Ira Sohn Conversation with John Collison

Summary

At Sohn 2022, with inflation at 8% and the fastest hiking cycle in decades underway, Stripe co-founder John Collison interviewed Druckenmiller about the aftermath of the regime he had warned about for years. The conversation produced one of his most cited historical rules — inflation above 5% has never been tamed without the funds rate exceeding CPI, and never without a recession — delivered with a characteristic twist: he predicted the first law would be violated, and history would win the second.

The session is the vindication lap of the 2021 WSJ thesis and the clearest statement of the post-QE positioning problem. With the bond market distorted by a decade of central-bank buying, the classic bear-market shelter was gone; with an asset bubble built on free money, the cost of fighting inflation would be measured in the bankruptcies QE had buried. His base case: hard landing, timing unknown.

Full Text

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

Thanks Dan. Thanks Frank. Our final conversation today is between John Collison and Stanley Druckenmiller. John is a polymath and pilot who together with his brother Patrick runs Stripe. I once had the occasion to ask a very experienced flight instructor what criteria he would use to select a pilot to ride with. And he said the the key is being able to both keep your eye on the horizon and on the controls in front of you simultaneously. I thought that was a remarkably good description of John. And also that that ability to go from 40,000 ft to 5 ft without getting whiplash is a quality that I feel like characterizes many of the best investors including the person John's going to interview today, Stanley Druckenmiller. John, over to you.

John Collison: I'm delighted um to be joined uh today by Stan Druckenmiller. And look, uh you could say that certain people in the investing world need no introduction. And in a lot of cases, it might be an exaggeration. But I think uh Stan is probably if you were to ask investors for their role models, uh you know, Stan would probably be one of the uh top three names uh that people give you. And uh you know, his performance over the last uh number of decades uh probably um makes that very very deserved. Stan is also a uh macro watcher uh and there's no more relevant time for us to be uh talking about that. And in fact, uh Stan, maybe a good place to start is that, you know, last year you gave an interview uh and you said uh you know, investors are going to stay uh disregarding the looming signs of inflation. Uh you can't find any period in history where monetary and fiscal policy were this out of step with economic circumstances uh and that there was a raging mania in all assets. And so, you said this uh last summer when everything was still kind of hunky-dory uh in terms of the markets. And so, I don't know, maybe you're pretty good at this uh this macro thing. And so, if that was your prediction, um uh last summer, which has since more or less come to pass, what are you predicting now?

Stanley Druckenmiller: Thanks, John. Um it was nice of you to cite uh a period that's actually turned out the way I've said cuz in my career I've said many things that didn't turn out. So, your your selective picking was uh quite nice. Look, um I I did say all that and I I would just say that a number of things happened since then. Uh some which didn't surprise me, some which did.

Stanley Druckenmiller: Um A, the inflation was actually a little higher than I thought it would be, although I thought it was going to be above 6%, which at this time seemed quite radical. Um B, the bubble has really burst with a vengeance, a lot more than you can see in the S&P. A lot of very good companies um have been de-rated 60, 70% without a whole lot of change in fundamentals. So, valuations have improved relative they were, and then C, I'd say the biggest surprise since I talked last spring was how slow the Fed was to recognize the problem. I thought they were slow not recognizing it last in April 21, but they were still buying bonds in March of 22, and they were still not even pivoting verbally until November. I think that period was incredibly costly because a lot of assets uh a lot of assets were purchased during that period that I think a lot of people moving out the risk curve will lose a lot of money on. I would just say where are we now? It's hard to believe given the extent of the monetary policy the last 10 or 11 years. I think globally we had 30 trillion of QE. Um even as late as I think a year ago there was 18 trillion of debt that was still negative yielding when the world was about to experience 8% inflation. It's pretty It's pretty extraordinary.

So, it's hard for me to believe you could have unwound all that that created in terms of a misallocation of resources in 6 months.

Stanley Druckenmiller: So, my best guess and um this business is about guessing. There are no certainties. Is it we're 6 months into a bear market that has some room to run? Uh for those tactically trading, it's possible the first leg of that is ended. Um but I think it's highly highly probable that the bear market has a ways to run.

Stanley Druckenmiller: Is it going to be a soft landing or a hard landing? Well, the answer is I don't know, but the probabilities of being a soft landing are pretty remote, John. Um historically, I think we've only pulled off two or three in history. The one I lived through I remember so well was the '94-'95 one. But we've never had a soft landing after inflation's gotten above 4 and 1/2%. And the situation we face now is extraordinary where the Fed um where are we these days? I guess we're at 75 basis points. I can't keep up. But even the projections of 2%, you're so far behind the inflation rate, and there's so much wood to chop, and there's been such a broad asset bubble going into it. Um it's very hard for me to say that the probabilities favor a soft landing. Indeed, I think they aggressively point to a hard landing. Anything's possible. As I said earlier, I've been wrong plenty of times in my career. But betting on a soft landing to me is a real is a real long shot.

John Collison: So you you think once inflation goes above 5%, it's very hard to tame it in a way that's elegant.

Stanley Druckenmiller: Well, that's what history says. It's There There's an interesting historical fact, which in fact I think is going to be violated. But two undefeated records are number one, once inflation gets above 5%, it's never come down unless uh Fed funds have gotten above the CPI. Well, since the CPI is eight, that would call for a Fed funds rate of above eight. Frankly, I don't think we'll get there because the extent of the asset bubble and the damage that would be done. Think about the fact that we have virtually no bankruptcies. And look at the dis- probably the most disruptive period um since the 1890s. Uh I don't need to tell a founder of Stripe that. Um but if you look across the landscape, there should have been many many many bankruptcies, which have been buried by QE.

Stanley Druckenmiller: So, if in fact Fed funds ever got to 8%, which by the way, I don't think is going to happen, um the destruction would be quite material. The other the other statistical fact is once once inflation's got above 5%, to use your word, it's never been tamed without a recession. So, if you're predicting a soft landing, you're going against decades of history. Could happen, anything's possible, but I don't think it's probable.

John Collison: Yeah, I think those historical examples are quite sobering. Was it you said that once inflation goes above 5% it has never come back down without the Fed funds rate going above the CPI?

Stanley Druckenmiller: Yes.

John Collison: And the CPI is currently eight year-over-year.

