text transcription of Stanley Druckenmiller talk at Lost Tree Club, including Q&A w/Ken Langone

gistfile1.txt

Last week the transcript of a talk Stanley Druckenmiller gave went a little viral on #financetwitter.

(http://covestreetcapital.com/Blog/wp-content/uploads/2015/03/Druckenmiller-_Speech.pdf)

Only problem- it's been traveling around in the form of an image PDF,
making it hard to cut + paste or search for your favorite quotes.
So I ran it through a couple programs, and bleepblorp, a text transcript is below.

If you want *just the text,* and not this surrounding web page, click "Raw" in the corner above.

While there may be some errors in this conversion, the original transcript also has some uninintelligible notes,
so check the original PDF above before submitting corrections.

@bluechoochoo

Stanley Druckenmiller Lost Tree Club 1—18—15

D = Don; SR = Sam Reeves; KL = Ken Langone;

M5 = male speaker

D:
Good evening, ladies and gentlemen, fellow members,
and guests. I'm Don [unint.], and Joyce and I are
chairing the 2015 version of the forum, and we're so
happy to have such a great turnout. We're delighted
to have Stan Druckenmiller and his wife, Fiona here
this evening. And I’m going to just give you a
little bit of oversight of two gentlemen who are
great sponsors of the forum, Sam Reeves and Ken
Langone. They're co—sponsors of Stanley
Druckenmiller, and they've been just terrific through
the years.

Let me just tell you a little bit about Sam. Most of
you know both of them quite well. They're long-term
members of our club, and they're really accomplished
so much in their lifetime — lifetimes I should say.
Sam, I sort of think of him as the king of cotton.
Dunavant Enterprises, Inc., a cotton merchant,
probably the largest in the world, Sam is a partner,
president, co-chairman. He actually retired from
that in 1995 and then he started Pinnacle Trading
International of which he was president and CEO.

His board memberships, I'll just mention a few: two
Morgan Stanley Funds; Tiger Management Corp., I
understand that he was one of the early investors
with Julian Robertson; Pacific Gas and Electric and
then other things, a member of the board of trustees
of the Fuller Theological Seminary; chairman of the
board of the Saint Agnes Medical Center in Fresno,
California; received the highest honor from their
Chamber of Commerce and just an all-around terrific
guy. And the runner-up in the member/member that
ended yesterday. How about that?

He has time for golf too. Well, he and Betsy support so many
charities that if I started to name them, we’d be
here for a long time, but everything from hospitals,
churches, the University of North Carolina. Just
absolutely outstanding.

Now, last week I introduced Ken Langone, and of
course he was the sponsor of Dr. John Damry [ph.] —
Hamre, excuse me, who is president of CSIS, which is
a Washington think tank, and he really was a
spellbinder. He was absolutely terrific. And Ken
continues to be a great supporter. I got to just
tell you — again, I'm a little bit repetitive because
I talked about it. He not only is a good source of
great sponsors, but he has spoken himself, and he
first told us a story of EDS, Electronic Data
Systems, the Ross Perot company, which he was
instrumental in bringing public. And then, of course
the Home Depot story. He's co-founder with Bernie
Marcus and Arthur Blank, and that's just an
absolutely phenomenal story.

Ken gives us his overviews on economics and business
with CNBC, and he does so many things. He's won so
many awards and the charities are again too numerous
to mention. He still runs Invamed, an investment
banking firm, and he's the prime mover and the
inspiration for the NYU Langone Medical Center. He's
the driving force, and he's pursuing excellency all
the time.

So, you know quite a bit about these two men, but
there's one thing you don't know about Ken Langone,
and that is that I have the unique situation of
having gotten him involved in a real estate
investment which he subsequently called the worst
bleeping investment I ever made in my life. I
figured enough years have gone by where he wouldn’t
be too troubled by me bringing this up, but in any
event, nobody's perfect, right. At this point I want
to bring up Sam, Sam Reeves to introduce our guest
speaker. [applause]

SR:
Thank you, Don, and thank you for yours and Joyce's
leadership in the forum. And we've had these
wonderful speakers and tonight there's no exception.
I think tonight is going to be fascinating and
thought-provoking as we hear maybe a different slant
on investing. We all have savings. We all want to
enhance the value of those savings. Thirty to 35
years ago basically it was just a ratio of stocks
versus bonds and that would depend on the stock
broker. By 1980 when Stan first started in the
business, you had different type of strategies. You
had the hedge fund strategies that were just coming
on, you had the LBOs, you had private equity. You
had all the different strategies coming on. Then you
had Volcker battling against inflation. Won that.
Then you had the Reagan supply-side. So, that
created tremendous tailwinds for investing. Then you
had the technology revolution, you had the frontier
markets, your emerging markets, all these things, the
currently fluctuation driven by a lot of the central
banks being on steroids, if you would.

