is a better disposition to have as an investor. [00:57:33] Speaker 2: I think you have to be a little skeptical and a bit of a contrarian but no you don't you definitely don't have to be grumpy and I think. Bulls make more money than bears so if anything. Being an optimist about life and about things in general is a great attribute to have as an investor. You just can't be starry eyed and naive. Well I think a better characteristic would be being able to control your emotions but I don't relate that to grumpiness. [00:58:07] Speaker 1: If you think about everything that you've experienced yourself you've seen the things that you think are happening now and the things that you believe are likely to happen in the future what are the qualities or characteristics that a money manager should come to the business with today. [00:58:25] Speaker 2: You're asking really great questions Eric. I think the number one thing you need is you need to be well there's about three but you need to be intellectually curious and really really open minded. So and you need you need to have courage and when I say courage you need the courage a bit big and a bit concentrated but also the courage to fight your own emotions. I've never made a buy at a low that I didn't just feel terrible and scared to death making it. It's easy to sell at the bottom. You know you can go home that night and it relieves you of your nerves and then you know the higher they go there's another saying drill issues to have the higher they go the cheaper they look. So when things are going up it's easy to buy them when they're going down it's hard to buy them. Do you need to be able to code. Do you need to be able to program an algorithm. No no but apparently some very good coders and very good algorithms really know how to make money so you so you can do that but it's not a necessary condition to make money as an investor. I do think in today's world you better know what they're doing because they and particularly if you're in the trading business like I am they influence markets and you have to know. If a particular price move is happening because of them or if it's happening for more natural causes.