Talks at GS: Stanley Druckenmiller

Summary

Recorded in early 2021 for Goldman Sachs's Talks at GS series, this session captures Druckenmiller at the exact moment he was forming the inflation thesis he would publish weeks later in the Wall Street Journal. The craft content is vintage — never invest in the present, visualize the world eighteen months out, size to conviction — but the session's historical value is the live positioning map he draws: short long-end Treasuries, long commodities, very short the dollar, all expressions of a single inflation-relative-to-policymakers theme.

The interview is the KB's best demonstration of how a Druckenmiller macro view becomes a portfolio. Not one arrow but a matrix of positions, each with its own win condition and its own response to the varied ways policymakers might react — top-down analysis translated directly into a set of asymmetric, partially hedged bets.

Full Text

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

Thanks for taking the time to do this. We've got about 45 minutes to cover a lot of ground, so should we get right into it?

Stanley Druckenmiller: Sure, and it's my pleasure to be here.

Tony Pasquarello: So stan, we're clearly living through, uh, and investing through, a truly historic period in, in many regards. So as you look at everything that's taking place, what's your current framework for the markets?

Stanley Druckenmiller: Ah, buckle up, um, tony, I've been doing this as some kind of chief investment officer since 1978, and this is about the wildest cocktail I've ever seen in terms of trying to figure out a roadmap.

Just to frame things a little: the recession we had last year, or whatever you want to call it, the economic downturn, was 5x, um, the average recession since world war ii, but it did it in 25 of the time. Um, more bizarrely, during the year, while 11 million people more were unemployed, we had the largest increase in personal income in 20 years during an economic downturn — this occurred. And of course, as you know, that's because of the massive policy response: we got the cares act added trillions of dollars in fiscal stimulus. How big was it? In three months, we increased the deficit more than if you took the last five recessions combined — and those were big ones: that was 73-75, the 82 recession in the early 90s, the dot-com bus, and then of course the great financial crisis. If you added the increase in the, in the deficit in all those five periods and combined them, we increased the deficit in the u.s more in three months in 2020 than we did in that two minute total.

The fed in six weeks bought more treasuries than they did in 10 years under bernanke and yellen, when people like me were screaming about how excessive qe was.

During that period, corporate borrowing, which almost always goes down in a recession as corporations re-liquify, and had already gone from 6 trillion to 10 trillion because of free money going into the period, um, actually went up, um, 400, 400 billion dollars. Just put that in perspective: it went down 500 billion during the great financial crisis.

So we had this massive increase in liquidity, this massive increase in stimulus, and as you and everybody on the call knows, um, they're not even close to being done yet. We're still doing 120 billion a month in qe in the united states. They throw trillions around like — when I got into business, I used to throw hundreds around, um, not about, uh, not about the overall economy, about my own salary. But, um, it's — so this is, this is sort of the background. And obviously all this stimulus has flowed into financial markets, in the commodities and the financial interests. So it's a, it's sort of a bizarre background.

The other thing I would say: I'm excited that we have an asian audience today, because the juxtaposition of the various policy response is somewhat breathtaking. Um, one of the best ways to encapsulate what I just talked about is: since 2018, m2 in the u.s has grown 25 more than nominal gdp, so we've had a 25 increase in liquidity. In china, m2 to nominal gdp is where it was three years ago, so they haven't borrowed anything from their future. We've had a massive liquidity input and, frankly, very little investment; it's primarily been transfer payments and fed stimulus. And we've done a horrific job with the virus. The chinese, basically asia in general, the chinese, the taiwanese, hong kong, they pretty much defeated the virus. They haven't borrowed from their future. So the background could not be more different, but it also could not be more exciting if you're a macro investor, because on top of all this there's the other big force in the equation, which is vaccines.

And it's possible, in fact probable, that all this stimulus is still going to be in place, and frankly increasing, just when we unleashed the biggest increase in pent-up demand globally we've had maybe since the 1920s, which could make the world look extremely different than it looks today. And so, um, please, that's my framework.

Tony Pasquarello: So let's jump off that. One of the hallmarks of your career has been a willingness to take risk in many different ways, in many different markets. And so as you look at all of the arrows that are in your quiver right now, across kind of all the major asset classes, and if I ask you to pick one asset that you think should offer the best opportunity set for, call it, the next year or so, what would your pick be?

Stanley Druckenmiller: That's not really the way I play the game, tony. I'd like to use more than one arrow if it's appropriate.