Stanley Druckenmiller: Um I actually think we are going to violate history and it is going to come down. I don't know how far, but without that happening the second one I think history is going to win. That's once inflation gets above 5% it's never come down without a recession and I think a recession is in the cards. I just don't know when. We have about depending on who you listen to a trillion and a half to two trillion of excess savings now. So it may take some time to work through that savings. But given the extent of the asset bubble and the destruction in the markets, given what's going on in Ukraine, giving zero COVID policy in China, um I don't take a lot of comfort from that. So I assume um and I pretty strongly assume we're going to have a recession sometime in '23. I just don't know whether it's going to be in the early part or the later part and again um it's a guess. It's not a fact.

John Collison: As we talk about what's going on in the markets or sorry in the economy and not the markets, you know, one thing I find really interesting about your style is people like to trot out the phrase, you know, the stock market is not the economy. But you have you know been on the record a number of times talking about how you use the stock markets as a signal for what's going on in the market in the economy. And so you know you have this distributed team. If you look at all the you know stock analysts out there covering all these different stocks and all these different sectors, they're kind of like the you know engineer in the cockpit of the train and you know when the you know dial starts flashing and you know it's a sign that you can investigate more. So I'd love you to talk about this approach where you are using movements in stock prices to decide or to to to know that hmm, something's going on there. Maybe I should go investigate.

Stanley Druckenmiller: Yeah, one of the ironies of my style, maybe it's because I was a dropout um of a PhD program in economics at University of Michigan, is that I don't use what traditional economists use to predict the economy, which is things like um employment and a bunch of macro top-down statistics. In fact, I started my career as a bank and a chemical analyst and over time I learned that the inside of the stock market had a very, very prescient message about future economic activity. And for whatever reason, stocks tend to lead the fundamentals by somewhere between 6 and 12 months. And you can even go beyond that and look at industries that lead the economy and industries that lag the economy. The obvious one that everyone knows about is housing has traditionally been looked at as a leading indus- industry. Retail has a slightly capital goods lag. And what we've done historically is actually, even though you refer to me as a macro investor and many people have, is we do the macro by a compo- compilation of listening to companies and doing a bottoms-up analysis of companies that lead the economy and comp- and I'm sorry, industries that lead the economy and industries that lag the economy. And if the leading industries are turning up or turning down, that's a signal. And that's worked beautifully historically.

Stanley Druckenmiller: The other signal which I have found quite prescient for markets is the bond market. Um unfortunately the last 10 or 11 years, the bond market has not signaled anything because the central banks took it upon themselves to manipulate bond prices, which to me is the 10-year Treasury has sort of been the most important price in the world, and they took that price out of the equation as a signal. I remember last summer when certain forecasters had a different forecast than my own, kept talking about, "Well, the bond market is saying this. The bond market is saying that." When the 10-year dropped all the way from 170 to 115, which by the way, I did not anticipate, but the bond market wasn't saying anything. What was going on is central banks were buying trillions of dollars and manipulating the price of bonds, so there was no signal. I don't think you get that tainting if you look inside the stock market. You could get it in the stock market as whole, but if you do this approach where you look at industries and you which lead, which lag, and you put the puzzle together, it's been precious over time, and it's certainly allowed us to consistently the last 20 or 30 years outperform the Fed in terms of economic forecasts.

John Collison: I find that really interesting. You know, equities acting as a kind of this synthesized predictors for certain industries. And so, say, if you think about understanding what's going on in housing, again, the economy now, what's kind of concretely what will you be looking at as a publicly traded REITs? Is it you know, the stocks of construction companies? What does that process look like for you?

Stanley Druckenmiller: Well, there there's You don't need to get real fancy here. You can just do the home builders themselves. And uh with supposed to good fundamentals, they've all declined 50% from the high. Another industry that's been incredibly pressured and has been trucking. Um and they're down 40% from the high despite the fact that they're all reporting record earnings. Um

Stanley Druckenmiller: An industry that is not that much of a leader, but it's more of a leader than a laggard is the retail industry. And there's been a lot in the news lately whether it's Walmart or other companies, um retail. That one's a little tainted. Just can't take these things blindly, John. That one's a little tainted now because in COVID retail went to 100% of the wallet from about 85% cuz we weren't going outside and traveling, going to football games. But even taking that into account, um retail appears to be much weaker than it should be given what the so-called GDP numbers are printing. So right now there's a there's a signal, albeit early, that um there may be trouble ahead.

John Collison: Yeah, so you look at trucking stocks being um uh you know, down 50% and you say, "Hmm, okay, this probably doesn't you know, does not bode well for trucking volumes." It kind of has to be the case.

Stanley Druckenmiller: Yeah, and if if it was just trucks, fine, but it's not just trucks. It's housing. It's retail. It's all over the place. And by the way, you can't get too carried away and say that means we're going to have a recession tomorrow morning. A lot of these things have longer lead times, like 6 months to a year.

John Collison: Yes. One thing you're also getting out of here kind of when you reference that, you used to be able to look at the bond markets and kind of now you can't, is it seems um very true that the investors who perform really well over uh multiple decades have to shift stylistically over time and become new kinds of investors. I kind of love the stories of uh you know, the the value investors back in the day where if you look at what Ben Graham was actually doing, you're hunting for companies where the uh you know, book value is greater than the market cap of the company. There was a famous you know case of Northern Pipeline where they were trading at $65 a share and they just had $95 a share of stuff and railroad bonds or whatever on their balance sheet and he bought a bunch of their stock and then just yelled at them and complained until they finally dividend out of the $95 a share of their assets. But that doesn't work anymore obviously. You know, markets have gotten a lot more efficient and you can't just buy companies that own more assets than their market cap. So value investing has to change. And similarly you're describing here, especially you know, the relationships with bonds, the relationships with currencies have to change. And so I'm curious, can you talk a bit more about how you stylistically have had to change the the tools in your toolkit?