All of these developments created a chance for
massive gains and massive losses. And with increased
complexity of all of this we all need help in
investing. We need money managers, but I think you
need more than that. You need prescient
practitioners, and we're going to talk about that a
little bit and rightfully so because $1,000 invested
30 years ago in S&P - S&P’s compounded about 11, a
little over 11.3, something like that. Your $1,000
would be $27,000 before taxes today, 25 up years, 5
down years, which is also important.

Probably the poster child of investors, Warren
Buffett in the last 30 years has compounded just
under 20 percent. A thousand dollars 30 years ago
would be $177,000 today, 24 up years and six down
years of which three of the six were more than 20
percent, and that‘s going to be interesting when we
get to that.

The pundit that you see on TV all the time, the
egotistical Bill Gross who you would think is the
greatest investor there's ever been, he compounded
the last 30 years before he got fired at 7.8 percent,
and $1,000 would be $10,000. In the process he's
made a couple billion dollars.

So, our speaker tonight if he invested $1,000 30
years ago, today it would be $2.6 million before
taxes and after taxes, because people say hedge funds
don't do a very good job, they‘re not tax efficient,
$300,000 still. Thirty years, no losses. Brian and
I were talking last night it's hard to do anything
for 30 years and not have one losing year. That's a
phenomenal thing.

So, I think there's five takeaways from here. Never
underestimate the compounding, the power of it; the
damage of down years; the impact of taxes; absolute
returns. Again you think of relative, growth is all
about relative. It's like me comparing myself to
Kanny relative. With Kenny, I'm pretty good at
playing golf. But in an absolute basis neither one
of us is any good at all. So, there's a lot of
difference between absolute and relative. So, I'm
more in the absolute returns. And then finally you
better choose a money manager that is a prescient
practitioner.

There's two other things I’d like to highlight about
the speaker this evening is that we know that the
public record suggests - and it says here in this -
the flyer that we had is right here. It says he was
the most charitable man in America in 2009. That's
half right. Fiona and Stan as a couple were the most
charitable and still are probably one of the most
charitable couples in America.

And I want to say something else about Fiona because
Fiona, many of you don’t know, is one of the great
money managers at Dreyfus. I used to read about
Fiona before I ever met Fiona. And so she was — and
then she became a mom, and there's three daughters.
Sarah‘s here now, who's in - sitting there with her
dad - in med school now, NYU. Ken, isn't that true,
she's there? And then Hannah is at home where Stan
would like to be watching the football game. And
then Tess is at Brown, who has her own band and
travels around, and she’s got all these CDs and
everything else.

Then also Fiona then became and really has a lot of
insight into neuroscience. She and Stan have founded
the institute again at NYU that's won many
recognitions, et cetera, the Nobel Peace Prize,
[unint.], et cetera, et cetera. Amazing things that
are going on there. And then to add to that five,
years ago started a jewelry boutique I guess you
would call it. FD is the name of it, and today it's
one of the leading brand names in the world. So, she
has customers in Europe, China, India. United States,
et cetera, et cetera. In fact it might be an
interesting for Harvard a case study because I think
probably what as I look and think about what Fiona
does, you have a lot of inequities and all these
things. It may be a wonderful case study. You have
international things going on, but that's another
subject.

But to go back to their charitable things, what very
few people know was during this time he's running
these funds, he had a fund that very few people knew
about that was called No Margin, and this fund was
for not-for-profits. No fees, no anything. It was a
pure — all the returns went to the not-for-profits.
Over $1 billion in this fund, and all of the hot
issues - in those days you remember back, some of us
are old enough to remember hot issues, those went in.
So, these not—for-profits had tremendous upside
potential. And that was when I had my friend Ed
Hurley [Ph.] set me up as a 501(c)(3) so I could be a
charitable donation for Druck.