I would say my overriding theme is inflation relative to what the policymakers think. But because of the policymaker response, which could be very varied based on the vaccine and how they respond to various metrics, I found it's better to have a matrix. So basically, to play potential inflation, I have a short treasury position, primarily at the long end, because the fed could drive me crazy and not really let that come to fruition. I also have a large position in commodities. The longer the fed tries and keep rates suppressed, so they'll have stimulus in the pipeline, the more I win on my commodities; the quicker they respond, the quicker I might have a problem with my commodities.

And then because of what I just mentioned earlier, which is also part of the cocktail, which is the ducks, the position of our sub policy response versus asia, I have a very, very short dollar position.

So my guess is, if you remember that old story about the toothpaste, if there's a bunch of holes in, I asked about one of the holes. Um, I don't know whether I'm going to win on the treasuries; I don't know whether I'm going to win on the dollar; I don't know whether I'm going to win on the commodities. But if you believe that inflation could actually take off here, the case being, 25 m2 growth never happened in history, and all this stimulus sitting at the same time, just as the vaccines are released,

I like this mix very much. You know, it kind of reminds me — luckily, I wasn't old enough to be in markets then, but I was old enough to be in school and remember this. As we exited the 1960s, chairman powell said in his last news conference that inflation is not persistent the way it was in the 70s, so it's nothing like them. Well, it wasn't persistent in the 50s and 60s either. We had this thing called guns and butter. Um, nixon just wanted to get reelected; all he cared about was employment. He fired william and chelsea martin and put artsy burns in. The stimulus we're seeing now makes that period look like a little tea party, and chairman powell makes arthur burns look like paul walker. So this is —

This is an amazing setup, I will say. One of the consequences of this is we're in a raging mania, a bubble, whatever you want to call it. I don't know when it's going to end. The way I could lose on the whole matrix: if we have a bus before the inflation hits. And it's not impossible, because I've said many times, if I was a central bank, I was trying to create deflation, the first thing you need is an asset bubble. Well, you can check that box off. So,

Even though I have this matrix on, I'm allowed to do this because I used to run a hedge fund, um, I am very open-minded to the other side. But for now, the way prices in the bond market are, the way commodities are priced versus history, I just think the risk reward of this matrix is very compelling.

Tony Pasquarello: So let's turn to the stock market for a moment, and specifically to the tech space. Um, you've been all over the mega theme as it relates to the cloud for a long time now, but as a, as we just heard, some of the macro, the big macro dynamics in the game are, are changing, and perhaps in a way that's probably less supportive for secular growth companies than it may have been prior to all this. And so, how do you currently look at the runway for tech, be it mega cap tech or some of those cloud names, or even some of the smaller names that have been very high velocity in the recent period?

Stanley Druckenmiller: It's a tough question, because there's no question if we get, say, four to five percent inflation in the u.s a couple years out, um, and bond yields rise precipitously, that's very negative historically for growth stocks relative to other stocks.

Um, on the other hand, I think the comparisons with 2000 are ridiculous, and the reason I think they're ridiculous is we had a double whammy back then. We not only had the raging mania, over valuation, but the earnings were about to end, because those companies that were growing rapidly then were all about building the internet itself. And the internet, and I, for one, didn't see this coming at the time, the internet had already built been built. So imagine companies selling railroad ties just as the union pacific had crossed the united states and it was done.

I do think the combination of valuation and challenged bond markets could certainly make growth stocks in a very, very challenged environment the next five years, certainly relative to what they've been, which is not, not saying a lot.

Having said that, you mentioned the cloud. I'd say we're in the third or fourth inning. We jumped and covered from the first inning to the third or fourth, but we're not in the ninth inning. And if anything, company after company I talk to is actually speeding up their transition, because they're going to competitively die if they stay behind with individual transformation. And you take a company like amazon, it's inconceivable to me that all these people that never used the internet before, and the whole move to aws, I don't see them going back. And a lot of their competitors, despite the fact that they're up 100 percent in the last two days in a short squeeze across the board, a lot of their competitors will be extremely wounded what they were pre-coveted. So,

The other thing I would say is, within, within tech itself, fang, or let's just talk about, say, amazon, microsoft, that brand, they've actually been big underperformers the last two or three months. It's like the market has rotated into 40 times sales tech companies, or into radioactive reopening stocks. And if you actually look at the amazons and the microsoft's, the googles of the world, they're not overvalued; they're garp names, and they're currently out of favor. And if the fed continues to push the envelope in terms of friendliness, I'm not really too worried about those stocks; if anything, I would think they could keep going somewhat.

