Soros' "intimate comrade" rarely speaks out: This is the wildest market in forty years!

The article is from Wall Street Insight, authored by Ye Zhen

"This is the wildest market I've ever seen!"

Recently, Stanley Druckenmiller, known as the "genius of Wall Street," made the above statement regarding the current market situation during an engaging conversation with Tony Pasquariello, the global head of hedge fund business at Goldman Sachs.

For decades, Druckenmiller has been regarded as one of the most successful macro hedge fund managers in the world. Over 30 years, he achieved an average annual compound growth rate of 30% and maintained a record of no negative return years throughout his investment career.

Druckenmiller was once a "close ally" of Soros. Invited by Soros in 1988, Druckenmiller officially joined the Quantum Fund. In 1992, Druckenmiller accurately predicted the decline of the British pound against the German mark. At that time, he helped Soros "short the pound," achieving a significant victory in the battle against the Bank of England.

In 2010, Druckenmiller suddenly announced his retirement, ending a 30-year "military career" in the financial battlefield, and since then, he has rarely appeared in public or expressed his investment views.

In this rare conversation with Goldman Sachs, he shared his latest insights on macro investing, major asset classes, and Bitcoin. Wall Street Insight summarized some key points from the interview:

1. "Strange Environment"

Druckenmiller first introduced the current investment environment and used one adjective—"strange":

The economic recession we are experiencing is five times the average level since World War II, but it has occurred in only 25% of the time. Even stranger, this year, 11 million people are unemployed, yet due to massive policy support, our personal income growth is the largest in 20 years.

The CARES Act added trillions of dollars in fiscal stimulus. How significant is this? In just three months of 2020, our added deficit exceeded the total of the last five recessions (1973, 1975, 1982, early 1990s, the bursting of the dot-com bubble, and the global financial crisis). The Federal Reserve purchased more government bonds in six weeks than Bernanke/Yellen did in ten years.

Due to the Federal Reserve's monetary policy, corporate borrowing increased from $6 trillion to $10 trillion before the crisis, while corporate borrowing typically decreases during economic recessions; however, this year, corporate borrowing increased by $400 billion. In contrast, during the global financial crisis, corporate borrowing decreased by $500 billion.

Putting U.S. policy in a global context is even more astonishing. Druckenmiller pointed out:

Since 2018, U.S. M2 has grown by 25% compared to nominal GDP, meaning liquidity has increased by 25%. In China, the ratio of M2 to nominal GDP has remained the same as three years ago. Therefore, China has not overdrawn anything from their future; we have injected a large amount of liquidity, and frankly, there has been very little investment, mainly transfer payments and Federal Reserve stimulus. We have handled the virus terribly, while China and much of Asia have essentially conquered the virus.

2. Shorting U.S. Treasuries and the Dollar, Going Long on Commodities

During the interview, Pasquariello asked what asset Druckenmiller would choose if he could only select one that would provide the best opportunity next year.

Druckenmiller stated that this is not how he plays the game. He believes the main investment theme right now is inflation relative to policymakers' thoughts. However, since policymakers' responses may vary depending on the effectiveness of vaccines, it is best to have an investment matrix.

Druckenmiller revealed some of his positions:

To combat reflation, he is shorting long-term U.S. Treasuries.

He holds a large position in commodities. The longer the Federal Reserve tries to keep interest rates low, the more favorable the outlook for commodities.

He is shorting the dollar. Due to the contrast between U.S. policy and Asian policy, he is "very, very" bearish on the dollar.

3. Growth Stocks Face Challenges, Large Tech Stocks Can Still Rise

Pasquariello asked Druckenmiller about his views on stocks, especially tech stocks, including large tech companies, cloud computing firms, and some small growth stocks.

Druckenmiller is cautious about growth stocks, believing that from the perspective of valuation and the bond market, growth stocks will be in a very, very challenging environment over the next five years:

If the U.S. experiences 4-5% inflation in a few years, bond yields will rise sharply, which historically has been very negative for growth stocks relative to other stocks.

On the other hand, the comparison to 2000 is absurd. The absurdity lies in the fact that we had a double whammy then, not only were we in a frenzy of high valuations, but earnings were also about to end, as those companies were rapidly growing due to the construction of the internet itself; once the internet was built, they could no longer generate earnings.

For those large tech stocks that have already matured, Druckenmiller remains optimistic:

In the past 2-3 months, Amazon and Microsoft have underperformed in the tech sector. However, they are not overvalued, and if the Federal Reserve continues to challenge the limits in a friendly manner, I am not worried about these stocks; in fact, they may continue to rise.

4. Asia Has Emerged from the Pandemic, Becoming the Big Winner

Druckenmiller is very optimistic about the investment prospects in Asia and holds assets in China, Japan, and South Korea.

These regions have had a good start this year. Druckenmiller pointed out that while the U.S. is desperately overdrawn from the future, Asia has emerged from the pandemic, becoming the big winner:

In the tech sector, with Intel surrendering, Asia has gained ground in contract manufacturing and memory, and is also leading in robotics. I believe that over the next five years, Asia looks much better than the U.S., because to some extent, the U.S. must pay the price for productivity, higher wages, and a depreciated dollar.

In the long run, Asia's performance will surpass that of the U.S., especially in the foreign exchange market. This year, China's net investment has just surpassed that of the U.S., which is just the beginning of a trend, not the end.

5. Doesn't Understand Bitcoin, But Still Bought It

Regarding the resurgence of Bitcoin, Pasquariello naturally did not miss Druckenmiller's views on it.

When asked whether Bitcoin is the mother of all asset bubbles or something more real and lasting, Druckenmiller replied that perhaps it is both.

Druckenmiller expressed his confusion about Bitcoin:

Bitcoin has existed for 13 years, and especially for the younger millennial generation, they view it the way I view gold. But I doubt whether Bitcoin will become a store of value, because as a currency, it has various issues, such as consuming a lot of energy and high volatility.

Druckenmiller candidly admitted that he does not understand Bitcoin and is not very confident in it, but he has indeed bought some, and after buying, it has risen significantly.

Video original link: https://premium.wallstcn.com/369e9bf3-9991-49eb-8f05-cbb943c43088.mp4