Monday, April 8, 2013

Interview with Druckenmiller on BBG (March 1st)

I just think this guy, alongside others like Soros, Rogers, Kovner and Tudor Jones, who had their asses on the line, is fantastic.He has lived through history. Has learned with the past and, well.. I hope I was good as he was/is/likely will be until he stops managing money.

I once read notes from his appearance on Grant's Conference and he said something that I'll keep within my mind's reach.
It basically read like this:
Secular bear markets end when a secular problem is solved. In the 70s we had inflation. It was choked off by Volcker, by doing the HARD thing which was, at the time, raising short-term interest rates to very high levels. "Welcome to the real world". That, of course, killed bonds and also equities. Why? Only the best survived the environment. Marginal projects died. Bad investments turned sour. But gave way to true capitalists and entrepreneurs that were competing with 18-20% short-term "risk-fre" bonds to fund their ideas, projects. The US government had that high a cost to pursue their plans, etc.

That spoke about the US. 

Today things are much more dramatic and serious as the secular problem we have in our hands is global, of incomprehensible proportions. The way out is so tough for everybody that people just can't think it can happen. The global debt pile is the malaise and for it to be solved, either through high inflation or through catastrophic debt-deflation (default, restructuring), we'll have to endure PAIN. We will feel it. I am very confident about this. Unfortunately I'm not sure when it'll start and how it'll end, but I am aware that it'll be very, very tough for everybody.  


<Date: March 1, 2013>
<Time: 10:00:00>
<Tran: 030169cb.550>
<Type: SHOW>
<Head: Duquesne Capital Founder Stan Druckenmiller on Bloomberg TV>
<Sect: News; Domestic>
<Byline: Stephanie Ruhle>
<Guest: Stan Druckenmiller>
<High: Duquesne Capital Management Founder Stan Druckenmiller talks to Bloomberg TV about his outlook for the U.S. economy>
<Spec: Economy; Spending; Markets>


MARCH 1, 2013



(This is not a legal transcript. Bloomberg LP cannot guarantee its

MANAGEMENT LLC: I started this journey back in `94, but as I
think a lot of people know, I've been in the investment
business for over 30 years. What I do is I look at economies
and markets, try and see where they're going. If I'm right I
make some money, and if I'm wrong I lose some money. Every
once in a while the world of investing and what's going on in
the country will intersect.

So in `94, I sort of came out of hiding. I was working
for George Soros. So I was having dinner with John Kasich and
a couple market people, and John Kasich, who's now the
governor of Ohio, was in Congress. And somehow the subject of
what would happen if we defaulted on our debt, what would
happen to the bond market. And we're not talking about the US
going under. We're talking about missing a couple payments to
get big entitlement reform or something like that.

And fortunately or unfortunately, I said, well, I think
the bond market would go up. And he was just stunned because
Secretary Rubin and some other people were telling him the
bond market would go down and it would stay down for 30 or 40
years. So all the sudden I found myself right in the middle
of this whole budget fight down in Washington. I kind of made
a mess of the whole experience, and in `96 decided I should
manage money, keep my mouth shut, try and do well for my
investors and stay out of the public eye.

Flash forward to 2004, late 2004, early 2005. As part of
what I do, just like I was looking at demographics back then
for now, I saw a big storm coming, which was basically I had
seen a table of subprime. So I almost came out of wherever I
was hiding again, but decided instead to meet with a couple
policymakers and a congressman. Had my 30 charts with colors
and pictures and laid out for them why I thought this was
going to be a huge, huge problem for the US economy and the
US financial system.

Apparently they didn't agree me because nothing was ever
done, but I've sort of always regretted that I didn't go
public like I did in `94 with the housing thing. Currently,
Stephanie, I see a storm coming, maybe bigger than the storm
we had in 2008 to 2010. And really the reason it could happen
without people looking is for a lot of - a lot of similar
reasons that we could get into. But - but the basic - the
basic story is the demographic bubble I was looking at way
back in `94 that started in 2011, we are right at the first
ramp up of this thing.

Something remarkable has occurred since 1994 until now,
which is entitlement spending - or let me say transfer
payments to be a little more correct - transfer payments,
which were 28 percent in `60 and were 50 percent when we were
in the budget mess in `94, lo and behold they've gone up to
67 percent of government outlays. But they haven't gone up
because of demographics. They've gone up because the seniors
have a very, very powerful lobby. They keep getting more and
more transfer payments from - from the youth, but the
demographic storm is just starting now.

