At the 2023 Sohn Investment Conference on May 9th 2023, Kiril Sokoloff spoke with Duquesne Family Office CEO Stanley Druckenmiller about the future of investing. This conversation is filled with insights into how Stan sees the world and the investment landscape today. I have chosen some gems to highlight, however, I encourage readers to watch the entire one hour conversation with one of the world's living legends of the hedge fund industry.
When you have free money people do stupid things (8:30): “There are going to be bodies out there. When you have free money people do stupid things, when you have free money for 11 years people do really stupid things. So there's stuff under the hood that’s starting to emerge obviously…”
I found Druck's comments regarding potential crisis scenarios over the next few years to be particularly interesting (14:20):
On what happens if the Fed pivots too soon: "That's where I could see a few years out.... a stagflationary environment"
On bursting of the massive asset bubble: ".... if you burst it, there's a possibility that they can't put Humpty Dumpty back together again."
On the possibility of another 2008 style crisis: "I think it's naive to not be open minded to some sort of possibility to that effect.... the banks have got themselves in a balance sheet problem before the loan losses have started.....Before we even get into an economic contraction many of the banks already have impaired balance sheets....."
On commodities and copper (19:00): “...coming out of it (potential hard landing) there are going to be some great commodities….. copper is in the tightest position well frankly I've ever even studied. I'm actually afraid to have a meaningful position in it at this point as we approach the hard landing, only because I'm not an idiot and I know what would happen to the cyclical factors as a hard landing starts. But coming out of it given the move toward EVs, given the usefulness of it in infrastructure spending, which I think a lot of government policies will try and encourage….it's hard to believe copper won't be a huge beneficiary….the question is when am I supposed to buy it and how big is the exposure?”
Long gold and silver (23:00): Druck says “we own gold and silver right now” but notes that precious metals have historically not done well during hard landings. However, he notes that other countries around the world have decided to not hold their reserves in dollars and monetary and fiscal authorities look to be “at the end of their rope”.
Scary cocktail (29:15): Druckenmiller emphasizes that the United States of America has a track record of always rebounding from economic downturns “it is amazing how America has this culture that always seems to respond and come back”. However, he goes on to state “it's a scary cocktail that we're being presented with…”
No fat-pitches right now (32:00): “I'm happy with a portfolio right now that is not net short or not net long and only about 60 percent gross…”
Druckenmiller states, multiple times in this conversation, that it’s important to keep an open mind. This is because how monetary authorities respond to the next crisis will drastically affect how market participants should be positioned.
On the US dollar “the curse of the reserve currency” (41:50): “the reserve currency is an unbelievable privilege and unfortunately that privilege while you have it allows you, if you choose to do so, to run very myopic policies that don't address the long-term, and allows you to behave in a way because markets don't check you…. If you do it enough you lose the privilege, and then you only have the consequences, so that's why I call it the curse of the reserve currency…if you’re the reserve currency you can keep digging your own grave until you're dead and under the soil.”
Never bet against America (47:20): “I'd never bet and say America is finished…” However, given the current political climate it’s hard to see policymakers cleaning up our act like Volcker and Reagan in the early 1980s “...given our political history, given the divisiveness, it's hard to imagine any politician having the guts to do that going forward”
On the promise of AI (50:30): "I have no doubt there will be applications made on top of the model builders in AI where you'll have $100 billion companies emerge…. and who knows with with all the dark talk we've had which is more than I think either of us would have liked to for the last 45 minutes, AI could be as impactful productivity wise as the PC was. For all the technology we've had, so much of it has gone into social networks and other things that have not enhanced productivity.”
On MBS, King of Saudi Arabia (52:00): “I think we’ve made a terrible mistake isolating this guy. He’s 37 years old, he’s wildly popular in the Middle East, he’s a dynamic leader.”
Druckenmiller always impresses me with his commitment to keeping an open mind, and always being willing to see things from a different perspective. While he is American, he definitely sees the world with global eyes and understands that Uncle Sam cannot impose its will on the world forever. I particularly found his comments on copper, and potential fiscal/monetary policy responses to a future hard landing to be notable. It's definitely worth filing away some of these nuggets of wisdom for use at a later date.
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