Stanley Druckenmiller: That's really an excellent question and um it's very it's it's right on point because when I got in the business um you could almost guarantee if a company reported lousy earnings, open down that day and close up big. That stock market was going to be higher 6 months from then and vice versa. You could almost always guarantee if the economy looked great and bonds were rallying that meant the economy was not going to look so great. We used to call it price action versus news. And it used to be an incredible indicator of security prices. Partly because of the efficiency partly because I think the growth of hedge funds, we all learned these rules. Um and partly because of central bank manipulation price versus news is a very weakened tool versus 20 years ago. Much to my chagrin because I always found it a great warning signal and now is a lot of times it may be warning of nothing or warning of something that doesn't exist. So that's been um one thing I've had to adapt to. I mean frankly when I started in the business I'm showing my age here which was the mid-70s um I started in equities.

Stanley Druckenmiller: And I also learned particularly in bear markets that I had to morph into bonds into commodities into foreign currencies things like that. I mean one of the most challenging things for me right now is maybe it says something about my dysfunctional personality but I've always made even higher returns in bear markets than bull markets. But the way I did it was just pretty much ignore equities, take them off the table, buy bonds, buy treasuries and go home. Well I've never present been presented a cocktail where you have 8% inflation, you think the economy might weaken and bond yields 3%. It's an analog with no precedent in history. So for the golfers out there going into the situation we're describing I feel like I'm about to play a round of golf without a driver and without a 60° wedge because bonds which have been my go-to asset in terms of of a recessionary bear market atmosphere they may work but there's good reason to believe things may be different this time because we've never had central banks with situation in Europe for example we have negative rates with 8% inflation or even here we've never had anything like this. So you always you can't get into black and white that it's an art form investing in from cycle to cycle. You have to constantly innovate and not just be a slave to past models.

John Collison: So how are you positioning the funds given that you know maybe you don't feel so good about going long equities but your normal bonds tool kit is not working quite well. is that you know is the golfing top of mind because you know it's actually hard to you know to do too much or how are you positioning things?

Stanley Druckenmiller: Well, currently I'm very challenged. Um, we were lucky enough to have made some money up until now the last six or eight months primarily by having a a let me call it a matrix of short fixed income short stocks and not doing a whole lot in currencies and owning some of the key commodities particularly oil and mistakenly gold but copper. Um,

Stanley Druckenmiller: things are a lot harder now because we're now getting definitive signals that the economy may be weakening particularly at the front end. And while I'm not comfortable owning bonds I'm much less comfortable being short fixed income to the to the degree I was three to six months ago when it looked like a much better risk reward. And even stocks so many companies have been degraded by 60 or 70% and I've lived through enough bear markets that if you get aggressive in a bear market on the short side you can get your head ripped off in rallies. So, currently I'm I'm coming in every day and I'm looking at my screen but I'm pretty much taking a break. I'm waiting for a fat pitch. I'm not shooting at any pins to use a golfing analogy. My anticipation is I will be going back to the short equity position at some point if the market affords me if not hopefully I'll just side step a decline that's not the worst thing in the world. But the fixed income market has become much more complicated. Uh and I'm lucky enough, since I play a lot of asset classes, to have a luxury of not playing in one. And I don't think I'm going to be playing much in that one going forward.

Stanley Druckenmiller: The currency market is incredibly interesting to me. I haven't been doing much there. And I'm not currently positioned aggressively there. But, I will be surprised if sometime in the next 6 months I'm not short the dollar. 14 trillion dollars has come in here because we were the first to tighten. There's a story about American exceptionalism. I'm not sure we're so exceptional anymore, and if we are, I'm not sure I'm excited about what we're exceptional in. Uh So, foreign exchange looks interesting. We still own uh energy and other commodities. Um Ukraine sort of gave that trade an extended life. Although, I must say the energy, because of the transition to ESG, we look to be short energy for 5 or 10 years, so that could last a while.

John Collison: It's so interesting to hear you talk about this stuff because you so fluidly move between all these different asset classes. And um one thing that makes me think of is um crypto. I I've seen you've done kind of a little bit in crypto before. I remember you saying this, it's just hard to guess the size of position that is interesting to in crypto. One thing I was wondering, are you seeing crypto start to affect other asset classes and other currencies?

Stanley Druckenmiller: Um I don't know whether I'm seeing it, but I expect it to. You can't take You can't build over 2 trillion in wealth in purchasing power and then take a trillion of it out and not matter. John, I also have high frequency um signals. And there certainly seems to be a strong correlation between crypto and the Nasdaq. I don't think it takes a genius to figure out why. So, I'm looking at it as an indicator that way.

Stanley Druckenmiller: Crypto um you know, everything that that Charlie Munger says about it, I'm sympathetic to. Everything that says Bill Miller says about it, I assume it's sympathetic to. So, I think that's a movie that has yet to be played out and one that I don't want to bet on conviction, but I will be very surprised if blockchain isn't a real force in our economy, say 5 years from now to 10 years from now, and not a major disruptor with with companies that will um have been founded between now and then that'll do very well, but they will also challenge things like our our financial companies and do a lot of disruption. So, I find crypto interesting. My 69th birthday is in a couple weeks. I'm probably too old um to compete intellectually with the young people in this space, but I'm certainly monitoring it.

John Collison: And do you I was going to ask that. Do you think younger Stan would be kind of diving into crypto more energetic energetically?

Stanley Druckenmiller: I think a younger Stan would be diving into everything more energetically than I'm talking to. Um it's age is a funny thing. I don't um I feel my predictive power and forecasting power is as good as it's ever been the last 3 to 5 years. But, I'm certainly not making 30% net returns per year like when I had clients. So, I think it's two things. Yes, um I think younger people understand new asset classes better. But, B, I'm just not playing anything as aggressively as I used to.

John Collison: I I want to get back to that cuz that's um that's interesting. But uh one other crypto-related question, as I think about um Bitcoin, the closest analog is clearly gold and you people talk about digital gold, by which I mean if you want to remove yourself from cash, if you want to be independent from inflation, your government in whichever country uh uh you're in, traditionally gold would be the asset that you would kind of pull back into. Nowadays, that can be Bitcoin. And so you would expect their cyclicality to be similar. And yes, Bitcoin is highly cyclical, gold is counter-cyclical historically. Why is that?