Finally, I think that when Druck closed his fund in
2010, he during these years had been returning
profits each year to the investors, and I've never
seen or heard of this before, in the way of
dividends. And when he closed out in 2010, none of
the investors, the hundred investors, had a net — had
all the initial investment back. No one had any
capital at risk. Everything had come back plus some,
plus when he distributed the $14 billion. So, when
he retired, these 99 people, including Kenny and I
and a bunch of them, we had to go back to work. He
retired; the rest of us go back to work.

But it is a fabulous record that I think that Stan -
and it is a delight for me to share some of that with
you because it's not a well-known record, but it's an
envious record and I think historical. So, Stan,
share if you can, how did this happen? How did this
happen? And then also what do you see going forward?

[applause]

SD:
Thank you, Sam. I know there are a lot of people in
the audience who would like to know what's going on
in the football game. The Seahawks have taken the
lead 22 to 19...with one minute to play.

This is a special moment to me.
I've never spoken in front of my own
community before, and it‘s particularly special
because I get to share the stage with probably the
two most important people in terms of influence in my
life outside of my family, Sam Reeves and Ken
Langone. It's not really an accurate statement
because I actually consider both of them part of my
family. So, that's a real thrill for me.
Sam, with the over-the—top introduction, of course, which I
anticipated because it's Sam Reeves.

I thought I would spend a moment just reflecting on
why I believe my record was what it was, and maybe
you can draw something from that. But the first
thing I'd say very clearly, I'm no genius. I was not
in the top 10 percent of my high school class. My
SATs were so mediocre I went to Bowdoin because it
was the only good school that didn‘t require SATs,
and it turned out to be a very fortunate event for
me.

But I'd list a number of reasons why I think I had
the record I did because maybe you can draw on it in
some of your own investing or also maybe in picking a
money manager. Number one, I had an incredible
passion, and still do, for the business. The thought
that every event in the world affects some security
price somewhere I just found incredibly
intellectually [unint.] to try and figure out what
the next puzzle was and what was going to move what.
And the fact that I could bet on that interaction,
those who know me, I do like to bet. One of the
great things of this business, I get to gamble for a
living and channel it through the markets instead of
illegal activity. That was just sort of nirvana for
me that I could constantly be making these bets,
watch the market moving, and get my grades in the
newspaper every day.

The second thing I would say is I had two great
mentors. One I stumbled upon and one I sought out.

And I see some young people in the audience and
probably some grandparents who have some influence on
some young people in the audience, and I would just
say this. If you're early on in your career and they
give you a choice between a great mentor or higher
pay, take the mentor every time. It's not even
close. And don‘t even think about leaving that
mentor until your learning curve peaks. There's just
nothing to me so invaluable in my business, but in
many businesses, as great mentors. And a lot of kids
are just too short-sighted in terms of going for the
short-term money instead of preparing themselves for
the longer term.

The third thing I'd say is I developed partly through
dumb luck ~ I'll get into that — a very unique risk
management system. The first thing I heard when I
got in the business, not from my mentor, was bulls
make money, bears make money, and pigs get
slaughtered. I'm here to tell you I was a pig. And
I strongly believe the only way to make long-term
returns in our business that are superior is by being
a pig. I think diversification and all the stuff
they're teaching at business school today is probably
the most misguided concept everywhere.

And if you look at all the great investors that are
as different as Warren Buffett, Carl Icahn, Ken
Langone, they tend to be very, very concentrated
bets. They see something, they bet it, and they bet
the ranch on it. And that's kind of the way my
philosophy evolved, which was if you see - only maybe
one or two times a year do you see something that
really, really excites you. And if you look at what
excites you and then you look down the road, your
record on those particular transactions is far
superior to everything else, but the mistake I'd say
98 percent of money managers and individuals make is
they feel like they got to be playing in a bunch of
stuff. And if you really see it, put all your eggs
in one basket and then watch the basket very
carefully.

Now, I told you it was kind of dumb luck how I fell
into this. Ken Langone knows my first mentor very
well. He's not a well-known guy, but he was
absolutely brilliant, and I would say a bit of a
maverick. He was at Pittsburgh National bank. I
started there when I was 23 years old. I was in a
research department. There were eight of us. I was
the only one without an MBA, and I was the only one
under 32 years of age. I was 23 years old.