Tony Pasquarello: So stan, you mentioned earlier, this conversation is part of our annual macro conference in asia, and given that it's been a very hot start to the year in local equity markets, could we just maybe dig a little bit deeper on your current investing views on, on the region? Does any, any market or any asset class there really stick out to you — japan, china, korea, et cetera?

Stanley Druckenmiller: I own them all, and I don't know what they're going to do over the next week or two. You're right, they've had a, they've had a very good start to the year, but when I look at how much the united states brought from their future, and when I look at what asia and how they've handled it, I just think they're the big, big winner coming out of covid. And even within specific areas like tech, intel's thrown in natal, so asia owns foundry; they own memory; they're ahead in robotics.

I just think the next, the next five years or so, asia looks a lot better to me than the united states, because at some point, um, we got to pay back, in terms of productivity, in terms of higher rates, in terms of a lower dollar, for all these transfer payments we've made the last nine months, and it looks like we're going to continue to make. So I'm, uh, I'm quite constructive on the number of names in taiwan and korea and china. I guess, like the rest of the world, we own c, um, in, in singapore. But I just think long term, I don't know about the next two months, I'm, I'm unfortunately right with the consensus. I think asian is gonna, asia is gonna be an outperformer, their equity market versus the u.s and especially their currency market. Um,

Again, I mentioned it, but china has done virtually no qe the last two years. Well, rqe to gdp has been like 14. Uh, their, their real yields are higher than ours; they continue to run a current account surplus. I'm sure you saw the financial times this morning that net investment into china actually passed the us for the first time ever this year. And I just think it's the beginning, not the end of the trend.

Tony Pasquarello: So I'd like to talk about the hedge fund business for a few minutes. In a way, last year saw a real validation of the industry and the promise of, of active management. And I imagine, given everything that we've discussed so far, you're bullish on the hedge fund business for the next phase of the cycle. And the current setup for macro investing looks very exciting. Would you agree with that?

Stanley Druckenmiller: Yes, I would. I am. I unfortunately made a great prediction in 2010 when I, um, got rid of my clients, and that, that's that I would be underperforming my historic returns because of compression by the central banks in my two main markets, which were currencies and, um, bonds. But you know, when you hold a beach ball underwater for a long time, when it finally comes up, it comes up a lot higher. And I think the, the extraordinary stimulus I spoke of is probably going to give us a boom period, but then it's going to give us a bust period. The trick will be, and I don't have the answer, certainly not on this call, when it goes from boon to bust. But what I do know that it will present tremendous opportunity, similar at least in the macro space, to what we had with the blow up of erm back in the 90s. The problem is, if you get it wrong, you can lose a lot of money, but I think the opportunities will be there.

And I just think hedge funds, differentiated performance, and macro in particular, is a lot better position on a relative basis than it's been for the last 10 years, when basically had a tidal wave lifting all equity votes.

Tony Pasquarello: And so jumping off that point, uh, I'd like to spend a minute on your process for money management. And you had referenced this earlier, but you've remarked to me before, you can't make big money without confronting big swings and real market volatility. And yet one of the hallmarks of your career is you just, you just don't lose money, not that you don't have drawdowns, of course you do, but I think you've been running duquesne since 1981, and I believe you've, you've never recorded a down year. And so I just want to ask a little bit about your portfolio construction process, and then your risk management around that. Is there a specific process or given set of principles you tend to follow at all times?

Stanley Druckenmiller: Well, first of all, the no down years is true, but a lot of it is luck. Um, I've been deep in the whole three or four years, and in every case something came along, and it was just a coincidence of the calendar. December 31st, december 31st, I happen to be up. Had you measured from another part of the year, say may to may, I would have had some down years. But

I would say, tony, and you're right, I referenced it earlier, um, the fact that I can travel around five or six asset classes does a couple of things. Number one, it can point you in the right direction, and if you really believe something, you can make big, big gains there. Number two is, a macro investor, currencies and bonds trade 24 hours a day, and they're very liquid, and you can change your mind, which I've had to do a lot of my career, because I've been wrong a lot of my career.