Stanley Druckenmiller: I'm not sure why other than Nasdaq-type risk-takers are the ones that tend to play in Bitcoin and curmudgeons that are gold bugs and want the world to fall apart, play in gold. But there's no question, and this I've watched and it's gone on long enough now that I believe it, that if you believe we're going to have irresponsible monetary policy and inflation going forward, if it's in a bull phase, you want to own Bitcoin. But if it's in a bear phase for other assets, you want to own gold. And I think I just start articulating the reason, but sometimes, John, I don't care. Um this has gone long on enough that I'm starting to believe what I'm observing. And for sure, if I think we're going to have an inflationary bull market, um I'd want to own Bitcoin more than gold. And if I thought we're going to have a bear market, you know, stagflation-type thing, I'd want to own gold. Doesn't mean I'm going to believe that in a year, but that's my assumption going forward from this point.

John Collison: And is that because of some fundamentals of the underlying assets or just based on what you've observed in their behaviors to date?

Stanley Druckenmiller: It's 85% what I've observed, but I would also say it's the type of investor. Um over-the-counter um FANG type investors, if they believe in inflation and they tend to be younger, they want to play Bitcoin. Uh old curmudgeons that that secretly want the world to fall apart, they don't own Bitcoin, they own gold. So, but that's kind of cheating because that's kind of a a reason I've made up for what I've observed, I think. You got to You got to know your own biases. Um yes.

John Collison: Go go back to how you work and you know, kind of the young man's game and things like that. Um I talked to someone who worked for you who said maybe an underrated aspect of your performance historically is you just work way harder than everyone else and there's few people who have been in the market since the '70s working with your work ethic uh and you know, across such a broad range of assets. How How How relevant do you think that is or how much truth do you ascribe to that?

Stanley Druckenmiller: I think it's very relevant. Um I was pretty lazy in college and I never considered myself a particularly hard worker, but I'm so passionate about our business that it's almost like a compulsive gambler that has a a way to channel his compulsions and the fact that every event in the world affects some security price somewhere and the fact that I'm so intellectually stimulated trying to imagine the world 12 to 18 months from now versus the way it looks in the present and security prices, how they would reflect that, I just find it so stimulating, it makes everybody think I'm a hard worker because I'm attracted to the game. So, in this game, I am a hard worker, but I actually think there's a life lesson there. I've seen young people who when they find their passion who had kind of looked like they were lazy or lost their way or weren't very driven become very driven. I just happen to be passionate about this particular discipline. So, I don't know whether I have a hard work ethic, but it that that's the end result of my passion.

John Collison: Are Are you then excited about the growth of mobile investing and you know, approachable retail investing for kind of a younger crowd because it might pull more people into this or do you think it might get people in for the wrong reasons and it's a bit more of a, you know, blinking slot machine game?

Stanley Druckenmiller: The latter. I mean, given given what's going on the last 11 years with central bank policy and the breadth of the bubble I do fear for um you know, one of the sayings I'm sure you've heard it, but I probably heard it the first week I was in the business 50 years ago, it still applied. Bull market geniuses. Um I think there's a lot of bull market geniuses around and it's not that they love the game, they love winning, but they were surfing with a hurricane behind their back that was giving them these nice waves. They they may become very discouraged. So, I don't embrace. I've heard a lot of people in base effect that all these people are investing now and all these and how great it is. I don't think it's so great if the story doesn't end well.

John Collison: Yeah, and and and certainly we may see an interesting scenario play out over the next year or two. Um going back to your style, you think I find very interesting in how you work is this you know your philosophy of put all your eggs in one basket and then watch this basket very carefully and you've described how you just develop conviction three to four times a year and act based on that. And I guess if you could talk a little bit more about that like the the spidey sense going off and you know you're clearly in a low conviction time right now but I think that's just very stylistically interesting where you even know how to size up and down your trades.

Stanley Druckenmiller: Yeah, it's it's completely contrary to what they teach in business school which is if you're highly diversified you have less risk than if you're highly concentrated. Um I don't believe that at all. As an investor when I think most people get in the most trouble is when they have stale longs or stale shorts. When you've got 15 20% of your asset base or sometimes in macro positions I'll have two or three hundred percent. Um believe me they're not getting stale and you have to have ruthless discipline and you're coming in every day just to quote Andy Grove you could not be more paranoid and you're constantly reevaluating and I think it leads to an open mind. So yeah, I would also say

Stanley Druckenmiller: people ask me what I learned from George Soros. Um I thought when I went there I was going to learn what made the yen and the deutsche mark go up and down and that kind of thing. No, what I learned was um sizing is probably 70 to 80% of the equation. It's not a whether you're right or wrong, it's how much you make when you're right and how much you lose when you're wrong. I've also found as an investor I believe in streaks. You see it in baseball, you see it in everything else. I see it investing. Sometimes you're seeing the ball, sometimes you're not. One of my number one jobs is to know whether I'm hot or cold. And when I'm hot, I'm supposed to turn the dial way up. Not not say, "Okay, I'm up 40% this year. Let's go this will look good at the end of year, go take a break." No, you got to make hay while you're hot. And then when you're cold, the last thing you should do is try and make big bets to get back to even. You should you should tone yourself down. So, believe it or not, that's that's part of the all your eggs in one basket. Not only do I have to see the see the investment that really excites me, I also have to see myself sort of being in a good in a good trade trading rhythm.

John Collison: I think this is so interesting, this notion of first off, having hot and cold streaks, cuz I think you know, some people would take issue with that and you know, people debate whether hot hands exist in basketball and all this sort of stuff, but kind of believing in that, but also being kind of self-aware to know that I am cold, I'm going to do trades but just small ones to, you know, keep myself from doing anything stupid. And then, as you say, kind of when you're hot, uh uh really being able to kind of size with conviction based on that. Do you know when other people are hot, by the way? So, people at the firm now at Duquesne, do you know when to egg them on to size up their positions, cuz you can tell they have it together?

Stanley Druckenmiller: I size up their views. And the answer is yes. So, the dark art of technical analysis, um there are technicians out there, they're all rational, they all look a lot of history. No one runs more hot and cold than technicians. One of your main jobs, if you follow technicians, is to know when they're hot and know when they're cold. Some of them have got so cold, you can actually fade them and go the other way cuz they got themselves all twisted up. It's more fun to follow one who's hot and make money with them. But yeah, absolutely, I see guys within my own firm, analysts who recommend things, and they go on streaks too where they get an area and they they're really hot and my job as a trigger puller is to size them up.