After about a year and a half - I was a banking and a
chemical analyst - this guy calls me into his office
and announces he’s going to make me the director of
research, and these other eight guys and my
52-year-old boss are going to report to me. So, I
started to think I'm pretty good stuff here. But he
instantly said, “Now, do you know why I'm doing
this?” I said no. He says, “Because for the same
reason they send 18-year-olds to war. You're too
dumb, too young, and too inexperienced not to know to
charge. We around here have been in a bear market
since 1968." This was 1978. “I think a big secular
bull market's coming. We've all got scars. We're
not going to be able to pull the trigger. So, I need
a young, inexperienced guy. But I think you‘ve got
the magic to go in there and lead the charge." So, I
told you he was a maverick, and as you can already
see, he's a little bit eccentric. After he put me in
there, he was gone in three months. I'll get to that
in a minute.

But before he left, he taught me two things. A,
never, ever invest in the present. It doesn't matter
what a company’s earning, what they have earned. He
taught me that you have to visualize the situation 18
months from now, and whatever that is, that's where
the price will be, not where it is today. And too
many people tend to look at the present, oh this is a
great company, they've done this or this central bank
is doing all the right things. But you have to look
to the future. If you invest in the present, you're
going to get run over.

The other thing he taught me is earnings don't move
the overall market; it's the Federal Reserve Board.
And whatever I do, focus on the central banks and
focus on the movement of liquidity, that most people
in the market are looking for earnings and
conventional measures. It's liquidity that moves
markets.

Now, I told you he left three months later, and
here's where the dumb luck came in in terms of my
investment philosophy. So, right after he leaves,
the Shah of Iran goes under. So, oil looks like it's
going to go up 300 percent. I'm 26 — 25, excuse me.
I don't have any experience. I don't know anything
about portfolio managers. So, I go well, this is
easy. Let's put 70 percent of our money in oil
stocks and let's put 30 percent in defense stocks and
let's sell all our bonds. So, and I would have
agreed with him if I had some experience and I was a
little more experienced, but the portfolio managers
that were competing with me for the top job, they, of
course, thought it was crazy. I would have thought
it was crazy too if I’d have had any experience, but
the list I proposed went up 100 percent. The S&P was
flat. And then at 26 years old they made me chief
investment officer of the whole place. So, the
reason I say there was a lot of luck involved is
because as Drelles predicted, it was my youth and it
was my inexperience, and I was ready to charge.

So, the next thing that happened when I started at
Duquesne, Ronald Reagan had become President, and we
had a radical man named Paul Volcker running the
Federal Reserve. And inflation was 12 percent. The
whole world thought it was going to go through the
roof, and Paul Volcker had other ideas. And he had
raised interest rates to 18 percent on the short end,
and I could see that there is no way this man was
going to let inflation go. So, I had just started at
Duquesne. I had a small amount of new capital. I
took 50 percent of the capital and put it into
30—year treasury bonds yielding 14 percent, and I
owned nothing else. Sort of like the oil and defense
story, but now we're on a different gig. And sure
enough, the bonds went up despite a bear market in
equities. Right out of the chute I was able to be up
40 percent. And more importantly, it sort of shaped
my philosophy again of you don't need like 15 stocks
or this currency or that. If you see it, you got to
go for it because that's a better bet than 90 percent
of the other stuff you would add onto it.

So, after that happened, my second mentor was George
Soros, and unlike Speros Drelles, I imagine most of
you have heard of George Soros. And had I known
George Soros when I made the bond bet, I probably
would have made a lot more money because I wouldn't
have put 50 percent in the bonds, I probably would
have put about 150 percent in the bonds. So, how did
I meet George Soros? By the early to mid-‘BOs
commodities were having dramatic moves. currencies
were having big moves, bonds were having big moves,
and I was developing a philosophy that if I can look
at all these different buckets and I‘m going to make
concentrated bets, I'd rather have a menu of assets
to choose from to make my big bets and particularly
since a lot of these assets go up when equities go
down, and that's how it was moving.

And then I read The Alchemy of Finance because I'd
heard about this guy, Soros. And when I read The
Alchemy of Finance, I understood very quickly that he
was already employing an advanced version of the
philosophy I was developing in my fund. So, when I
went over to work for George, my idea was I was going
to get my PhD in macro portfolio manager and then
leave in a couple years or get fired like the nine
predecessors had. But it’s funny because I went over
there, I thought what I would learn would be like
what makes the yen goes up, what makes the deutsche
mark move, what makes this, and to my really big
surprise, I was as proficient as he was, maybe more
so, in predicting trends.

