CNBC Squawk Box — Trimming Nvidia, Still Bullish on AI

Summary

On May 7, 2024, Druckenmiller appeared on Squawk Box with a portfolio update that made headlines: he had trimmed his Nvidia position. The reasoning was pure doctrine — the AI fundamentals were unchanged, but the multiple had expanded past the point where the position's risk/reward justified its size. Long-term bullish on AI; short-term disciplined on price.

The interview is the third act of the Nvidia arc and the most instructive about position management: the secular thesis and the trade are separate evaluations, reviewed on separate clocks. He paired the trim with renewed alarm on government spending — the fiscal critique and the AI position running simultaneously, each sized by its own ratio.

Full Text

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

Stanley Druckenmiller:

Well, and then we totally overspent in terms of fiscally as well, in biomics. If I was a professor, I'd give them an F. Um, basically they misdiagnosed Co and thought it was — we were going into a depression. Um, the Fed did too; I worried about it too in early days. The FED eventually pivoted — better late than never. Treasury — Treasury is still acting like we're in a depression.

It's interesting because I've studied the Great Depression, and you had a private sector crippled with debt, with basically no new ideas, so interventionist policies were called for and were effective. The private sector could not be more different today than it was in the Great Depression. Their balance sheets are fine; they're healthy. And have you ever seen more innovative ideas that the private sector could take advantage of? Now you got blockchain, you got AI, you got the whole thing. All government needed to do was get out of their way and — and let them innovate. Instead they've spent and spent and spent.

Um, and my new fear now is, is that spending and the — and the resulting interest rates on the — on the debt that's been created are going to crowd out, um, some of the Innovation that otherwise would have — would have taken place. We've got a 7% budget deficit at full employment. It's just — it's unheard of. And this is when you've got grid — grid spending, you — um, I'm sorry — you got defense spending, mhm, you have data center spending, and then of course you have green. So this spending is going to take place. You're going to build the Capital stock. How do you build the Capital stock When government is intruding with regulations and all this spending?

And it's just sad, because I think we're looking at one of the most exciting periods in terms of potential productivity-enhancing Investments ever, and why we're spending like we're still in the Great Depression is beyond me. And they haven't stopped. As you know, they're trying to circumvent the Supreme Court to give money to kids who had the opportunity to go to college, who haven't repaid their loans. You know, Harlem children's own — our motto was always, get them into college so they have a shot. These are kids that went into college, and we're talking about spending hundreds of billions of dollars, um, to put in their pockets. I assume it — I assume it's because of the election. Um, even — and they're now floating ideas for Fanny and Freddy to change the rules, so you can refinance, um, you can take out a second lean mortgage and you get to keep the rate on the first mortgage at whatever you did during Co. There's — there's one spending program or another. We don't need spending right now. We just need the government get out of the way and let the private sector do its thing.

Interviewer:

How much of the inflationary pressures that we see are because of fiscal spending versus the FED? I mean, it's kind of hard to break it down, but which would you think is the bigger problem?

Stanley Druckenmiller:

I'd say it's definitely the fiscal, but the fed's been the great enabler. And the latest thing, um, we're going to apparently — well, we've already started — we're going to shrink QT from 60 billion to 25 billion, and we're going to land apparently at 7 trillion somehow because of the plumbing. All of a sudden we need a $7 trillion balance — just a function. If you remember in beran's speech when we started QE, he said, don't worry, this is temporary; the balance sheet will be back to 8 — 800 billion; this — this is never going to grow again. So that is, um — I'd say it's — it's mainly the treasury, because we just don't have room for all this. And it could get worse, because we need to build the Capital stock, but the FED needs to stop helping them out.

And I understand chair Pal's statement that he wants to stay in his Lane. Well, he didn't stay in his Lane during Co, and I don't blame him — he was encouraging fiscal spending, and that was totally appropriate. But now all of a sudden, oh, that's — we don't comment on fiscal policy. Well, you — you commented on it when you wanted them to be more stimulative. You know, somebody's got to say something.

It is interesting — since — since my last interview here in October, there do seem to be a lot more recognition by various people I see on your shows and elsewhere of the fiscal situation facing us. Everybody seems to get it but Yellen, who just keeps spending and spending. And again, I think it's dumb politically, because it's causing inflation, and it doesn't take a genius to figure out, as the — the average American is getting hurt by the—

----- CLIP 2: Fed should get rid of forward guidance -----

Interviewer:

Uh, last time we spoke was October, I think. So six months or so. It's a lifetime, obviously, in the markets, the economy, and especially with the fed. And I've been — and you, I know you watch — I've been perplexed — and we will talk about perplexity later, uh — but I've been perplexed about the unwavering Focus the FED has had on, on, on Cuts. It's been difficult to understand, because it's been the entire time, um. And I'm just wondering, how do you view this period — That's six-month period where the focus — that's all we've heard about. Did Cuts make sense the whole time? What — what — what's causing that?