John Collison: The The other thing I find so interesting about this dynamic in terms of working with your team is the invest then investigate idea and I remember talking to someone else who works at UK and who you know described the terrifying feeling of having joined and you're telling you about an idea you know before lunch and then they go out to lunch and they you know come back and they find you've put on a massive position based on this just idea that they thought they were telling you and you're actually trading on. And so can you talk a bit more about kind of why that matters you know why it makes sense from an EV perspective and kind of any stocks where it worked particularly well?

Stanley Druckenmiller: Well you mentioned earlier that the business has got a lot more competitive than it was 20 or 30 years ago. There is so much information out there and so many smart people in our industry have come in since 2000 when the financial remuneration went crazy that you just don't have the time you had when I got in the business. When you hear a good idea if you wait two or three weeks a lot of times now believe it or not 60 or 70% of the move will taken place maybe not the long-term move but entry price is important and it's important psychologically as you add over time. So yes look if some if some analyst comes in with a great idea or an idea I don't just buy it and then go tell them to do the analysis but if they have an idea that appeals to me intuitively and I really like it and it might fit in with the macro matrix we described earlier it might tick a bunch of boxes. I mean let's just suppose somebody came in today with a copper company not because they were bullish on copper, this particular company um had a new mine coming on and for whatever reason they loved the management. It would matter a lot if before they ever came in, I was already bullish on copper going three to five years out. So yes, I might put on a very large position and then over the next two or three weeks tell them to really do their homework and really grind down.

And if the story panned out, add to it. If it didn't pan out, just get rid of it. I've just found, John, particularly the last 10 or 20 years, you just don't have time anymore to do deep dive analysis. The world You do, but if you have the intuition, you buy it and then you do the analysis and then get rid of it if it doesn't pan out as opposed to wait and do the analysis.

John Collison: And is part of the idea here that if you're wrong, you know, the position is probably net zero when you exit. If you're right, then you got in at the favorable time, so there's a nice symmetry there.

Stanley Druckenmiller: Yeah, it when when you enter it, there's no story out there. So hopefully in 10 days, if you're wrong, there's still no story. There's not going to be some bear story because the guy's giving you a bull story. Um but if there is a bull story, it's quite likely that somebody else is going to discover it over the next two or three weeks. These analysts go out to dinner with each other like four nights a week and talk their ideas and a lot of times they don't wait for the portfolio manager cuz they're trying to make themselves look good with the other guys at dinner, too. I used to do that when I had more energy.

John Collison: Um And then are are there any cases where they memorably worked quite well?

Stanley Druckenmiller: Oh, sure. Um I'd I'd say there are a number of them. Um I mean, there's so many of Some of I did, don't really need to point them out, but uh yeah, it it it works. It's it's a much better method or I still wouldn't be using it. I've had 40 years of test cases to do it to do it with it.

John Collison: Yeah. Um you know, on the hot and cold thing that I think is so interesting is um so everyone knows the famous story of uh you know, you in 2000 where uh you know, you were getting frustrated watching uh you know, others at your firm earning like 8% a day during kind of the go-go uh uh last days of the tech bubble uh and uh you know, you thought all these tech stocks were crazy. You had been short the tech markets and uh and so you know, you against your better judgment you kind of maybe knew deep down it was a bad idea. You uh put on uh you know, a long trade or a few long trades uh uh you know, very briefly before the uh market crashed and then you kind of knew you shouldn't do it and then you did it and then you did it and it kind of worked out poorly and you have famously you said um uh this you know, what did I learn from that? I learned absolutely nothing. You know, I knew it was a bad idea at the time. I think that's the version of the story that everyone knows. I think the longer version of the story of both being kind of significantly up and being kind of right in the shorts is uh super interesting and then the kind of cold period followed by the hot period that came after that in 2000.

So I was wondering could you tell kind of the longer version of that because I think that's really interesting and gets to this the importance of not only being right, but knowing that you're right when it comes to being a trader.

Stanley Druckenmiller: Yeah, the the long version is very simple. It actually started quite a while before I am I I didn't do it in the beginning, but sometime I believe in like March of '99 I got the brilliant idea to short like 10 internet stocks which were up like seven or eightfold at Soros and I think I put 200 million into the Quantum Fund short. And within about 4 weeks, the 200 million investment was a 600 million-dollar loss. I didn't just misstate that. I lost eight time I'm sorry, four times um well, three times my investment. So, because the 200 million went to 800 million, then I covered it.

Stanley Druckenmiller: So, I was very bruised. I was down mid-teens. I'd never been down double digits before, and I was I was exhausted, and then I kind of backed off, and for a few months, I realized Greenspan was doing this huge easing program because of the Asian financial crisis, but there was no crisis in the United States, but we're pumping all this money in. And I could see the the tech revolution, and I said, "Oh my god, I've got to go along." So, one of the things I did was hired two two people in their 20s who were sort of gunslingers, because I knew gets back to Bitcoin now. I knew the younger people knew the new companies like VeriSign and that kind of stuff. I didn't know how to spell them. So, we then I'm down like 16% or something. We pivot into this stuff in the summer, and by the end of the year, we're up 42% net.

Stanley Druckenmiller: Uh we have this massive year. I go in to George in January, and I said, "This is crazy. We're in a bubble. I'm selling all the technology stocks." So, I sell them. This is January. And then the two gunslingers are still there. They have little small accounts, so I can size them up when they're hot or cold per our our their conversation. And then as you just said, they're making like 8% a day, and it's driving me out of my mind, cuz I'm out of the market. So, we're now getting into March and there's a little devil here going March of 2000. The little devil here is going do it, do it. And the little devil here is saying, don't do it, don't do it. And I think I missed the top by an hour and you said I bought a few things. I didn't buy a few things. I put like I think 6 billion. And which turned into a massive loss, two or three billion. Um

Stanley Druckenmiller: I knew like in five days after I did it, but the whole exit it was messy. So, now I'm down like 18% again. And I had just been down 18% the year before and I'm literally like an emotional mess. And to your point, I know I'm an emotional mess. So, I go into Soros and I say, I'm quitting. Um I need a break. I'm exhausted. I write a letter to the Cain investors. I had I had, you know, two funds growing. And I said, I'm I'm going on sabbatical. I might come back, I might not. Right now, I'm a mess. If you want your money, here's the number, just call, we'll send you all your money back. I did cheat a little. I said, if you take your money out, I might not let you back in, but you're free to take it all out.