That's not what I learned from George Soros, but I
learned something incredibly valuable, and that is
when you see it, to bet big. So what I had told you
was already evolving, he totally cemented. I know we
got a bunch of golfers in the room. For those who
follow baseball, I had a higher batting average;
Sores had a much bigger slugging percentage. When I
took over Quantum, I was running Quantum and
Duquesne. He was running his personal account, which
was about the size of an institution back then, by
the way, and he was focusing 90 percent of his time
on philanthropy and not really working day to day.
In fact a lot of the time he wasn't even around.

And I’d say 90 percent of the ideas he were [ph.]
using came from me, and it was very insightful and
I'm a competitive person, frankly embarrassing, that
in his personal account working about 10 percent of
the time he continued to beat Duquesne and Quantum
while I was managing the money. And again it's
because he was taking my ideas and he just had more
guts. He was betting more money with my ideas than I
was.

Probably nothing explains our relationship and what
I've learned from him more than the British pound.
So, in 1992 in August of that year my housing analyst
in Britain called me up and basically said that
Britain looked like they were going into a recession
because the interest rate increases they were
experiencing were causing a downturn in housing. At
the same time, if you remember, Germany. the wall had
fallen in '89 and they had reunited with East
Germany, and because they'd had this disastrous
experience with inflation back in the ’203, they were
obsessed when the deutsche mark and the [unint.]
combined, that they would not have another
inflationary experience. So, the Bundesbank, which
was getting growth from the [unint.] and had a
history of worrying about inflation, was raising
rates like crazy. That all sounds normal except the
deutsche mark and the British pound were linked. And
you cannot have two currencies where one economic
outlook is going like this way and the other outlook
is going that way. So, in August of '92 there was 7
billion in Quantum.
I put a billion and a half, short the British pound...
...based on the thesis I just gave you. So,
fast-forward September, next month. I wake up one
morning and the head of the Bundesbank, Helmut
Schlesinger, has given an editorial in the Financial
Times, and I’ll skip all the flowers. It basically
said the British pound is crap and we don't want to
be united with this currency. So, I thought well,
this is my opportunity. So, I decided I’m going to
bet like Soros bets on the British pound against the
deutsche mark.

It just so happens he's in the office. He's usually
in Eastern Europe at this time doing his thing. So,
I go in at 4:00 and I said, “George, I'm going to
sell $5.5 billion worth of British pounds tonight and
buy deutsche marks. Here's why I'm doing it, that
means we‘ll have 100 percent of the fund in this one
trade." And as I'm talking, he starts wincing like
what is wrong with this kid, and I think he's about
to blow away my thesis and he says, “That is the most
ridiculous use of money management I ever heard.
What you described is an incredible one-way bet. We
should have 200 percent of our net worth in this
trade, not 100 percent. Do you know how often
something like this comes around? Like one or 20
years. What is wrong with you?" So, we started
shorting the British pound that night. We didn‘t get
the whole 15 billion on, but we got enough that I'm
sure some people in the room have read about it in
the financial press.

So, that's probably enough old war stories tonight.
I love telling old war stories because I like to
reminisce when I was a money manager and doing better
returns than I have since I retired, but I do think
it's important maybe let's try and move me to the
present here a little bit. So, I told you that one
of the things I learned from Drelles was to focus on
central banks. And Sam was kind enough to point out
some very good returns we had over the years.

One of the things I would say is about 80 percent of
the big, big money we made was in bear markets and
equities because crazy things were going on in
response to what I would call central bank mistakes
during that 30-year period. And probably in my mind
the poster child for a central bank mistake was
actually the U.S. Federal Reserve in 2003 and 2004.
I recall very vividly at the end of the fourth
quarter of 2003 calling my staff in because interest
rates, fed funds were one percent. The nominal
growth in the U.S. that quarter had been nine
percent. All our economic charts were going through
the roof, and not only did they have rates at one
percent, they had this considerable period — sound
familiar? — language that they were going to be there
for a considerable time period.

So, I said I want you guys to try and block out where
fed funds are and just consider this economic data
and let's play a game. We've all come down from
Mars. Where do you think fed funds would be if you
just saw this data and didn't know where they were?
And I‘d say of the seven people the lowest guess was
3 percent and the highest was 6 percent. So, we had
great conviction that the Federal Reserve was making
a mistake with way too loose monetary policy. We
didn‘t know how it was going to manifest itself, but
we were on alert that this is going to and very
badly.