Stanley Druckenmiller:

Um, thank you, and I'm happy to be here. Thanks for having me on. I was, uh — I was perplexed with the December pivot, if that's what you're referring to. It seemed to me the Fed was in a perfect position: inflation was coming down, Financial conditions were tightening, and to some extent I feel like they fumbled on the 5 yard line with the game on the line. Um, I remember saying to some of my partners, that's a speech I thought we might hear March, um, as opposed to now, because there's like four or five more months potentially, um, could lead to inflation coming down the way they needed to come down.

Instead, um, they set Financial — Financial conditions on fire again. Bitcoin, I can't remember where it started from, but it went from like 30,000 to 70,000. Um, equities, obviously credit, um, interest rates. I — ironically, Duane was a major beneficiary of it because, um — um, I had spoken at a Robin Hood conference and, like an idiot, forgot that there was press there and — and revealed that I had a — Paul got me going in the interview and revealed that I had a massive leverage position in two years, um, because I thought the risk reward — I think they were like 510 or 515 — the risk reward, with what was going on, we could potentially pull this thing off, uh, sometime in the next year, and the risk reward was — was terrific for that.

Um, I was a beneficiary because after their pivot, two years went down to 415. I didn't get the low, but I did get 430. And — but at that point it was obvious that Financial conditions — which is one of the things had put me in them in the first place — we turning — we were starting to get anecdotal from businesses that their business — businesses were picking up, um. So I exited the position. So I — I was a major beneficiary. But once Financial conditions took off, it became very clear, um, that this thing could go either way. So I didn't even understand, um, why they put it on the table, but more curiously, why they and others continued to talk about, well, it's not going to be six Cuts, it's only to be three Cuts or four Cuts or two cuts. And I'm going, why are we even talking about Cuts? Inflation — if you remember, we did trillions of dollars a QE because it was 1.7 instead of two over a decade. But somehow now that we're at three versus two, we got to start cutting rates to bring in a smooth Landing. So to me, it didn't make any sense. It was a huge mistake.

But it goes back to — I don't know whether you remember, but Kevin warsh, when he was in — in the running for the FED job, used to talk about reforming the fed. And I go, Kevin, well, what is the major reform we do? Says, we got to get rid of forward guidance. All this talking and all this forward guidance — first of all, we're all wrong on the economy quite often, me included. And when you put forward guidance out — unlike me, when I'm wrong, who tend to change my mind very rapidly — they sort of get trapped into the for guidance and stuck in it. And to some extent they were stuck in this, um, talk about continuing to cut rates. So Financial conditions just continued to melt up.

Um, and finally in — I guess a month or so ago — the FED pivoted. But then bizarrely, um, the last press conference seems to still be hanging on to this directive of, we're not going to hike and we expect to cut, but we're going to wait for the data. We're not guaranteeing you're going to cut, but — but it's weighted that way. And for the life of me, I can't figure out why. Because if you look at the six-month rate of inflation, the — the chart's very clear: it — it comes down from very rapid rates, and now, if anything, it's — looks like it's turned up.

Look, I don't know where inflation's going to be in a year. jome pal don't know where inflation is going to be. I don't think anybody knows. But they worked so hard, and they — they did so much work when they went from basically 0 to 5%. Um, I'd hate to see them all throw it away here. The first time I — and the first time I noticed was when he said, yeah, uh, we're not going to do it to — today, but we're close, we're getting closer. And I didn't know — how do you — how do you know that we're getting? And that — that went from, but we're getting close, to now — yeah, it's definitely not going to be now, but, uh, we think things are going to work out and they're going to be — he's never taken them off the table and never talked about even saying a hike is — just, I mean, he took that off the table. And a hike is not—

Interviewer:

You think a hike is off the table? Definitely zero chance? 0% chance?

Stanley Druckenmiller:

No, because there's not a 0% chance that INF as the bottom. I don't know what I would do is just say nothing, and do what fed Cher used to do: when you need to raise rates, raise them; when you need to cut them, cut them. Don't go on 60 Minutes. You're not a rock star, okay? You're the FED chairman. You're supposed to be running monetary policy, um, for the good of the country, not — not to be going on 60 Minutes and, you know, the whole thing.

banki did a lot of things that by hindsight I don't feel very good about. One of the worst was forward guidance. You got a bunch of academics talking about, um, Sending message to the market. You know, as a practitioner, I'd rather them just get rid of the whole forward guidance and just do their job: when you need to raise rates, raise rates; when you need to cut them, cut them.

