Delivering Alpha 2022

Summary

On September 28, 2022, at CNBC's Delivering Alpha conference — with the S&P deep in a bear market and the Fed mid-way through the fastest hiking cycle in four decades — Druckenmiller gave his sharpest public assessment of the post-QE reckoning: he would be stunned if there were no recession in 2023, and the Fed's error was compounding — first the delay, then the speed.

The appearance is the macro-strategy companion to the Sohn 2022 conversation with Collison weeks earlier: the same two-laws framework (inflation above 5% has never been tamed without the funds rate above CPI, and never without recession), extended with the asset-bubble corollary — a decade of free money had buried countless bankruptcies that real tightening would now unearth.

Full Text

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

Joe Kernen:

might be seeing some of the deleterious effects now. In 2021 you were on, I think, Squawk Box. What was the term that you used for — for the monetary policy? Because we had — we had nfts, we had the AMC Apes, we had Bitcoin and Dogecoin, and yet the still didn't see a problem.

Stanley Druckenmiller:

Yeah, I think I said it was the most radical monetary policy relative to the circumstances in history. Look, I — I made a New Year's resolution that year not to be on TV, but when I saw what was going on I couldn't control myself. I haven't been on TV since.

Joe Kernen:

Apparently this isn't on TV.

Stanley Druckenmiller:

That's a good thing. Um, but I was just incredibly frustrated with what, to me, looked like a Fed that was just taking unbelievable risks. For what? Um, the story of the time was inflation was 1-7, and we were buying 120 billion bonds a — this was post-vaccine, successful vaccine — because inflation was one seven instead of two. So we're taking this massive gamble, um, where you threatened 40 years of credibility with inflation, and you're blowing up the wildest raging asset bubble I've ever seen. And I knew that the worst that can economies happened post-asset bubbles: the 30s here, post-89 in Japan, after the housing bubble up here. So that's what I went on.

If you remember, the Fed did 2 trillion in QE after vaccine confirmation, and after the time I went on, you had the strongest momentum and employment in history on a rate of change basis. At the same time, their — their partner in crime, the administration, was doing more fiscal stimulus — again, post-vaccine, after it was clear emergency measures weren't needed — than we did in the entire great financial crisis.

I'm not talking about before the vaccine; I'm talking about after. Um, look, it turned out I was right. I've been wrong plenty of times in my life. The Fed was wrong; they made a big mistake. It's not so much that they were wrong — I've been wrong a lot — it's the risk-reward bet they meet —

Joe Kernen:

There's some news this morning in —

Stanley Druckenmiller:

30 years ago, we shorted the pound in the quantum fund. I didn't know whether the pound was going to devalue. What I did know was: if they didn't devalue in the next six months, my fund was going to lose 50 basis points; if they did devalue, I was going to make 2,000 basis points. So it was a 40-to-1 one-way risk-reward bet. If you look at what the Fed did, the radical gamble they took to get inflation up 30 basis points from one seven to two — it's, to me, sort of a risk-reward bet: you bit one to lose, you bet one to lose 40. And they lost. And who really lost? Poor people in the United States ravaged by inflation, the middle class — and my guess is the U.S. economy for years to come, because of the extent of the asset bubble, in time and duration and breadth, that went on.

Joe Kernen:

So they have that dual mandate. So you think that in the back of — of Jay Pal's mind, he was like, "I got 30 basis points to go to get where I want to go"? Or — or was he just saying, "I don't see a problem yet, I want full employment, so I'm just gonna — I'm gonna let — let it ride" at that point? Because the problem I have is that there's two — there's inflation and there's asset inflation. Was it not clear at that point that even if you weren't a two percent, there was asset inflation everywhere? Now — now, how does a guy that's running the Fed not — why is that not on his radar screen?

Stanley Druckenmiller:

Because it's not part of their mandate, in their opinion. And I don't think they looked at it as a risk. And to be fair to — we'd had 20 years of disinflation; people to live in the past. And he had plenty of company, including on your network.