Sure enough, about a year and a half later an analyst
from Bear Stearns came in and showed me some subprime
situation, the whole housing thing, and we were able
to figure out by mid-'05 that this thing was going to
end in a spectacular housing bust, which had been
engineered - or not engineered but engendered by the
Federal Reserve's too-loose monetary policy and end
in a deflationary event. And we were lucky enough
that it turned out to be correct. My returns weren‘t
very good in '06 because I was a little early, but
’07 and ’08 were - they were a lot of fun.

So. that's why if you look at today — can we get the
charts up please? I'm experiencing a very strong
sense of deja vu. Let's just play the game I played
with my analysts back in 2003, 2004 and go through a
series of charts. So, this is the United States
households' net worth per household. And it's
textbook. You see the big drop in the financial
crisis. It's textbook when you have consumer balance
sheets torn to pieces by a financial crisis to use
super loose monetary policy to rebuild those balance
sheets, which the Federal Reserve did beautifully.

What’s interesting though is if you look forward by
2011, we had already exceeded the '07 levels, which I
think a lot of people would agree was already an
overheated [ph.] period, and since then we’ve gone
straight up for two more years, and household net
worth is certainly in very, very good shape.

Here's employment. As you can see after another big
problem after the financial crisis, the employment
market has largely healed, and we're down at 5.6 on
the unemployment rate. Here's industrial production.
Again, big drop after '07. Look at this thing. It's
screaming. Here's retail sales. Again you see the
damage, but you see where we are now. You're right
on a 60-year uptrend, which is actually very good.

And then I'm sure for those of you who are
unfortunate enough to watch CNBC and read other
financial statements, you'll know that the fed is
absolutely obsessed with Japan. They’ve been talking
about this Japan analogy for 10 or 15 years now or
certainly since Bernanke took over. And let me just
show you something. This is the core CPI in the U.S.
I‘m sure you've heard the word “deflation” more than
you’d like to hear it in the last three or four
years. We've never had deflation. Our CPI has gone
up 40 percent over this time with not one period of
deflation. And at the bottom you see Japan, which is
down 15 percent. I did think there was a case, a
viable case in '09, '10 that we may follow Japan.

But you know what, I've thought a lot of things when
I’m managing money with great, great conviction, and
a lot of times I'm wrong. And when you're betting
the ranch and the circumstances change, you have to
change, and that's how I've always managed money.
But the feds‘ thesis to me has been proved dead wrong
about three or four years ago, which is okay, but
there was no pivot.

Here's another one that I like to look at. Has
anybody heard on CNBC in the last week comparisons
with 1937 and the mistake the Federal Reserve made in
1937 because it is a constant thing they’re bringing
up? But again, here's the net worth chart I showed
in the first slide in dark blue, but look at the
light blue line, which is net worth in the 19305 in
the U.S. We're not even close to the kind of numbers
we had in 1937. And if I showed you all those other
four charts, they wouldn't have moved during the four
years either.

And finally, one more comparison with Japan. In
light blue is average net worth per household in the
U.S. In dark blue is Japan. If you took apples to
apples the same time period, there's just no
comparison.

So, my point is this, if I was giving you a quiz and
you looked at these five charts and you hear all this
talk about a deflation and depression and how
horrible things are, let me just say this, the
Federal Reserve was founded in 1913. This is the
first time in 102 years, A, the central bank bought
bonds and, B, that we‘ve had zero interest rates and
we've had them for five or six years. So, do you
think this is the worst economic period looking at
these numbers we’ve been in in the last 102 years?
To me it's incredible.

Now, the fed will say well, you know, if we didn't
have rates down here and we didn't increase our
balance sheet, the economy probably wouldn‘t have
done as well as it's done in the last year or two.

You know what, I think that's fair, it probably
wouldn’t have. It also wouldn't have done as well as
it did in 2004 and 2005. But you can’t measure
what’s happening just in the present in the near
term. You got to look at the long term.

And to me it's quite clear that it was the Federal
Reserve policy. I don't know whether you remember.
they kept coming up with this term back at the time,
they wanted an insurance policy. This we got to
ensure this economic recovery keeps going. The only
thing they ensured in my mind was the financial
crisis. So, to me you're getting the same language
again out of policymakers. On a risk-reward basis
why not let this thing a little hot? You know, we
got to ensure that it gets out. But the problem with
this is when you have zero money for so long, the
marginal benefits you get through consumption greatly
diminish, but there's one thing that doesn't
diminish, which is unintended consequences.