In some ways it reminds me of `05 when people just
extrapolated housing prices going up for 50 years. Everyone
sort of lives with their rules in the past and doesn't look
at coming changes. So what's going to happen is we now have a
working population - this is the way entitlements work -
where the current workforce is paying for the benefits of the
seniors. Since 2000, we've had about 4.5 to 4.8 workers for
every retirees. By 2050 (ph), that number will drop to 2.4
workers per retirees. Another catchy way to say it is by
2030, the average population of the United States is going to
be older than the average Floridian right now.

a dinner party, look what senior citizens are doing, stealing
from the next generation. Who is going to be the group of
people that stop this?

DRUCKENMILLER: Okay. You asked me why I'm here. And I
think people like me and others need to speak out. It's about
the future, not about the present where the problem is. And
let me just say one thing. I am not against seniors, okay? I
love seniors. Unfortunately, I'm going to be one in the not
too distant future. What I am against is current seniors to
me stealing from future seniors.

Well, you can ignore it until you can't. If you go back
to Greece, February of 2010, they had the German credibility
umbrella above them. Everything was fine. Two to three weeks
later, it was a disaster. If you go back to 2006 here,
housing prices have gone up for 50 years. Everything's fine.
Markets, they tend to care until they don't. And I'm not
about to tell you when this is going to care. I can tell you
right now that my 2005 thesis cost me a lot of money in 2006.
We were up, but we had one of the more mediocre years in the
history of Duquesne because I saw this big storm coming and
my timing was off.

And I can tell you right now that I don't know, again,
if we don't act, I don't know what the timing of when the
markets will respond to this, but it will happen. I don't
know whether it's going to happen in one month, one year,
five years. It could be as long as 10 years, but it will
happen because fundamentals are fundamentals.

RUHLE: Well then is the investment community going to be
to blame for hurting the economy or societal problems?

DRUCKENMILLER: It's hard to tell who's going to be
blamed if we don't act and this occurs.

RUHLE: Who should be blamed?

DRUCKENMILLER: Well, there's plenty of blame to go
around. If I had to analyze how did we get into the financial
crisis, I would say it started way back in the `90s when then
Chairman Greenspan refused to address the dot-com bubble,
came up with some new theory of productivity and therefore
we're not going to have a problem. So all these NASDAQ
companies that were never going to earn money went to
hundreds of times earnings, and then of course we had a major
bust. And instead of taking a recession and having the clean
up, they needed an offset, so they created the housing

So now by hindsight, everybody says well, you had these
horrible Wall Street actors. And I'm sure there were quite a
few horrible Wall Street actors, and I don't doubt that they
were part of the - part of the problem. In fact, I know they
were part of the problem. But I also know it was negative
real interest rates for 12 out of 20 years that enabled these
factors to do the things they were doing and incented - yes,
incented them to go out and gamble the way they were

One of the things that is kind of one of my pet peeves
is hearing all these people on TV say, well, you've got to go
into equities because they're so cheap relative to bonds and
there's no other game in town. They are cheap relative to
bonds, but everything is cheap relative to bonds. So just
because equities are cheap relative to bonds doesn't mean
their price isn't subsidized. And I'm not making a forecast
here because the subsidization could go on for a long time,
but real estate, gold, equities, they're all priced off of
zero interest rates and they're all subsidized.

RUHLE: But are equities so cheap when the deal of the
week is this Warren Buffett Heinz deal, which is really a
bond deal?

DRUCKENMILLER: Well again, this party can go on, so
don't take this the wrong way, but I don't believe equities
are cheap. And I don't believe equities are cheap for a
different reason. Again, I don't like to look at the current
and the past. I like to look at the future. So if you look at
the demand in the current economy, it's unsustainable. We
have a 9 percent deficit-to-GDP. We have this debt I'm
talking about. So demand is going to be lowered one way or
the other. So if you normalize margins and you normalized
demand, equities don't look so cheap. Now they're cheap
relative to bonds. The S&P yields more than the 10-year, so
pick your poison.

RUHLE: Do you have a fear that fundamentally the
investment community might agree with you that overall we
face major problems, but unless they're long the market
they're making a huge mistake and their investors are going
to pull their money out?

DRUCKENMILLER: I don't know whether it's investors. I
like a good party too, and I've been long the market when I
was thought it was overvalued if I thought it might go on for
a while. A lot of those times have been profitable, and one
that's well documented in the spring of 2000 wasn't so
profitable. But I do think investors right now think equities
are the only game in town. They are. There will be a day when
what they're measuring themselves against will make them not
the only game in town. When that will happen I'm not sure,
but it will happen.

If you look at Japan, they've had a deflation now for
the better part of 15 years and they've had a market problem
now for 23 years. I think they are dead serious about
attacking the epicenter of the problem, which is deflation.
And they're talking in ways and they seem committed in ways
I've never seen before, at least in the last 10 or 15 years,
in Japan. So to answer your question, I think they are very
serious about deflation. I think they're going to take a real
run at it. I think their market will respond for a while and
then we'll see what happens.