Um, so the other thing I'll say is: I've been wrong a lot in my career; when I do, I correct my mistake. What was particularly mind-boggling to me: two to three months later, inflation takes off. It's no longer a theory; it's actually happening. We come up with this ridiculous theory of transitory. I mean, so we have five trillion in fiscal stimulus, we have 5 trillion in QE, Janet Yellen is running down the TGA account — so that's another trillion in. And if you remember the monetary framework in the fall of 2020: they were no longer going to forecast; they were going to be data dependent and wait till they see the whites of inflation's eyes. So guess what: they saw the whites of their eyes, and what did they do? They forecast that it was going to be — when you make a mistake, you got to admit you're wrong and move on. That nine or ten months that they just sat there and bought 120 billion in bonds — I think the repercussions of that are going to be with us for a long, long.

Joe Kernen:

So the — go into whether you really — whether they partners in crime with — with fiscal spending as well, and is that what caused — I mean, inflation is everywhere, and we know about Putin price hike and we know about supply chain issues following the reopening. But is it really the growth in — in the money supply and the deficit that is the root cause of what we're seeing right now?

Stanley Druckenmiller:

That's what — that's what lit the match, absolutely. I mean, come on. And when I'm on TV — I wouldn't consider this one of my better calls — you've got massive fiscal stimulus, you have massive monetary stimulus, and the thing is already starting to percolate. And of course it's what caused it. What I will say: there's a lot of people out there saying Putin caused it. Putin did extend it, all right. But can I remind everybody that when Putin invaded, the CPI was seven percent year to year before he invaded? And this — all this crazy stuff we did was to get inflation one from one seven to two, and we were already at seven.

But yeah, once — once you light the match — and we found this out in the 70s — inflation rotates. That's summer, everybody kept talking about used car prices are going to come down, this can come down. That's not the way it works. And by the way, there are a lot of disinflationary things happening now in the good sectors. But so the UK unions, okay — do you think they're going to come in in the spring and they're going to negotiate and they're going to say, "Oh well, the five-year five-year forward is 2.3, so yeah, I'll take a 2.3 raise"? Right? No. It's like the real world: workers, they just got 24 over three years. When you lose that much purchasing power, so then the wage negotiations, it seeps in there. Then of course there's customers of companies that have to raise their wages, and the thing spirals. And that's what we're dealing with, and that's the position the feds got themselves in, with basically a boom bus policy. But yeah, they were not alone; the fiscal stimulus was a huge part of this. But to be fair, they enabled it. The government can't spend five trillion dollars if they don't print it.

Joe Kernen:

Yeah, the — the move today from — from the Bank of England — the last I looked, I haven't looked, you know, in this market you got to look every two minutes — but it was being received positively, which I thought was pretty shocking. I guess it was the notion that if they blink, maybe we blink sooner than — than people thought. I would have thought this is one of those — you know, you mentioned 30 years ago — this is one of those things where they put a drop in the ocean trying to stop this thing from happening. You know, it's not going to work probably, and it almost indicates maybe there are some underlying dislocations, because rates have gone up so fast. We need to worry about what happened in England today. And are you surprised that —

Stanley Druckenmiller:

I think it's a — of everything we're talking about, we've had 30 trillion of QE globally over the last 10 years. When you have free money and you have bond buying for that period of time, it creates bad behavior. Okay, so the pension funds and the insurance companies are buying bonds, repoing, taking the repo money, levering that up with — with equities and all kinds of stuff to try and enhance their returns. And then — and by the way — doing so when guilts are yielding it — we're yielding what, two eight, and inflation's 10 or 15. That doesn't happen if you don't have the environment created the last 10 years.

Joe Kernen:

So you're the Bank of England, and you've got this situation on your hands now, which is quite serious, because I think 30 percent of mortgages there are — or at least 30 — are heading toward being variable rate. What do you do?