Stanley Druckenmiller: Okay. So, I go to Africa with my kids. I don't allow myself to see a TV or read a financial newspaper. So, I don't know where anything is. So, it's a true break. Which is something I'd advise young traders to do. If you take a break, take a break. Don't sit there and like trade your own account and mess around. So, I come back on Labor Day cuz my kids are going back to school and I'm sure my wife doesn't want me around the house. So, I open up a newspaper and I can't believe it. The NASDAQ has recovered like 70 or 80% some losses. The S&P is almost back to the high, but oil is up, interest rates are up, and the dollar is up. By the way, that might sound a little familiar, and this has always been terrible for corporate earnings looking forward.

Stanley Druckenmiller: So, I mentioned this to my good friend Ed Hyman. I go, "What's going on?" And uh I said, "Oil is up, interest rates are up, and the dollar's up. Why why is the market up?" In the meantime, I'm calling all my ex-clients who are small businessmen. I didn't have big fancy clients, and they're all telling me their business is terrible. Okay. So, Ed sends back a regression thing 2 days later showing that if you have oil, interest rates, he he plugged in the percentages, and the dollar up this amount, earnings the next year forward based on history go down 35%. And the average earnings estimate of the Wall Street guys is up 18. So, I then get the idea, and I'm down, and one of my trading rules is you don't trade a lot when you're down, but I've had a break, my mind is fresh, I just love this idea, so I put 350% 10-year equivalent of the fund into um Treasuries betting that Greenspan, who has a tightening directive, will reverse and we'll go into a recession. And to make a long story short, I make 40% in the fourth quarter, even though I had given up on the year and decided I was finally going to have a down year. That's the end of the story.

John Collison: But importantly, you think you wouldn't have had the conviction to actually do those trades at least in the proper size had you not taken

Stanley Druckenmiller: I will go to my grave believing if I had sat in my office all year, grinded away, looked at the screen, I would not have had my brain was too messed up in May and it would not have gotten un-messed up watching that price action. I will go to my grave believing it was by stepping aside and clearing my head that enabled me not only to see the trade, but to have gumption to put it on in size because I needed that 4 months to rebuild my confidence.

John Collison: You you kind of talked about being low conviction now, you know, you're not actually short equities though maybe you'd like to be or you think you at might be in future. What do you think getting to higher conviction in the current envi- environment might look like?

Stanley Druckenmiller: Oh, I think if if the market were to rally 15 to 20% from here over the intermediate term, I'm going to take a shot because 6-month bear markets preceded by asset bubbles don't exist historically and I think we still have a lot of wood to chop. Um if I see for the dead cat bounce.

John Collison: What's that? You're waiting for the dead cat bounce. You're waiting for the for the falls for

Stanley Druckenmiller: It might not be so dead. That's why I'm not still like invested the way I was two or three weeks ago. I was quite short. Um interest rates, I want to hear where the Fed is. I want to follow the company data. We're following to to see how this thing is unfolding. And then of course there's this whole inflation debate.

Stanley Druckenmiller: And I could see like the Fed says food and energy don't count because they're core. Well, tell that to a labor union. Who what do you think they're going to go in there and they're going to negotiate say, "Okay guys, don't worry. We only need 3% because the core PCE is only up 4%. We're not worried about the fact that our own cost of living is up 16%." So, I want to see if that's embedded. I want to see all this. By the way, one of the reasons in addition to low conviction it's back to what we're talking about. I'm taking a mental break. I'm at work. But, I want to be fresh. And this has been a lot of activity the last 4 or 5 months, and it may be in a week, it may be in 3 weeks, it may be 3 months. I'm in no hurry here. I'll need to sprint.

John Collison: like You're you're you're tapering before the marathon. You're giving yourself a break before you expect to get pretty busy.

Stanley Druckenmiller: I'm in the marathon, and I'm not running full out on the on on mile 16.

John Collison: Yes. Yes. Um if you were what do you think 20-year-old Stan Druckenmiller today would be getting into or doing differently? As you just look at or maybe you know this comes up in as you give advice to you know I know you talk to kind of college students a bunch and things like that. But again, the investing game has changed a lot. And so, uh you know, maybe it got made more sense to get into bonds back when you could do interesting things there, back when the markets weren't so uh so wacky as they are today. You have a particular skill set, you know, you're you're not going to learn you know entirely new domains maybe at at kind of at this stage. And so, if you have a very sharp, very hard working investor who is looking at what should they become an expert in to be really successful, where would you be steering them that you know is maybe a bit different to where you play?

Stanley Druckenmiller: Well, the first thing I'd tell them is if you're not really passionate, if you don't love this stuff, go do something else. And I've hired guys with IQs 50 or 60 points higher than me who stink in my business because and by the way, they could be off inventing or or starting new companies that could do very well. But, um I actually think

Stanley Druckenmiller: the next 4 to 5 years are going to be tailored to the skillset that worked for me in the in the '80s and '90s, which was all sorts of macro chaos, and I would encourage them to learn all the asset categories and how how they integrate. Not easy. If I was a tech investor, um I would certainly be learning you know, we had the internet wave, we had the cloud wave. Cloud doesn't look like it's over yet, but I would certainly be learn be looking into blockchain very deeply into the possible disruption it might take, but I think fundamentals are fundamentals. Look, when companies are losing money, capacity is always going to shrink and their margins going to look better in 3 years. When companies are over earning, their margins are going to come down in 3 years. I think all that stuff will be out there. I think the great thing about my original mentor, Spiros Drelles in Pittsburgh, was he made me focus on what moves the stock price. Like you can't just say, "Stan, okay,

Stanley Druckenmiller: this is a great company and the earnings are great." So, tell me how people are going to think differently in 18 or 24 months about the situation than they're thinking now. That would be my number one advice to young people. Do not Do not invest in the present. The present is not what moves stock prices. Change moves them. And I want you to try and envision a different world in a year and a half from now and where these security prices would trade at versus now given the world you envision. That would be my number one advice to a young person getting in the business.