RUHLE: So if you had to rate policymaking today, would
you say Japan's doing it right, Europe's doing okay and US is
doing it the worst?

DRUCKENMILLER: I would say Japan's just doing what
everybody else has been doing for 15 years. But I would say
that it's more appropriate in Japan given their situation.
They haven't had imagined or take or potential deflation.
Their price level is lower than it was 15 years ago. I don't
think the policy is extreme in Japan relative to their
circumstances. I've needed - I think it's needed. But to say
who has the best policy, we're all doing the same thing now.
Other than Brazil, every single central bank in the world is
engaging in highly-stimulative monetary policy.

RUHLE: Everybody loves to talk about currency wars. Some
people say it's a joke, we've actually been in one since
2010. Do you think we're in a currency war or this is just
policymaking colliding?

DRUCKENMILLER: We're not in a currency war. We're in -
we're in a stimulation war. I would say to a large degree we
started all this, and we started it with less bad
circumstances than some of the others have responded. But you
asked me about Japan earlier. I am a little bit amazed that
all this currency war stuff has been erupting with -
surrounding the Japanese. And I only say that because the
Japanese have been in deflation, not fake deflation, real
deflation, prices have been going down there for 15 years.
They have a record trade deficit, okay? Some of the people
that are voicing big opposition to them, such as the Koreans,
have a record surplus and they intervene in their currency

So if you look at the Bank of England, which has a
reasonably high inflation rate and which is doing the same
thing, I don't quite understand why the Japanese situation
has triggered all this angst in the other capitols. But no, I
don't think we're in a currency war. I think we're all doing
the same thing now, with the exception of Brazil. And for all
we know they'll be doing it shortly too, but every single
major country now is running stimulative monetary policies
basically modeled after the Fed.

I'm pretty frustrated. This sequester thing, if you just
look at how it came about, first of all there's - every five
minutes all this suffering and all this horrible stuff is
going to happen in various sectors if this goes through, but
there's three things that are not on the table in the
sequester. I know you're going to be shocked by this.
Medicare, Social Security and Medicaid, okay?

RUHLE: Why is that?

DRUCKENMILLER: I'm sure it's because of short-term
politics. The problem with politicians is they really only do
have a four-year lifecycle. The rest of us should have the
responsibility to look a little further than that ahead. But
yeah, I don't know whether mad is the word. I'm extremely
frustrated by - by their refusal to deal with this problem.
And the sequester thing, I think the president made a deal.
It was a deal so they would extend the debt ceiling, which
they did, all right?

I am very much for tax reform, but I don't think it
should be part of this particular thing and we should be
parading out the crowd we've been parading about to say how
horrible this is going to affect the economy. Let me tell
you. I don't know what the economy's going to do, but it's
just a little ridiculous to say a $600 billion tax increase
over 10 years and $150 billion increase in the payroll tax is
going to have no effect on the economy, but an $85 billion
cut in - in - in discretionary spending is going to take the
economy? If the economy were to often, I can tell you it will
not be because of this $85 billion.

RUHLE: We've got to talk about tax policy. Do you think
has - enough has been done to address current taxes in the
United States?

DRUCKENMILLER: No. I think the United States is in
major, major need of major tax reform. I would take the
corporate tax rate to zero, zero, but I would fully tax
dividends and capital gains at the normal rates. So they
wouldn't be taxed twice. Corporations would stop figuring out
ways to build plants in Ireland or the Cayman Islands or
wherever they're going or having fancy lawyers to figure out
lease-back arrangements, and you know what they'd do? They
would just try and make money.

So the zero rate there - by the way, a lot of these
corporations are already paying zero. And they're - they're
in some sense stealing from the guys that are paying 30 and
35 percent. And then there's things like this private equity
carried interest. Are you kidding me? What a joke. Current
income is current income. That thing should have gone away
years ago. Why hasn't it? I think we both know the answer.

RUHLE: Why don't you go to Washington? Not to visit, why
don't you become a policymaker?

DRUCKENMILLER: Because my wife loves New York and I love
my wife.

RUHLE: Would you ever consider it?


You've got to do your own work. You've got to look at
history and see where things are. And most importantly,
you've got to think in an open- minded fashion and look - you
have to visualize 12 to 18 months how things might look, not
where they are today or where they've been - what the
trajectory has been today. You have to sit down and say what
is this company going to look like in 12 to 18 months.

Since it's down a lot, we could just use Apple as an
example. Instead of frothing at the mouth and saying
everything they were saying when it was $700, maybe they
should have thought about the fact that the margins were
where they were and Samsung's margins were where they were,
and got a Galaxy from somewhere and just looked at that phone
and looked at the history of hardware company's margins can
be over the long term.