People like me, others, when they get zero money -
and I know a lot of people in this room are probably
experiencing this, you are forced into other assets
and risk assets and behavior that you really don't
want to do, and it's not those concentrated bet kind
of stuff I met [ph.] earlier. It's like gees, these
zero rates are killing me. I got to do this. And
the problem is the longer rates stay at zero and the
longer assets respond to that, the more egregious
behavior comes up.

Now. people will say well the PE is not that hard.
Where's the beef? Again, I feel more like it was in
'04 where every bone in my body said this is a bad
risk reward, but I can't figure out how it's going to
end. I just know it's going to end badly, and a year
and a half later we figure out it was housing and
Subprime. I feel the same way now. There are early
signs. If you look at IPOs, 80 percent of them are
unprofitable when they come. The only other time
we've been at 80 percent or higher was 1999.

The other thing I would look at is credit. There are
some really weird things going on in the credit
market that maybe Kenny and I can talk about later.

But there are already early signs starting to emerge.
And to me if I had a message out here, I know you're
frustrated about zero rates, I know that it's so
tempting to go ahead and make investments and it
looks good for today, but when this thing ends,
because we've had speculation, we've had money
building up for four to six years in terms of a risk
pattern, I think it could end very badly. Kenny, do
you want to come up? [applause]

MS:
You've never been on the left in your life, Ken.

KL:
I am now. [laughter] There's a first time for
everything, Stanley. There’s one addition I'd make
to Sam's introduction, and not only do the
Druckenmillers share their treasure with so many
charities, but they share their time. Everything
they support, they support not only as they say with
their checkbook, but with their time and their effort
and their great abilities. And for the both of you
for all of us here we say thank you. Okay.

[applause]

You mentioned in your talk that there are already
early signs of excesses due to over-easy [ph.]
monetary policy. What are some of the signs you see?

SD:
Okay. I mentioned credit. I mentioned credit.
Let's talk about that for a minute. In 2006 and
2007, which I think most of us would agree was not a
down period in terms of speculation, corporations
issued $700 billion in debt over that two-year
period. In 2013 and 2014 they've already issued $1.1
trillion in debt, 50 percent more than they did in
the '06. '07 period over the same time period. But
more disturbing to me if you look at the debt that is
being issued, Kenny, back in '06, '07, 28 percent of
that debt was B rated. Today 71 percent of the debt
that's been issued in the last two years is B rated.
So, not only have we issued a lot more debt, we're
doing so at much less standards. Another way to
look...

SD: ...at that is if those in the audience who know what
covenant-light loans are, which is loans without a
lot of stuff tied around you, back in '06, '07 less
than 20 percent of the debt was issued coy-light.

Now that number is over 60 percent. So, that's one
sign. The other sign I would say is in corporate
behavior, just behavior itself. So, let's look at
the current earnings of corporate America. Last year
they earned $1.1 trillion; 1.4 trillion in
depreciation. Now, that’s about $2.5 trillion in
operating cash flow. They spent 1.? trillion on
business and capital equipment and another 700
billion on dividends. So, virtually all of their
operating cash flow has gone to business spending and
dividends, which is okay. I'm enboard with that.

But then they increase their debt 600 billion. How
did that happen if they didn't have negative cash
flow? Because they went out and bought $567 billion
worth of stock back with debt, by issuing debt. So,
what's happening is their book value is staying
virtually the same, but their debt is going like
this. From 1987 when Greenspan took over for
Volcker, our economy went from 150 percent debt to
GDP to 390 percent as we had these easy money
policies moving people more and more out the risk
curve. Interestingly, in the financial crisis that
went down from about 390 to 365. But now because of
corporate behavior, government behavior, and
everything else, those ratios are starting to go back
up again.

Look, if you think we can have zero interest rates
forever, maybe it won't matter, but in my view one of
two things is going to happen with all that debt. A,
if interest rates go up, they're screwed and, B, if
the economy is as bad as all the bears say it is,
which I don't believe, some industries will get into
trouble where they can't even cover the debt at this
level.

And just one example might be 18 percent of the
high-yield debt issued in the last year is energy.
And I don't mean to offend any Texans in the room,
but if you ever met anybody from Texas, those guys
know how to gamble, and if you let them stick a hole
in the ground with your money, they’re going to do
it. So, I don’t exactly know what’s going to happen.
I don't know when it's going to happen. I just have
the same horrific sense I had back in '04. And by
the way, it lasted another two years. So. you don‘t
need to run out and sell whatever tonight.