Number three, this is more subtle, but it also gives you discipline not to be playing around in an area that is dangerous. If you're an equity-only investor, it's your job to be in equities. If you have the latitude to say, I'm just not going to play, it's too complicated, you don't play in them. So I think in many cases credit would be a perfect example. I've never lost money big in credit, because the only time I've got credit is every eight years there's a complete debacle in the credit market, and we go in and we buy a bunch of credit. Well, if I was a credit investor, I would have had three or four down 30 years.

So that's, uh, the other thing I would say, and this is totally counterintuitive. I'm very much of the philosophy, which also creates its own discipline: put all your eggs in one basket and watch the basket very carefully.

You know, I have found time and time again that every investor has three or four big winners a year, and usually you know what they are, and where you get in trouble is something you're not entirely focused on. Well, when you put 50, 60, 70 percent of your assets or more in one asset class, trust me, you're focused, and you're more risk averse than something where you might have five or six in, and you can have a blow up. Um, I've never used var; we had to use it at soros to get banking lines from great companies like goldman sachs.

But, basically, very unsophisticated: I watch my p l every day, and it starts acting in a strange manner relative to what I would expect out of a matrix, I described one earlier for today, you know, my antenna go up. And I've always used my p l, because I found all those risk models, they're great until complete chaos happens, and then all the correlations break down, and they can suck you into a false security.

If you're watching your p l and your antenna up, and you've been doing it for 30 or 40 years, I found it a much better warning system than some of these, some of these mathematical models out there. They're useful; they're just not useful when you really, really need something like that.

Tony Pasquarello: Stan, I want to spend a minute on the topic of capitalism, uh, which had become a hot button issue before covet. It felt like public sentiment towards capitalism was shifting, certainly in the u.s, and then for better and for worse, through the covet period, that debate intensified. If our friend, her friend cam langone, who literally wrote a book called i love capitalism, we're on this, I think we know his views. But I just be curious, as we kind of move through this, again, a very pivotal period in american history, how would you characterize the state of american capitalism? Are you worried about, again, kind of the american style, western style future of capitalism?

Stanley Druckenmiller: Well, the reason I'm worried is we haven't really engaged in capitalism for quite some time. The central bank has bastardized probably the most important price in the world, which is the cost of money, particularly at the long end. We have crony capitalism, as you know.

But even in, even in the best days of capitalism, there's always been a stain in the united states, which is, I grew up believing this theory about pulling up your bootstraps and wear a meritocracy, and we are a meritocracy, by and large. But there's a, there's a sub-sector of our society where we're really pretty much in a cast system, and we have neighborhoods in our country, and a lot of them, I might add, where millions of kids just don't have the opportunity to pull up their bootstraps and work hard. And that's always been there, and that is something we need to address, which is why I'm not sure the events of last summer were such a bad thing. I'm, it's my own view that they were kind of a good thing, because people need to be woken up to the fact that the american dream, it's a great thing; I think it's the greatest country on earth, but there are, I don't know, a significant amount of kids who don't have access to the meeting, the american dream, the way you or I did.

Tony Pasquarello: And maybe, stan, just to take us home, a handful of kind of quicker speed round questions, if you will. Bitcoin: is this the mother of all asset bubbles, or perhaps something more genuine and more lasting?

Stanley Druckenmiller: Maybe both. Um, I think it wouldn't be doing what it was doing if we didn't have the central bank behavior we have. Um, I was skeptical three or four years ago when it came out: why would anybody buy this thing just because you can't make more of it? There's a lot of things you can't make more of.

But they've done this unbelievable marketing job; it's been around 13 years, and particularly younger millennials look at it the way I've always looked at gold. And you know, right now, it looks like an elephant trying to get through a keyhole, to play the rise of, friend of mine's, um, characterization of it. So the supply demand is really good.

I do doubt, I have my doubts whether anything, um, whether bitcoin itself will be anything other than a store of value, because it's got all sorts of problems as a currency. Number one, it uses up a lot of energy. Number two, it's volatile. Um, there's other technical problems with it I don't really understand. Um, but you know, right now it's an asset class. My view of it has been way overblown in the press. I do own some of it; it's gone up a lot since I bought it. It's just sort of a play thing. I don't really believe in it; I don't really not believe in it. It could be a new action class. The answer is, I don't know.

Tony Pasquarello: Uh, like any great liberal arts grad, you're, uh, you're well read, you're certainly a market, a student of market history. What book would you recommend as a must read for today's up-and-coming generation of traders and investors?

