CNBC Squawk Box — Fed Playing With Fire

Summary

On the morning of May 11, 2021 — the day his WSJ op-ed with Christian Broda hit the presses — Druckenmiller appeared on CNBC's Squawk Box for the unscripted version of the argument. Where the op-ed was measured and jointly signed, the television version was personal and urgent: the Fed, he warned, was making a historic mistake by choice, keeping emergency settings long after the emergency had passed.

The interview matters as the emotional register of the thesis. The op-ed laid out the ledger — recovery at record speed, $120 billion a month of purchases still running, 32 months to first hike; the broadcast supplied what print could not: a man who had watched this film before, in the 1970s and in 2003–05, and could not believe the Fed was choosing to watch it again.

Full Text

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

Stanley Druckenmiller:

...combine fiscal policy that we're seeing with the monetary policy — it's the, the scariest combination in the post-World War II period, in your — certainly the most radical policy by a long shot that I've ever seen, relatively economic circumstances. Let's not forget that Ben Bernanke at the peak was doing 85 billion dollars a — we are now back to normal — normalization on GDP; we're above trend on retail sales. Funny — last year at the Economics Club around this time I said that a V was a fantasy. I couldn't have been more — but this is all about risk reward. I — why the Fed and Congress did what they did at the time, I think it was the right decision on a risk-reward basis. But when the facts change, you have to change, and the facts have changed dramatically since then. And yes, I don't think — I can't find any period in where monetary and fiscal policy were this out of step with the economic. Not one.

Joe Kernen:

Stan, you talk about how quickly the job market has come back, and he pointed out retail sales, a lot of other things that are almost pre-pandemic levels. And in normal situations you might think that the Fed would be talking about an interest rate hike right now, and you point out it's 32. The other statistic that I saw you point out was — and I don't have it right here — but the amount of, of asset purchases that the fund has, or that the Fed is orchestrated just in, in a very brief period of time, eclipses what we did through the whole financial crisis, for the seven, eight years after the financial crisis.

Stanley Druckenmiller:

What is, in six weeks last spring, um, we did more QE — more, more purchasing — than we did the entire time, the nine-year period from 2009 to 2018. Frankly, Joe, I don't have a problem with that. We were in a black hole; no one knew where we were headed. What I have a problem with is the Fed is expected to do two and a half trillion of QE after — after vaccine confirmation, and after retail sales, um, reach trend — and we're above trend. So the, the, the black hole didn't occur. That's wonderful; we're all happy. But we're still acting like we're in a black hole. In fact, uh, the economy accelerating — could your producers bring up the chart of retail sales? Is that possible?

Joe Kernen:

Yep, I think we — yeah, we've got them all ready, uh, that we can bring up. There — there it is, I think it's up now. US nominal retail sales.

Stanley Druckenmiller:

Okay. So if you look at this, this is a chart of retail sales the last 20 years, and as you can see, they grow about three percent a year. And after the last — the great financial crisis — it took about six years to get back to trend. If you look at the current recession, it's like nothing we've ever seen: a sharper decline, but then within months you were back to, to trend level. And you see check one — that's the first stimulus package; that's the one I have no problem with. I think it was the right risk award, which was right at the bottom. But look at check two and check three when they're coming: not only are we back to trend, we're now 15 above trend. To put that in, retail sales grow at about three percent a year, so we are five years' worth of demand above trends. There's some pull forward here away from travel, but it's not 15. So when you look at this chart, and then you look at the Fed policy and all the stimulus and them talking about the hole we're in, I just think it's totally inappropriate.

Joe Kernen:

Let's talk about the dollar. And 85 percent of the transactions are still done in, in the dollar. You pointed out in a speech that you think we've crossed the — are you comfortable saying, with what you said there, that, that for the first time in your career, you think we lose reserve status at some point?

Stanley Druckenmiller:

I'm comfortable with it. That's my central case. As you know, Joe, I can change my mind, but yeah.

Joe Kernen:

Um, you said that, to some extent, the Fed is enabling the fiscal transfers.

