Stanley Druckenmiller Is Embracing Risk Again, Just ‘Timidly’
(Bloomberg) -- Timid isn’t how most people would describe Stanley Druckenmiller. Yet that’s how he describes himself today.
It’s not that Druckenmiller has sworn off taking risk. He owns copper and U.S. and Japanese equities, and he’s wagering on the Canadian and Australian dollars while shorting the yen and long-dated Treasuries -- all positions that should profit in a stable-to-growing global economy.
And in recent weeks, anticipating a pro-Brexit vote in the U.K., he bought the pound and banks including Barclays Plc and Lloyds Banking Group Plc. Only he wishes he’d been bolder.
“I’m just too conservative in my old age,” Druckenmiller, 66, said in an interview on Bloomberg Television. “I was well-positioned, but very timidly.”
This from an investor renowned for making huge, aggressive bets, including one that infamously “broke” the Bank of England. In a year when stocks worldwide have gained 24% and keep reaching records, Druckenmiller, widely considered the greatest hedge fund manager of his generation, has barely eked out a double-digit return.
Part of the trouble: A year ago, he misread the markets. Druckenmiller saw “warning signs” in prices and predicted a period of low returns. Sensing a prolonged slump in the making, he shorted financials, took shelter in Treasury bonds and favored recession-proof technology stocks.
“I couldn’t have been more wrong,” he said.
When risk assets rebounded from a swoon in the fourth quarter of 2018 and the Fed eventually cut rates, Druckenmiller pivoted. He remains bullish heading into next year.
“We have negative real rates everywhere and negative absolute rates in a lot of places,” he said. “With that kind of unprecedented monetary stimulus relative to the circumstances, it’s hard to have anything other than a constructive view on the market’s risk and the economy, intermediate term. So that’s what I have.”
Druckenmiller hasn’t lost his zeal for making money. But like other investors who rose to fame in the 1990s, including Louis Bacon and Paul Tudor Jones, he finds the markets harder to master now.
Aside from a standout performance in 2014, when he shorted the euro, he hasn’t been able to replicate the annual returns of 30% he produced for three decades at Duquesne Capital Management.
For reasons even he doesn’t fully understand, Druckenmiller said he’s “become a coward” since closing the hedge fund in 2010. He finds he doesn’t trust himself as much or feel compelled to put on trades as fearlessly as when he was competing with rival managers.
Add to that the unpredictability of everything from trade policy to geopolitics in the Donald Trump era and Druckenmiller isn’t sure anymore what investments are safe or secure.
Fighting the Fed
“This administration, with wondering about where the hell the next bomb is coming from, just doesn’t allow me to take some of the positions I’ve taken historically where I just thought it was a one-way bet,” he said.
Low interest rates are partly to blame for the struggles of macro managers, he added. Druckenmiller recalled, as chief investment officer for George Soros in the early 1990s, buying Japanese government bonds at a 7% yield and making a killing as prices steadily rose. Today, the same bonds yield nothing and trade in such a narrow range that such gains are almost impossible to produce.
One thing Druckenmiller hasn’t shied away from: picking fights with the Federal Reserve. A year ago, he thought the central bank was wrong to be hiking rates “on autopilot” and publicly called on policy makers to pause. Druckenmiller bought Treasuries with the expectation the Fed would have to cut, which it did starting in July.
Today, he thinks they’ve gone too far in the other direction. With more certainty over U.S. trade policy and Brexit, and the unemployment rate at a historic low, the Fed should be raising its overnight rate target, he said. Instead, Chairman Jerome Powell said earlier this month he “would want to see a significant move up in inflation” before tightening monetary policy.
“I will go to my grave believing that the financial crisis happened because of bubbles created by easy money,” Druckenmiller said in the interview. “And then this crazy president saying we need negative rates to compete with negative rates in countries where they clearly aren’t working. It’s the most anti-capitalist idea I could ever dream up.”
Druckenmiller is no fan of Trump. Yet the possibility that a left-wing Democrat will be elected president is one of the three events he believes would end the decade-long bull market. The others are a major selloff in credit markets and a sudden acceleration in inflation that prompts the Fed to jack up rates.
His prediction about the presidency isn’t a political one. Druckenmiller agrees with Senator Elizabeth Warren and other candidates that billionaires like himself should pay more in taxes. He also favors raising the capital-gains tax rate, closing the carried-interest loophole that benefits private equity and hedge fund managers, and eliminating pass-through investment vehicles.
What concerns him is a sense that America is drifting away from capitalism.
“When you have a president of the United States who puts hundreds of billions in tariffs and then goes and picks and chooses individual economic actors who pay those tariffs and those who don’t, it might as well be the politburo,” Druckenmiller said. “When you have monetary policy around the world with negative rates, you cannot have capitalism if you don’t have a hurdle rate for investment.”
For all his anxieties, Druckenmiller is still an optimist. He considers himself lucky and is determined, though philanthropies such as the Blue Meridian Partners organization he chairs, to create what he calls “economic mobility” for those less fortunate.
Plus, he doesn’t think Trump or Powell will do anything to upset the markets, in the near term.
“One of the reasons I’m pretty sanguine right now is I think we’re close enough to the election, at least we can breathe for a few months,” he said.
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