Stanley Druckenmiller: This same one I read that was written in 1923, reminisces of a soccer operator by jesse livermore. But this is, this is a business you got to learn on the job. If I was young, the first thing I do is seek out a great mentor; that's the most important thing. But if an actual book, there's a lot of wisdom in that book that was written, well, I guess 98 years ago, that still applies today. Number one, uh, just keep reading what the old turkey says about the trend, and you'll have about fifty percent of the game licked.

Tony Pasquarello: Uh, you mentioned earlier, uh, the united states has produced so much for the world, certainly so much in business. In the modern context, if you were to name, call it, three people you consider to be the greatest living americans?

Stanley Druckenmiller: Well, one would be james watson, obviously, who discovered dna. I mean, look at, look at what, how he has transformed the quality of life through that. Um,

Number two, I would have to say jeff bezos. It's, it's, when I look at aws, when I look at amazon, and maybe space will be his biggest legacy of all in 20 or 30 years, where we're manufacturing stuff up there and not polluting stuff down here, it's hard to look at him, as, as the son of an adopted son of an immigrant, starting with nothing, not as the quintessential american dream story.

Then number three, um, and this is a homer because he's a friend of mine, I would have to say jeff canada. Um, he's an african-american who, to me, has developed a model in harlem that will hopefully deal with the problem we, we talked about earlier in sort of a systemic way. It's been imitated in hundreds and hundreds of communities, united states and across the world. And I'm hopeful that we can get to the, get to the point where every kid has a chance and you'll level the playing field. And I, I think jeff's done unbelievable work in that regard.

Tony Pasquarello: Please, yeah. So speaking of the harlem children's zone and what a legacy you've, you've built with, with jeff, in just a handful of lines, how would you describe your, your personal philosophy, your family philosophy on philanthropy and on giving back?

Stanley Druckenmiller: I don't think in terms of giving back. We give money away because I love the thrill of providing positive change. I do it for selfish reasons; it makes me mostly satisfied. I don't judge other people who don't, but I will say to them, you have no idea what you're missing.

And I would say, in terms of how we do it, it's very similar to our business philosophy. We find a leader in an area we really think matters, and we bet big on that leader. And whether it's fred crump an environmental defense fund, or ken langone and bob grossman at nyu, or jeff canada at harlem children's zone, those are all spectacular leaders. When I've been on their boards, no read to micromanage them; let them run, try and help fund them. And the results have been fantastic and really self-satisfying. And I would recommend everybody do it, not out of some moral guilt, but I'm telling you, it'll be a joy of your life.

Tony Pasquarello: And final question. We're about two weeks out from the super bowl stand. You're down by six with the ball, two minutes left in the game. Who's your quarterback?

Stanley Druckenmiller: Oh, come on. The same guy you'd won any minute of the game, patrick mahomes. I've been watching the football for 60 years, and with all respect to the guy who has been the greatest of all time, who's his opponent, uh, in two weeks, this kid is like something I've never seen before, and, uh, he's a thrill to watch.

Tony Pasquarello: So we're going to end on that. No, I know, I might not disagree with, but I respect the, I respect the answer. Uh, stan, uh, masterful as always. Thank you so much for taking your time and sharing your thoughts with us.

Stanley Druckenmiller: Thank you, tony. I enjoyed it.

Key Themes

The session is the 18-month rule stated in its purest form and then applied: the entire matrix is built on what the world looks like in 2022, not what the data says in early 2021. It is asymmetric risk/reward at portfolio level — three partially offsetting bets, each cheap to be wrong on — and liquidity analysis converted into cross-asset positioning: suppressed rates, commodity upside, dollar downside. The Soros inheritance runs underneath: concentration within each theme, discipline across the whole.

Context & Significance

Talks at GS sits weeks before the WSJ op-ed — the private positioning and the public argument of the same thesis, captured almost simultaneously. Together they show the full loop: analysis (inflation risk is mispriced), positioning (the matrix), and accountability (publishing the warning). The matrix framing is also the clearest public answer to a question the KB's readers repeatedly ask: how does a conviction investor hedge? Not by diluting the theme, but by expressing it through several instruments whose payoffs depend on different branches of an uncertain policy path.

For the KB's method thread, pair this with Lost Tree for the doctrine and with Sohn 2022 for the thesis's vindication eighteen months later — almost exactly the horizon the rule predicts.