Stanley Druckenmiller:

Well, what you don't do is go and take taxpayer money and buy bonds at four percent when your inflation rate is over 10. You don't cure inflation with an inflationary act. And buying bonds, you know, seven eight nine points on an inflation rate — of course the markets are cheering it, because you know, they get a Band-Aid. Everybody's blinking. But this is creating long-term problems down the road. That 30 trillion has created all sorts of stuff that's probably under the hood. I used this term a week ago; I didn't know about this thing happening. And you're going to see more of it, because that's what happens during asset bubbles: behavior changes.

Joe Kernen:

Recently, you talked about the potential for a 69 — 1969 to 1982 — potentially type situation for the next 10 years here, in terms of the indexes being at the same level a decade from now.

Stanley Druckenmiller:

Yeah, I — I will say this: the — its conventional wisdom, which I agree with, that stocks go up over the long. The problem is we've become a little complacent about what does long term mean. If you bought the Dow in 1929, you got back to even in 1954. As you just pointed out, the Dow was in 1966 where it was in 1982. When I look back at the secular bull market started in 82, let's just take a trip down memory lane. We had a president who said government the problem, not the solution. We had a guy who fired all the air traffic controllers in the country when they wanted a big raise. We now have a president who is a union man, who says he's trying to beat inflation, who cheers at 24 over three year reward to the railroad unions. We have a president who thinks government is the solution, not the problem.

Maybe more importantly, or I'd say in terms of what we're talking about: if you look at valuations back then, the S&P was 50 percent — um, I'm sorry — the stock market was 50 percent of GDP. It's now 150, down from 225. That's because five years yielded 15 when I started Duquesne, so real rates were high. That's why we were at eight times depressed earnings. We're now what, 18, 19 times inflated earnings that I have a very strong feeling are going to be down next year. Then you have the secular forces. You were right on your initial ramp of globalization: a fantastic thing, building supply chains around the world, increases efficiency, causes disinflation. That was — that's been a trend for 20 or 30 years going the other way. Now we're disentangling all that; that's going to be inflationary. And then finally — and we've already kind of alluded to it — the last 10 years, the bull market, you put it all in hyperdrive with 30 trillion of QE and zero rates. Now the consequences of that are born, and all those factors that cause that bull market, they're not only stopping, they're reversing — every one of them. We're going from QE to QT — unless you live in England this week. Um, they're really unfolding.

So when I put all that — the one thing I — I bristle a little about when I hear people on your — on — on your network, as they say, "Well, I'm bearish, but I'm bullish for the long term." Look, you can have a period of 15, 20 years, 10 years where the market doesn't go anywhere. That doesn't mean you can't make money. You could have made money, plenty of money, in the 70s at various times; we had two sixty percent rallies. I'm not saying, you know, go get another job and you can't do stocks. I'm just saying we've had a hurricane behind us for 30 or 40 years, and it's reversing. And I wouldn't be surprised — in fact, it's my central forecast — the Dow won't be much higher in 10 years than it is today.

Joe Kernen:

There was a time you went to college campuses and you talked about an equity and debt — I think in this case it wasn't necessarily Fed induced, but it was entitlement and dust — and it could come. This was 10 years ago, and I think you said sometime between, you know — you said 2020 and 2035. Yeah, so it's 2000 — is it 2022? Is it happening?

Stanley Druckenmiller:

We are — we are in deep trouble. So everything I said at those colleges is worse, in terms of the metrics, except for one thing. And what I miscalculated was I didn't calculate zero rates; I used four percent rates. But the only thing Donald Trump and Hillary Clinton agreed on in 2016 was don't cut Social Security, don't cut entitlements. So nothing was done. Joe Biden has excruciated Rick Scott because he dared mention maybe we — we shouldn't be increasing senior Pace. But if you look at the reversal I just talked about and you use the CBO estimate, which is rates at 3.8 percent — which I think, frankly, is pretty optimistic, um, given all the things we've talked — um, by 2027, the interest expense alone on the debt eats all health care spending. By 2047, it eats all discretionary spending. So we're now getting into fiscal dominance. By the way, by 49 it eats also security. We're getting to the point now where the interest expense on the debt is so high that it's going to eat up our ability to basically service the next generation. I'm not even sure about the current one.