John Collison: Didn't that happen to a surprising extent during COVID? That people were all of them investing in the, you know, the present where airlines will never make money again. Oh, actually airlines are fine, you know, a bunch of internet beneficiaries are the greatest stocks in the world. Oh, actually maybe they're just kind of normal companies. But why it kind of it seems like the stock market was pretty inefficient over COVID. Why why were people investing in the present rather than 2 years out?

Stanley Druckenmiller: I think it's what you said earlier. I think a lot of new investors, particularly retail, came in and they were rewarded immediately in the early parts of COVID. Supposedly there's like 400 billion in retail in the market now that wasn't there 2 years ago. So they were rewarded immediately by buying Amazon and buying the stuff, you know, huge, obvious, immediate Peloton COVID beneficiaries, but they'd never played the game.

Stanley Druckenmiller: I didn't have I don't have the nerves I used to, but this was the was the best short-selling period I've ever seen the last year or two because never before were there such obvious over-earners. Like particularly brick-and-mortar retail. You know, you see companies that don't grow for 15 years and all of a sudden um and I'm not talking about Amazon. I'm talking about old brick-and-mortar companies. All of a sudden the stocks have quadrupled. It didn't take a rocket scientist to figure out 2 or 3 years from now, oh, people will start traveling again. Uh you know, uh companies will will overspend, you know, all the stuff that typically happens. So I think COVID was a unique opportunity. I think the fact that all this new money came into the market made it even more unique and it and exaggerated in terms of opportunity.

John Collison: Is that a common way you make money in equities? It's kind of spotting mean reversion or noticing where people are maybe valuing a company based on last year's results as opposed to the steady-state performance of the business?

Stanley Druckenmiller: I have a bias toward growth stocks. Um luckily not so big of a bias that I didn't uh ignore it um the last year or two, but I think if you can envision a company that 3 to 5 years from now is going to be in a much much better situation than it is today, um long-term that's my bias where to go, but yes, um

Stanley Druckenmiller: on a cyclical basis I've always done what you said, maybe because one of my first groups was chemicals, and they were really easy, John, when they were losing money, you were supposed to buy them cuz everybody shut capacity down the next 2 or 3 years, but people were still going to need chemicals, and when they made a month made a bunch of money, they used this was a market so inefficient, they used to announce all these capacity expansions, so you knew what was going to happen. Well, I taken those lessons, you know, forward 30 or 40 years, and they still work. So, yeah, I do a lot of countercyclical stuff, but really I'd say the biggest money I've made in equities have been in growth stocks over time.

John Collison: Um when you talk about your bias for growth stocks, is big tech getting kind of too cheap uh for you to uh to to to not be in it as you look at a lot of um the the the GAFAs? I I mean, they they earn very large amounts of money, and so is that uh is that something that's starting to become attractive to you?

Stanley Druckenmiller: Not yet. I'm just too um I'm too bearish on the world um to go there yet, although I will say that they've gotten too cheap for me for them to be my shorts anymore. They were widely regarded as uh overearning overearners in COVID, and maybe they were early on, but it was so widely broadcast. The true over earners were things to me like retail, trucking or today ocean ocean shipping companies just have these massive margins.

Stanley Druckenmiller: I can envision a world where world trade is not booming in 2 years, by the way. Um So, I think it wasn't obvious It was obvious who the over earners were the net first 6 months. All you had to do is go down the chain and pick them off the last year and a half. It's gotten much harder because 80% of that set is already down to a place where I'd rather not play. And I don't have my sandwich. I don't have bonds um to go to and just ignore that world.

John Collison: Yeah. And uh how that energy you mentioned the world being short energy, how do you actually um put that into uh how do how do you actually trade that?

Stanley Druckenmiller: We're there. I mean, it's been widely publicized. People looking at 13 Fs, by the way, which I would caution against because that's old data and in this case with us, it's true. Um very nervous because it's not the unique thesis it was 6 months ago in terms of looking out 18 months where these companies might be. But, I think the reasons we're still there is we just see this thing as being more sustainable because of ESG and all the reasons we all know about um that it can last a while and that doesn't seem to have been priced in the stocks. But, it's not a classic Duquesne play because it's now become widely recognized, but I don't just sell something because people talk about pain trade. I don't care about pain trade, this or that. Um we we think these companies are still cheap relative to what we see a year or two out. The big problem would obviously be if you have a horrendous worldwide recession, but we'll look for um we're looking for demand destruction in energy, but so far we don't see it.

John Collison: Makes sense. Makes sense. Um maybe to to close out, you know, if we go back to um you know, one other prediction. I don't think I'm cherry-picking cherry-picking good predictions. I think I think you just had a lot of them, but obviously, you know, you were warning at this very conference in 2005, 17 years ago, you were warning about the prospect of a you know, a great financial crisis, and you were you were very bearish at that conference. And so, kind of like you know, doctors or nurses use the pain scale 1 to 10 in terms of what what what you're feeling. If we say one is everything's great, feeling super excited about the economy and the markets, just couldn't be better, and 10 is max on the bearishness scale in in in this context, where you know, maybe you were at a nine back then when you were when you were warning about this back in 2005, how would you describe where you are today?

Stanley Druckenmiller: I'm glad you asked this because this is my 45th consecutive year as a chief investment officer. And in 45 years, I've never seen a constellation while I was a practitioner or frankly studied where there's no historical analog. So, right now I probably have more humility in terms of my views going forward than I've had maybe ever. But I would say

Stanley Druckenmiller: if I have an objection out there, in 2009, I made a statement inside the firm was, well, we won't have another financial crisis for 30 or 40 years because once you have one of these everyone learns from it and we get disciplined and it takes them that long to screw up again. The last one we had was obviously 29. I'm not so sure I buy into all this stuff about bank balance sheets and this and that. What the central banks globally have done the last 10 or 11 years I'm not predicting this, John, but it leaves me open-minded to something really bad. Um so that's the guy on this shoulder we were talking about earlier. Um the other shoulder is saying this is an analysis harder than you've ever faced in 45 years, so please be open-minded because this is not a story we've seen before, so the ending is not as predictable as it has been in other parts of your career.

Stanley Druckenmiller: 2005 was a no-brainer, I thought. By the way, I didn't make much money in '06.

John Collison: Why why why was it such a no-brainer?