Stanley Druckenmiller:

It's not to some extent. They couldn't be doing this without the Fed. The Fed is monetizing their activity. I mentioned all the QE after vaccine confirmation and retail sales: we've had 850 billion of direct — 575 billion of them came after retail sales were above trend. 575 of the 850 billion. I'm old enough to remember the, the bond market Vincent Lannies — I used to be one of them. Without the Fed buying — I don't know what the exact number is; I think it's 60 percent of all the debt issued that — the bond markets would be totally rejecting this. So they are enabling this massive expansion in fiscal policy. And the problem is, if you end up getting inflation — and even if you don't — the debt is going to be so big. You remember, I did my entitlement talks eight or nine years ago. That's all happened except for one thing: the interest rate level. So we're right now in the corrupts of when the demographic — when the baby boomers accelerate in terms of, of getting Medicare, Medicaid, Social Security. That stuff. Right as we're doing that, we just put six trillion of new debt on — again, all enabled by the Fed. These guys could not be doing it; bond rates would go to a prohibitive level.

So my, my issue here is in the future, um, as we go forward. If you look at — you have chart five up? Let's get it.

Joe Kernen:

I think we can do it. Uh, which one? Uh, it's federal spending, Social Security, major health care programs — federal spending, percent of GDP.

Stanley Druckenmiller:

This is the CBO. This is not me, okay? And they're saying if 10 years go to 4.9 — which is their normalized projection — the interest expense alone will be close to 30 percent of GDP every year. That's basically what we just spent on the covert emergency in the last year. There is no way we can afford to have 30 percent of all government outlays be, be toward interest expense. So what will happen is the Fed will have to monetize. When they monetize it, um, I believe it'll have horrible implications for the dollar. And that's why I said in that speech, yes, that I think it's more likely than not, within 15 years, we lose reserve currency.

Can we go to the chart on the dollar? Because I think this is really important. Last spring, in the midst of an equity market meltdown — and I've been trading for 40 years and I've never seen anything like — right in the middle of an equity market meltdown, the bond market went down 18 points one day. And everybody thought it was macro traders like me and others that were rejecting the, the implications of the CARES Act. The Fed did a deep dive, and by — foreigners sold a trillion dollars a — of Treasuries overnight, as we were proposing the CARES Act. They've continued to sell Treasuries ever since then.

Why is that important? Because for 20 years, Treasuries have been the go-to of foreigners to hedge global portfolios. In every case, whenever you had a problem in the equity market or in the world, they fled to Treasuries and they fled to the dollar. Last spring, that was violated. So since then, they've continued to sell. So what we've gone from is, for 20 years, an average flow of 500 billion a year into Treasuries, from — an outflow out of Treasuries, uh. So when you have a 700 billion dollar current account deficit — our estimate for the year — you need capital to flow in to offset that. If you just erase 500 billion inflow and turn it into an outflow, you see the pressure will put on the dollar.

A reasonable person might ask: well, if that's true, why did the dollar not go down from March to July? Very simple, um. Who was the biggest beneficiary of coven? Obviously the massive digital transformation companies: Google, Microsoft — not so massive but Zoom — those kind of names. What country dominate in terms of those? The United States of America. So the 500 billion dollar outflow out of bonds was offset by a massive inflow from — from world central banks, from sovereign wealth funds — into our equity market. By July they had become — that had become pretty much in the market. The relative prices had gone up, and frankly the vaccine profile was starting to look better. So that is when the dollar peaked, as that offset started to diminish. And as you know, Joe, the vaccine tends to cause a rotation out of growth stocks into value stocks. Our big advantage over here are the growth stocks. So that's why I think the pressure on the dollar is going to continue.

Shepard Smith:

Shepard Smith here. Thanks for watching on YouTube.

Key Themes

The interview is liquidity analysis pointed at the price level, and the endgame at the moment of its vindication — the inflation arrived on schedule within weeks. The decision to spend op-ed day on live television is public accountability as method: a dated, falsifiable warning made in the most visible venue available.

Context & Significance

Pair with the WSJ op-ed for the written thesis and the 2022 Sohn conversation for the post-mortem. Together the three documents make the 2021–22 inflation the KB's cleanest example of the full loop — analysis, public commitment, outcome — and the Squawk Box interview is its most human record: the warning delivered with the frustration of a man who knew exactly how early he was.