Joe Kernen:

I brought some cyanide if you'd like one.

Stanley Druckenmiller:

No, no, no. I'm thinking about that, and I'm thinking maybe we'll be okay, but uh — uh, but —

Joe Kernen:

Because we'll be dead.

Stanley Druckenmiller:

Yeah, that's what I mean. Um, but I worry about —

Joe Kernen:

Okay, let's bring it back to how hard, okay, is it gonna be — uh, it's gonna be a landing. Is it going to be a nice, smooth, like, three-point landing? Is it going to be a little bumpy, or is it going to be, you know, one that you hope to walk away from?

Stanley Druckenmiller:

Right now I don't — walk away, I don't know. Let me just say this: our — I will be stunned if we don't have a recession in 23. Don't know the timing, but certainly by the end of 23. I will not be surprised if it's not larger than the so-called average garden variety. And I don't rule out — not my forecast, but I don't rule out — something really bad.

Why? Because if you look at the liquidity situation that has driven this: we're going to go from all this QE to QT; we're following an asset bubble. We've been doing all this, uh, running down on the SBR, which is now — that's the strategic petroleum reserve — it's now below 84 levels, even though obviously oil consumption is much higher. We've had a bunch of myopic policies that have actually delayed the liquidity shrinkage. QT has been almost entirely offset by Janet Yellen running down the treasury savings account — by the way, pretty amazing policy: she could have sold 10 years for under one percent during this time, and said, she runs down the treasury savings account. So all that has mass the liquidity shrinkage, but it really comes into full gear. And she can continue this for a while; we can do the SBR for a while, stimulative stuff. But by the first quarter of 23, it kind of goes the other way. So our central case is a hard landing by the end of 23. But I don't know the — I've been wrong on a lot of things; I could be wrong on this. But since I do it for a living, that's our forecast, which is a recession in 23.

Joe Kernen:

You said — said — everything has reversed from 1982. That ushered in arguably the greatest time in — in human history, probably, for everything — for all scientific and medical advances and disinflation in the stock market and everything else. So we're, you know, we're at the —

Stanley Druckenmiller:

By the way, I'm wildly bullish on medical advances. That's the one thing I'll push back on. Yep — cancer, and I expect neural progress.

Joe Kernen:

Right. So we're all going to live forever and none of us are going to have any money.

Stanley Druckenmiller:

That's — that's not so. We better not all live forever, because our kids won't have any money, because they'll be paying our social security. You know, Reagan said, unfortunately, every generation has to learn the same stuff all over again. I don't see that happening, and I don't see any Reagans on the horizon.

Joe Kernen:

Do you see — how we gonna — what — what do you think happens in the next five years politically? Do we have someone riding in on a — on a horse that —

Stanley Druckenmiller:

My first boss in Pittsburgh in 1976, he said, "Stanley, the way you time a political cycle is you buy the market two years before the general election, and then you sell it on the general election, because they always rig things to be good in the election year." He said this in 76. We had major bottoms in 78, 82, 86, 90, 94, 98, 02 — not so much in 06, because Bush tried to push it through all the way. And we see what — the incredible thing about the myopic policies they're running — and I assume it's for the midterms, I can't come — is it's kind of dumb politically, because it sets up a bad, bad 24.

So maybe the silver lining is we get a crisis that doesn't destroy us but is bad enough, maybe, to bring us together, and someone comes out of nowhere, because we definitely need to change. Half the country hates the other. Um, we got myopic economic policies, boom-bust policies. You don't really get change unless bad stuff happens to — to catalyze the change. That's what brought in Paul Volcker; G. William Miller and Arthur Burns preceded him. So as gloomy as I am, I'm open to something really great happening out of nowhere that we don't see, by catalyzed by something bad.

