Stanley Druckenmiller (Trades, Portfolio) is a legendary investor and the founder of Duquesne Capital Management, a family office that reported $2.3 billion in 13F holdings as of the end of the first quarter of 2023. At a June 2023 interview with Bloomberg Invest, Druckenmiller discussed his thoughts on asset bubbles, investing in artificial intelligence (AI) and his economic forecasts; let's dive into my notes on the interview.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Asset bubbles
Druckenmiller deals in a world of “risk and reward." There is a “500 year issue of asset bubbles," which documents after every asset bubble, “economic trouble followed."
During 2020, a total of $10 trillion was injected into the economy, consisting of $5 trillion in monetary stimulus and $5 trillion in fiscal stimulus. This compounded on top of the “11 years of free money” and thus caused people to “do stupid things” in Druckenmiller’s opinion.
A prime example he gives is Dogecoin, which ended up worth a staggering $88.8 billion in 2021, despite “being invented as a joke." To put this craziness into perspective, automanufactuer Ford (F, Financial) has a market capitalization of $50 billion and sold nearly 14 million cars in 2022.
Druckenmiller believes there is “a lot under the hood," referring to economic troubles. Despite interest rates having been “jacked up 500 basis points," there hasn’t been many bankruptcies. The “probabilities would suggest” that the failure of Silicon Valley Bank and Bed Bath and Beyond are just the “tip of the iceberg." Therefore, Druckenmiller's central case at Duquesne is “there are more shoes to drop."
During a hard landing, he could foresee corporate profits “down 20% to 30%." This would have been worse, but given the recession is so “widely anticipated," few companies will be “caught with their pants down."
Commercial real estate could continue to have issues due to a move away from in office to remote work. Rising interest rates also raises the cost to service mortgages and financing in general.
Will we have a recession?
Druckenmiller points out that because we haven’t seen a recession yet, many economists have changed their forecasts. They have changed it from an expected “hard landing to a soft landing” and even “no landing” in some cases.
Druckenmiller admits that his forecast “hasn’t changed” and just because a recession hasn’t occurred yet, doesn’t mean it won’t occur or “change the probability of whether it will be hard or soft."
AI tailwinds
Even if we have a recession, “pockets of the market” are likely to do well. An example Druckenmiller gives is during the “hard landing” in 1974 and 1975, oil and chemicals did well.
Druckenmiller believes unlike crypto, “AI is real." One of his favorite AI stocks is Nvidia (NVDA, Financial). He forecasts a rapid 70% increase in the company’s orders and earnings even during a hard landing. He believes that it is not clear Nvidia will go down, despite its lofty valuation.
Nvidia’s share price has increased by a rapid 152% between January 2023 and June 2023, and now the company trades close to a $1 trillion market capitalization. According to his firm's latest 13F filing, Druckenmiller added to his position in Nvidia in the first quarter of 2023, during which shares traded for an average price of $216..
Druckenmiller points out that real secular shifts “don’t have 10 month moves." The internet bubble only lasted “two and a half years." He believes Nvidia is a stock he would want to own for two to three years at least, not just 10 months.
Short selling
Druckenmiller reveals he also has short positions, but admits this is a challenging game, as you are betting a stock will fall in price. It's “fun,” but “you can get your head handed to you."
The “math is also against you when shorting stocks." If you're wrong on a long you can lose 100%, but if you're wrong on a short you can lose “10 times your money."
A historic example he gives is a $200 million short on internet stocks in March 1999. But in just three weeks these stocks continued to rise and he had to cover them at an eye watering loss of $600 million. Ironically, shortly after this, the tech bubble popped and the stocks fell, and all 12 of them eventually went bankrupt. Therefore, Druckenmiller was right in his outlook, but in the short term he still lost money.
Investing in China
Druckenmiller admits he was in love with China, up until six our seven years ago. He humorously described the “energy in Shanghai” as like “New York on crack." However, Druckenmiller believes that Chinese President Xi Jinping is "clearly not a capitalist," so this will create an “undynamic economy." Therefore, he doesn’t look at China, which is a contrarian opinion relative to the value consensus.
Japan is booming
Druckenmiller has had a mixed relationship investing into Japan, after shorting the Nikkei during its boom in the 80s and losing money on many “value trap” trades. However, now Japan looks to be a dynamic market. Its inflation rate dropped to a conservative 3.5% in April 2023, down from its high of 4.3% in January 2023. This looks to be much better than the U.S., which reported an eye watering inflation rate of 9.1% in June 2022, which has now fallen to 4.9%.
Long-term tsunami
Druckenmiller refers to demographic data which outlines a birth rate which has “declined since the 1950’s” from close to four per couple to less than two per couple (1.64) today. This basically means people were having more children historically, but not so much now. This ultimately means less active workers and thus less tax revenue to be captured in the future.
This trend is then combined with a huge growth in senior citizens due to the advances in medicine. The end result is not enough revenue being captured to fund the current and future pensions, which is also a common trend throughout Europe.
Druckenmiller is also worried about the “enourmous amount of debt." The U.S. national debt stands at an eye watering $31.8 trillion as of 2023.
However, Druckenmiller points out that this assumes “no other Medicare or Social Security payment will made," which of course is crazy to expect. Therefore if we assume payments will be made, the present value of U.S. debt is close to $200 trillion, which is enormous. To put things into perspective, U.S. GDP is around $23 trillion per year.
The punchline is what Druckenmiller refers to as the “Fiscal Gap." This is the amount the government would have to raise taxes by today, to fund the promised senior payments in the future. Druckenmiller calculates this as 7.1% of GDP, which means all taxes would need to be raised by an eye watering 40% today, forever. Or alternatively, the government would need to cut all spending by 36% today. Either way the outcome would be atrocious for the economy. Such a large tax rate would likely cause an exodus of the best talent and companies, while cutting spending would destroy the education system, defense and other public funded institutes.
Interest rate expenses alone are also expected to make up 27% of outlays by 2050. Therefore Druckenmiller believes “entitlements will be cut," as just entitlements and interest expenses will be more than all taxes by 2040.
Druckenmiller does caveat this apocalyptic forecast by stating this is in the future and “doesn’t impact trading today."
Final thoughts
Druckenmiller believes the current economic situation is the most “unanalyzable” situation he has ever seen with regard to forecasts. He doesn’t see a “fat pitch” right now but he does believe some “really fat pitches” may emerge within the next eight to 24 months. Therefore, he says he will be keeping liquidity available ready to invest.