Stanley Druckenmiller: Because I looked at a housing chart and for 50 years it went up like this and then in 5 years it went like that and I knew that people had taken 800 million home equity loans out and spent it and I knew that all this stuff was going to come back on the bank balance sheets because they had securitized this stuff with CLOs and stuff, but they had done it in a way that it could come back and I had a brilliant analyst from Lehman Brothers come in sort of your story earlier probably the best example of it lay out the whole subprime thing for me and he said by the third quarter of '07 all hell's going to break loose.

Stanley Druckenmiller: And by the way, by the time he left that meeting over the next 2 days I shorted everything to do with housing and in '06 I was wrong for 6 months. It drove me crazy. Um but the analysis was consistent. So, the the deeper we dug, the more confident we got.

John Collison: So, uh you know, you said after the GFC that there's everyone's going to have another financial crisis like this for 30 or 40 years. Now, you're not predicting this, but you're just saying you're not so sure. What could that look like? You know, is this you tied to money printing? Is this a say uh you know, dollar losing reserve currency status issue? Is this a you know, another banking crisis? What's Again, I I know you're not saying this will happen, but as you think about the grim scenarios, what what could they look like?

Stanley Druckenmiller: I mean, I'm really not predicting this, but think of the '30s. A post-asset bubble, just absolute destruction in buying power going forward. And then, do we have the Fed pump it all up again? And we get some kind of horrible sort of stagflation thing? Or do we actually get deflation? Uh I hate to be a hedger, but somebody always asks, "Is this going to end in inflation or deflation?" I go, "I don't know. 70% inflation." This was a year and a half ago. Um 30% deflation. They said, "What do you mean deflation?" I said, "Well,

Stanley Druckenmiller: we've never had inflation because we were too close to the zero bound. That's why I was so angry at the Fed about worried about 1.7. Every deflation has preceded an asset has followed an asset bubble. And since the Fed has created the biggest asset bubble, and by the way, there's other central bank rhythm in history and the broadest, even though a lot of the air has been let out of the balloon, it's so big, I just have to be open-minded the consequences. So, we've had two really bad ones in the last 100 years. The US in the '20s and Japan in '89, they're still suffering. So, it could be just no growth and sideways for 15 or 20 years, like '66 to '82 in terms of the markets, or it could be something more pernicious like we had in Japan. Frankly, I don't know. Um I'm just trying to be open-minded.

John Collison: I am You remind me as as you kind of talk about some of these scenarios and, you know, you think we're bit maybe not being imaginative enough in our pessimism. And I, you know, think about your um various predictions. I also, you know, I enjoy reading Paul Singer's letters as as Elliott's, and he's always, uh you know, complaining about uh NIRP and ZIRP and, uh you know, the profligate uh policies of governments around the world. But, you know, it feels to me that macro watcher or macro investor is kind of synonymous with macro pessimist. Why is that?

Stanley Druckenmiller: Um for some reason it's like intellectually stimulating, but I would say one practical reason is in in bear markets, that's when macro make all their money. It's that's when you have the or used to have the biggest bond moves and the biggest currency moves. This stuff really moves in chaos. So, a macro investor sort of helps roots for chaos, and we're all competitive fanatics. So, you also outperform everybody on an absolute and on a relative basis. I think that's one, and I would also say

Stanley Druckenmiller: that Paul and I have the same disease, which is I started in the business '76, the first 5 years were a bear market, I did well. I have a bearish bias, I know it. One of my jobs is to manage myself and know I that that bias exists, but it does exist in me. And your listeners should be aware of that. So, maybe all this pessimism I'm spewing isn't going to happen.

John Collison: Well, no, but you're interesting, right? Cuz you're you're a bearish but you're or a bearish bias, but you're also perfectly happy going long equities, growth stocks, everything like that. And so, you have plenty of options in a bull market.

Stanley Druckenmiller: Yeah, and I I frankly made a fortune from '82 to '87. I was a Ronald Reagan nut, and I was wildly bullish and uh I was bullish

John Collison: And as you were discussing earlier, you were massively up in '99.

Stanley Druckenmiller: Yep. And frankly, from '95 to '99, I did really well. Um Yeah, I Look, there's an there was an old-timer most of your um listeners will know this guy, Robert Wilson, one of the greatest short sellers sellers ever. It's really cool to make money in short cuz it's different, but any great short seller will tell you they made 90% of their money on the long side. The math is with you.

John Collison: Yeah. Well, I I I I think you've given me lots of reasons to sleep worse tonight and new things to to worry about. So, that is exciting. But I do think it's very thought-provoking that maybe we are not being imaginative enough about about the things that could go wrong. And again, you know, tying back to your story about you know, the year 2000 when oil's up, interest rates are up, and the dollar is up has not historically tended to portend well for the economy. Um With that

Stanley Druckenmiller: Well, I would I would I would also say that two guys, Warren Buffett and Ken Langone, that have done quite well, say never bet against America. So, I think um the audience has to keep that in mind, too.

John Collison: Yes. Though, that has always been true over the long term.

Stanley Druckenmiller: Yes.

John Collison: Yeah.

Stanley Druckenmiller: Underlining the long term.

John Collison: Yes. Well, it's not Listen, this has been an absolute pleasure. I I've found this fascinating and so just really thank you for your time and excited to to to see you at the next one.

Stanley Druckenmiller: Thank you, John, and I think we're both happy to do anything for Irish stone. Their contributions have been immeasurable. So, appreciate it.

Thanks, John.

Key Themes

The session is the endgame meeting its test year: the inflation he and Broda dated in May 2021 arrived on schedule, and the analysis shifts to its cost. The two-records framework is top-down macro as historiography — regimes compared across a century, not quarters. The soft landing call also belongs in the intellectual humility file: he publicly split his own thesis, got the disinflation right and the recession wrong, and said so within two years.

Context & Significance

Sohn has been Druckenmiller's periodic public accounting venue since 2005 — the stage for the housing-bubble warning, the 2013 bullish liquidity call, the 2016 Endgame. The 2022 Collison conversation is the point where the warning and the outcome finally meet on the same stage. Its deeper lesson for the KB is calibration: even the best macro framework of its era, fully vindicated on inflation, could not time the landing — and its owner never pretended otherwise.

Pair with Talks at GS for the thesis in formation, the WSJ op-ed for its public commitment, and Sohn 2023 for the aftermath.