Joe Kernen:

Yeah, great. Yeah — crisis, and then something good.

Stanley Druckenmiller:

Good. Well, you know — greater than we've already had. 82 was a terrible recession. Everybody says, "Oh my God, are we going to have a recession?" 82 was a terrible recession. First of all, politically, Reagan won 49 states in 84. Secondly, it brought in 20 years of prosperity. So if the Fed engineer something here that we have some short-term pain for — um, to me, they're doing the right thing. It'll be worth it. The risk is, because it was preceded by 30 trillion dollars of that, it turns into something worse. And I'm not predicting that, but I'm open-minded to it.

Joe Kernen:

Nordstream, you know, leaks. I mean, in a heap of trouble over there in Europe with the winter approaching, and with Putin — I don't know, he could get desperate, God knows. But I mean, we have messed up this energy transition, and — and are we going to be able to reverse that? What's going to happen in Europe? Is there going to be a recession? They can't — they're going to have power to heat homes, much less manufactured —

Stanley Druckenmiller:

I wish — things are going to be a recession. I wouldn't be surprised if they haven't prepared for the winter better than we'd think, but of course there's going to be a recession. Um, you've got monetary policy tightening in Europe like everywhere else, and you have the price of natural gas at about 300 equivalent to oil there. Putin, I don't know what he's going to do. I don't know what President Xi is going to do. And you know, we haven't even gotten into all the red and black swans flying around up above.

Joe Kernen:

I know, which I'm assuming aren't going to happen, but they are flying around. I'm going to name a couple of them. Well, one is red — uh, yeah — China. I mean, something strange could happen there, obviously. Putin, yeah. Um, nuclear — yeah, and say that word.

Stanley Druckenmiller:

I'm — I'm not expecting that; I'm just saying you don't even need to talk about black swans to be worried here. I just — to me, the risk-reward of owning assets doesn't make a lot of sense. I'm not advocating going short. The greatest short seller ever, Jesse Livermore, made a hundred million dollars in 29, and then he went bankrupt in 36 and killed himself.

Joe Kernen:

Did he jump or shoot or what?

Stanley Druckenmiller:

It wasn't good. But I don't think you need to short — just sidestepping. But to me, the risk award is difficult right now.

Joe Kernen:

We've got not much time left. You know, can we — do we have to go to the next session? Would you —

Stanley Druckenmiller:

I would stay all day. I think the living office should be a week.

Joe Kernen:

This is enough venom, you sure? I — I love listening to you. So you became a Bitcoin — just in — in closing: is Bitcoin for real? You still own it?

Stanley Druckenmiller:

I don't own Bitcoin — crypto. I — it's tough for me to own anything like that with central banks. But yeah, I still think if — if the Bank of England — what they did — is followed by stuff like that by other central banks in the next two or three years, if things get really bad — yep, I could see cryptocurrency having a big role in a renaissance, because people just aren't going to trust the central banks.

But right now I like everything I'm hearing out of the — I hope they finish the job. They — they made a big mistake; they seem to have owned it. Uh, but it's easy to own it when employment is strong. Let's see what happens if we get a hard landing. I just hope they stick to their guns, because this stuff was terrible in the 70s. You have to slay the dragon. And the chair is right: you're probably going to have some —

Key Themes

The session is the endgame in its execution year: the regime change moving from forecast to fact. The fragility argument — hidden damage from a decade of free money — is liquidity analysis applied to the real economy, and the defensive construction is ruthless risk management and asymmetric risk/reward at portfolio level when no shelter is clean.

Context & Significance

The call's aftermath is itself instructive: the disinflation he predicted arrived; the recession did not — a miss he later owned publicly, most directly in the 2023 Sohn conversation with Sokoloff. The KB preserves this appearance not despite the miss but because of it: the two-laws framework was the best macro reasoning available in 2022, and watching its author score it honestly is the method's real curriculum. Read with Sohn 2022 and Sohn 2023 for the complete arc.