----- CLIP 3: AI over-hyped now, under-hyped long term -----

Interviewer:

Your excitement about — about AI sort of came into play with that discussion, because you're worried that it's going to take a lot of investment and there's no savings. We got to build up the defense; there's Wars everywhere. Can you — you were early with Nvidia, you were early with — with AI. You — you paired back a little bit, but are not less bullish on the prospects for it, are you?

Stanley Druckenmiller:

Well, first of all, I wasn't early with Nvidia. My young partner was early over the Nvidia, um. He — he called me in — in the fall of 22 and said that he thought all this excitement about blockchain was going to be far outweighed by Ai. And, um, I asked him how to play it, and he told me I should buy this company NVIDIA. I didn't even know how to spell it. Um, I bought it. Then a month later, chaty PT happened. Even an old guy like me could figure out, okay, what that meant. So I increased the substantially.

Um, I said in an interview in June of that year that I expected to own Nvidia for two or three years, that this was a mega Trend like I'd never seen, potentially bigger than the internet. Um, but when the stock went from 150 to 900 — I'm not Warren Buffett; I don't own things for 10 or 20 years. I wish I was Warren Buffett. Um, and 150 to 900 — yes, we — we did — we did cut that position, a lot of other positions, uh, in late March. I just need a break. We've had a — we've had a hell of a run. A lot of what we recognized, uh, has become recognized by the marketplace now. pal was — we expected pal to come back and rep pivot, which he subsequently did. Um, but no, longterm we're as bullish on I AI as we've ever been.

I also — you just wonder, if we were all sitting here in 1999 talking about the internet — or anybody was talking about it — I don't think anybody would have estimated it would be as big as it got in 20 years. Um, we didn't have the iPhone, we didn't have Uber, we didn't have Facebook, yada yada. Um, and yet if you bought the nas de in 99, it went down 80% before that all came to fruition. That's not going to happen with AI, but it could rhyme. AI could rhyme with the internet. As — as we go through all this Capital spending we need to do, the payoff — while it's incrementally coming in by the day, um — the big payoff might be four to 5 years from now. So AI might be a little overhyped now, but underhyped long term.

Interviewer:

You said — said you're not like Warren Buffett, but what you just did with Nvidia sounds an awful lot like what he did with apple. He paired his position in apple by 133%, and they went on to say it's a better company than Coca-Cola or American Express or any of the other companies that they have in their portfolio, and he thinks Tim Cook is great.

Stanley Druckenmiller:

Yeah. Well, I will be very surprised if I don't own Nvidia on and off, um, the next 10 years.

Interviewer:

You're — you're so bullish on AI that — Andrew, you did, uh, a great interview with perplexity, and in — I — I think that that's where you decided might be a place that — that — that you want be.

Stanley Druckenmiller:

I love perplexity. Um, again a funny story. My young partner — the one who has basically been behind all our AI play, with — with — with his, uh — with his staff, um — he told me, I don't know, in January, that all the kids on the west coast weren't using chat GPT or Google anymore; they were using this thing called perplexity AI. So, um, I of course tried it out, and it was just unbelievable. It's — it's an answer machine, but the speed, but the depth of the answers and the quality, and then the fact that they give you the sources if you want to go deeper — it was nothing like I've ever seen. If you don't believe me, just ask chat gbt, Gemini, and perplexity a question and get the answer, and you'll see — you'll see exactly what I've talked about.

I fell so in love with it, um, we tried to get in on a round, um, that we were lucky enough to be accommodated. I love the founder, aravan shavas, um. He's super aggressive, and with his team, super Innovative, but he's also got humility — everything we love and a found her. So there's a land grab going on now in the answer machine business. Um, it's obviously a big task to take on Google, but if you think about it, Google has 300 billion in sales. If perplexity even goes to two billion in sales, it'll be a huge winner. Um, frankly, I'd say 90 — 95% of my searches now I use perplexity. Probably the best thing I could do for the viewers today, unless they're listening to all my other stuff: try this thing out. You'll love it.

Key Themes

The interview is secular vs. cyclical separation applied to an exit: the theme intact, the trade resized — the distinction most investors collapse. The trim itself is asymmetric risk/reward hygiene and ruthless risk management (exit when the ratio degrades, not when the story does), and the fiscal thread is generational theft in its current form.

Context & Significance

Read as the bridge between the 2023 entry and the October 2024 full exit, the trim interview shows the position being managed in public, in real time, by the book's own rules: enter on the 18-month picture, add as evidence confirms, trim as the ratio decays. That the full exit months later was itself publicly called a mistake only completes the lesson — the rules govern even when their outcomes are imperfect.