Now since the stock's way down from $700 - I'm not
opining on it now - but there's a case of people, again, just
using a rule and looking at the past or the present and not
visualizing the future. So if I had one - one piece of advice
to give to your viewers, try and imagine the world 18 to 24
months from now, not the way it is today, and then think
about where security prices should be to reflect that view.

RUHLE: Because so many hedge funds aren't investing that
way, they're investing today, they're trying to please their
investors today, they want to raise money today, do you think
12 to 18 to 24 months from now they could be in hot water and
the hedge fund industry could be even further consolidated?

DRUCKENMILLER: I don't know. I think the hedge funds
short-term thinking is just a manifestation of our entire
society. Whether it's the Fed or whether it's the
administration or whether it's Congress, no one bothers to
think about the long term anymore. And the hedge funds are
just one more manifestation of that.

That's hard for me to answer because I have the luxury
of a lot of experience in sitting in front of a screen, and I
can go into currency markets (inaudible) relative price, so
it's the one area where prices aren't subsidies - subsidized
- and I'm arrogant enough to think I can time these things.
But I don't really know how to answer that question for
public investment.

Let me - let me just say that this idea that you've got
to go plowing into risk assets because rates are zero, that -
they will rue the day. One day the music will stop. And I
would probably be invested right now thinking I'm smart
enough to know that we're quite away from the music stopping.
I don't think Bernanke is about to end these policies for a
while. But let's just know what we're dealing with here, and
clearly I carry professional experience and your normal
individual doesn't.

RUHLE: If you were starting today, would you say hold
off and wait 18 months?

DRUCKENMILLER: Me - if I was starting as a professional
investor today? No, I'd probably be playing the same game
everybody else is. I'd probably make money for a while and
then I'd probably get burned and start all over again.

That's a complicated question because we're all
outraged, but the consequences had those big banks failed - I
think Geithner did a great job with that stuff. I really do.

RUHLE: You have these big banks that are now doing
business where they look more like utilities. Do you think, I
don't know how these guys are going to make a ton of money
going forward? Maybe there does need to be more

DRUCKENMILLER: I'd like to see them be more like
utilities. I could care less whether they make money, unless
I owned the equities. But if we're talking about as a United
States citizen, I have no problem with banks being utilities
and going back to what banks used to do.

RUHLE: Banks are about human capital. They don't - they
don't make TV sets. They don't innovate products. They need
to have the smartest, most sophisticated people in the
building in those seats.

DRUCKENMILLER: Not if they're just making loans.

RUHLE: And that's what they should just be doing?


RUHLE: And the most sophisticated guys should work at
hedge funds, not on sell-side trading desks?

DRUCKENMILLER: You said it, Stephanie, not me.

I think solvency is being addressed in certain
countries, Spain, some other countries like that. But no, the
- the big difference is once Draghi said those famous words,
they're going to do whatever it takes, people felt better.
And there's - there's a - there's an umbrella under the
market in investor's minds right now. Can they pull out of
this? It'll be difficult, but we'll see.

RUHLE: Can central banks just keep printing money
because there's no one to foreclose on them?

DRUCKENMILLER: Not forever, but maybe for a lot longer
than we think.

RUHLE: And if they do, then what's going to be the

DRUCKENMILLER: The longer you keep the thing going, the
worse it is. I'm probably going to disappear again at some
point, but in the mean time I'm going to do what I can to try
and bring the awareness of this issue out. Because with
respected economists, again, focusing on a little problem
over here when you've got this big problem over here, I think
the message needs to be out there.

But one area I'd love to focus on, if they'll have me,
and I know I'm going to give a talk at some point at my alma
mater, Bowdoin College, is to talk to the young people.
Because I don't think they would be electing leaders who say
they don't want to balance the budget on the back of seniors
if they knew what was going on out there. And so I'd like to
some extent,try and communicate with young people, whether
that is going to college campuses or using some other medium
to get to them.

RUHLE: Does that mean you're going to start tweeting?

DRUCKENMILLER: No tweeting for me.

RUHLE: So if I'm a college student today, I'm at Bowdoin
College, maybe I don't know who Stan Druckenmilller. Maybe I
don't know what your investing history is. Why should I
listen to you as far as what the US economy should look like?

DRUCKENMILLER: I've had my money on the line for a long,
long time trying to forecast future events, and I think feel
strongly enough about this event that you just get them
there, I think my record will speak for itself. I'll probably
have to do a little bragging about some past experiences just
to establish the credibility to get them to listen. But I - I
have a lot of faith in our young people.



(Copy: Content and programming copyright 2013 BLOOMBERG,
LP. ALL RIGHTS RESERVED. Copyright 2013 CQ-Roll Call, Inc.)

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com