Excerpts from Stanley Druckenmiller's
Talk at the Sohn Conference,
May 4, 2016
Stanley Druckenmiller spoke at the Sohn Conference recently. ZeroHedge printed an article on it which I Tweeted. See link to that article
here.
Below, I present excerpts from that article which I have prefaced
with my own questions. So, it's as though Druckenmiller was answering my set of questions. I think this makes for a more interesting read.
Anything in bold or underlined is from the original article except, of course, the questions themselves which are mine.
What has been the goal of most policymakers since the 2008/09 Great Financial Crisis? Has it been to leverage or deleverage?
Druckenmiller: The policy response to the global crisis was, and more importantly, remains so forceful that it has prevented any real deleveraging from happening. Leverage has actually increased globally. Ironically from where I stand, that has been the intended goal of most policymakers today.
Is the Fed being as "data dependent" as they claim to be?
Druckenmiller: If the Fed was using an average of Volcker and Greenspan’s response to data as implied by standard Taylor rules, Fed Funds would be close to 3% today. In other words, and quite ironically, this is the least “data dependent” Fed we have had in history.
How does today's investment environment compare to the early 1980's? Which one promises superior returns to investors?
Druckenmiller: When I started Duquesne in February of 1981, the risk free rate of return, 5 year treasuries, was 15%. Real rates were close to 5%. We were setting up for one of the greatest bull markets in financial history as assets were priced incredibly cheaply to compete with risk free rates and Volcker’s brutal monetary squeeze forced much needed restructuring at the macro and micro level. It is not a coincidence that strange bedfellows Tip O’Neill and Ronald Reagan produced the last major reforms in social security and taxes shortly thereafter. Moreover, the 15% hurdle rate forced corporations to invest their capital wisely and engage in their own structural reform. If this led to one of the greatest investment environments ever, how can the mirror of it, which is where we are today, also be a great investment environment?
What seems to be the vision of today's central bankers?
Druckenmiller: The obsession with short-term stimuli contrasts with the structural reform mindset back in the early 80s. Volcker was willing to sacrifice near term pain to rid the economy of inflation and drive reform. The turbulence he engineered led to a productivity boom, a surge in real growth, and a 25 year bull market. The myopia of today’s central bankers is leading to the opposite, reckless behavior at the government and corporate level. Five years ago, one could have argued it was in search of “escape velocity.” But the sub-par economic growth we are experiencing in the 8th year of a radical monetary experiment and in Japan after more than 20 years has blown that theory out of the water.
What is the Fed's end game?
Druckenmiller: The Fed has no end game. The Fed’s objective seems to be getting by another 6 months without a 20% decline in the S&P and avoiding a recession over the near term.
What is the major divergence between EBITDA and corporate debt today?
Druckenmiller: As you can see, the growth in operating cash flow peaked 5 years ago and turned negative year over year recently even as net debt continues to grow at an incredibly high pace. Never in the post-World War II period has this happened.
How would you summarize the American corporate sector today?
Druckenmiller: The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness. And we are paying 18X for the asset class.
How would you summarize the Chinese debt situation today?
Druckenmiller: China: As a result, unlike the pre-stimulus period, when it took $1.50 to generate a $1.00 of GDP, it now takes $7. This is extremely rare and dangerous. The most recent historical analogue was the U.S. in the mid- 2000’s when the debt needed to generate a $ of GDP increased from $1.50 to $6 during the subprime mania.
Do you perceive the US stock market as overvalued or undervalued today?
Druckenmiller: If we have borrowed more from our future than any time in history and markets value the future, we should be selling at a discount, not a premium to historic valuations. It is hard to avoid the comparison with 1982 when the market sold for 7x depressed earnings with dozens of rate cuts and productivity rising going forward vs. 18x inflated earnings, productivity declining and no further ammo on interest rates.
What are your recent observations on global equity markets?
Druckenmiller: The lack of progress and volatility in global equity markets the past year, which often precedes a major trend change, suggests that their risk/reward is negative without substantially lower prices and/or structural reform. Don’t hold your breath for the latter. While policymakers have no end game, markets do.
