Bloomberg Invest New York

Summary

At Bloomberg Invest New York on June 7, 2023, Druckenmiller made his public entry into the AI trade — and did it in the most Druckenmiller way possible: in the same breath as a hard-landing warning. He told Sonali Basak he was tired of being a bear, then spent most of the interview being one about the economy. The synthesis: AI is real, potentially as transformative as the internet, and a company like Nvidia can rise even into a hard landing — a secular theme powerful enough to override a cyclical macro view he still held.

The interview is the first primary document of the AI arc that runs through the rest of the corpus. It also contains one of his clearest articulations of why great earnings can lift a great company through a bad economy — and, in a line that would age beautifully, his intention to own Nvidia for years, not quarters.

Full Text

Machine transcript (auto-captions / ASR), punctuation lightly normalized; wording as transcribed. Recognition errors possible — see sources.yaml for provenance.

Sonali Basak:

...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?

Stanley Druckenmiller:

Thanks chanoli, nice to be here. 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 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. 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.

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 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 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 — 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.

Sonali Basak:

I should also say that the type is: U.S. exceptionalism at risk. Is it?

Stanley Druckenmiller:

Yeah, I think it is. 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. We've been eating so much seed corn presently that I worry about the future. If — if you were to take — economists have — 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.

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.

Sonali Basak:

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?

Stanley Druckenmiller:

That's my central case. 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.

Sonali Basak:

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?

Stanley Druckenmiller:

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.

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. You asked me my worries; that's different than my predictions. I—

Sonali Basak:

Well, the predictions you've been talking about—

Stanley Druckenmiller:

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.

Sonali Basak:

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?

Stanley Druckenmiller:

Um, a lot of people — 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, 10 trillion dollars — 5 trillion monetary, 5 trillion fiscal — was put in during. 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: 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 — 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.

Sonali Basak:

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.

Stanley Druckenmiller:

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.

Sonali Basak:

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?

Stanley Druckenmiller:

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, um — unlike crypto, I think AI is real. It's — 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 — 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 we have some longs, we have some shorts, and the AIs have sort of dominated the long portfolio for five or six months.

Sonali Basak:

How do you think about — and shortened — this market?

Stanley Druckenmiller:

Our shorts have been fine this year, except my index shorts, which have been a — 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, then I short them. Frankly, I'm not sure I've ever made — 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.

Sonali Basak:

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?

Stanley Druckenmiller:

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. 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.

Sonali Basak:

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?

Stanley Druckenmiller:

I do not. 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. 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, um. But he has proved he's not a capitalist; he's definitely not a — 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.

Sonali Basak:

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?

Stanley Druckenmiller:

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 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—

Sonali Basak:

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?

Stanley Druckenmiller:

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, 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.

Sonali Basak:

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?

Stanley Druckenmiller:

I actually think, until recently, he did a great job in Florida. If — if you look at the record, he's very smart; not that broad in terms of the people around him — he'd have to build that going. 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.

Sonali Basak:

I wonder — you define yourself — is there anyone in the Democratic party that excites you?

Stanley Druckenmiller:

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? 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 — 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.

Sonali Basak:

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?

Stanley Druckenmiller:

I'll set for a hedge. Yeah, the only — the only way out of this — I mean, given what I talked about earlier — taxes are going to be much higher in 20. 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—

Sonali Basak:

Before I let you go, I know you won't perfectly answer me on this with a lot of specificity. You've been saying—

Stanley Druckenmiller:

I know I had any perfect answer. Well—

Sonali Basak:

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?

Stanley Druckenmiller:

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 — 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 — but this is the most complicated non-road map 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 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. 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. So I don't have a fat pitch, but I hope — I hope I've imported something to your audience.

Sonali Basak:

Yeah, absolutely. We will ask you again in eight months, you said. Appreciate it.

Key Themes

The interview is the origin text of secular vs. cyclical separation: the AI thesis held against his own hard-landing call, each sized by its own logic. The earnings-through-recession argument is the 18-month rule applied to a technology shock, and the willingness to drop a public identity ("tired of being a bear") is intellectual humility at the identity level again.

Context & Significance

Recorded the same month as the USC fiscal address, this interview completes the 2023 two-handed posture: warning about the ledger with one hand, positioning for the revolution with the other. It opens the Nvidia arc that the 2024 trim and the 2024 exit and its public self-assessment close — the KB's most complete real-time case study of a secular theme being entered, managed, exited, and audited in public.