KL:
Will this unprecedented global money printing ever
stop? And what is your intermediate and long-term
view on inflation?

SD:
Well, the global money printing is interesting
because the United States is the world‘s central
bank. And Japan had this guy named Shirakawa running
the central bank, and he didn't believe in this
stuff. So, what happened when he didn't print the
money but the U.S. was printing the money and we're
[inaud.], the Japanese yen started to appreciate and
it stayed appreciating, and it basically hollowed out
the country. And they were eventually forced, as you
know, two years ago into flooding their system with
money.

You have a very, very similar situation going on in
Europe now. I know Mario Draghi and Angela Merkel
don't like QE. They don’t like anything about it,
but again, the chump - I have this partner. I don't
know if he's in the room, Kevin Warsh who's on the
Federal Reserve Board. He said Japan used to be the
new chump because they had the overvalued currency.
Now it's Europe. So, their currency went from 82 say
back in 2000 all the way up to 160, and it was 140
last summer, and they're absolutely getting murdered.
And now they're apparently caving in and they're
going to print money.

I don't know when it's going to stop. And on
inflation this could end up being inflationary. It
could also end up being deflationary because if you
print money and save banks, the yield curve goes
negative and they can't earn any money or let's say
the price of oil goes to $30, you could get a
deflationary event. If you had asked me this
question in late '03, I'd have said well, this
probably ends with inflation, but by the time we
needed to, we figured out no, this is going to end in
deflation. So, the fed keeps talking about
deflation, but there is nothing more deflationary
than creating a phony asset bubble, having a bunch of
investors plow into it and then having it pop. That
is deflationary.

KL:
You mentioned some of your biggest winners in your
career. What is the biggest mistake you made and
what did you learn from it?

SD:
Well, I made a lot of mistakes, but I made one real
doozy. So, this is kind of a funny story, at least
it is 15 years later because the pain has subsided a little.
But in 1999 after Yahoo and America Online
had already gone up like tenfold, I got the bright
idea at Soros to short internet stocks. And I put
200 million in them in about February and by
mid-march the 200 million short I had lost $600
million on, gotten completely beat up and was down
like 15 percent on the year. And I was very proud of
the fact that I never had a down year, and I thought
well, I’m finished.

So, the next thing that happens is I can't remember
whether I went to Silicon Valley or I talked to some
22-year-old with Asperger's. But whoever it was,
they convinced me about this new tech boom that was
going to take place. So I went and hired a couple of
gun slingers because we only knew about IBM and
Hewlett-Packard. I needed Veritas and Verisign. I
wanted the six. So, we hired this guy and we end up
on the Year — we had been down 15 and we ended up
like 35 percent on the year. And the Nasdaq's gone
up 400 percent.

So, I'll never forget it. January of 2000 I go into
Soros's office and I say I'm selling all the tech
stocks, selling everything. This is crazy. [unint.]
at 104 times earnings. This is nuts. Just kind of
as I explained earlier, we're going to step aside,
wait for the net fat pitch. I didn't fire the two
gun slingers. They didn't have enough money to
really hurt the fund, but they started making 3
percent a day and I'm out. It is driving me nuts. I
mean their little account is like up 50 percent on
the year. I think Quantum was up seven. It's just
sitting there.

So like around March I could feel it coming. I just
- I had to play. I couldn't help myself. And three
times during the same week I pick up a - don't do it.
Don't do it. Anyway, I pick up the phone finally. I
think I missed the top by an hour. I bought
$6 billion worth of tech stocks. and in six weeks I
had left Soros and I had lost $3 billion in that one
play. You asked me what I learned. I didn't learn
anything. I already knew that I wasn't supposed to
do that. I was just an emotional basket case and
couldn't help myself. So, maybe I learned not to do
it again. but I already knew that.

KL:
Here's one you may not be able to answer. Why are
the regulators so intent on penalizing our best
banks?

SD:
Because the regulators are appointed by politicians
and the banks make a perfect punching bag for what's
going on. And I will say this, I think there were
very, very bad actors in '06, ‘07. Let's not kid
ourselves in the banking industries.

KL:
I agree.

SD:
But the point I was making earlier is there was a
great enabler, and that was the Federal Reserve...

KL:
Yeah.

SD:
...pushing people out the risk curve. And what I
just can't understand for the life of me, we've done
Dodd-Frank, we got 5,000 people watching Jamie Dimon
when he goes to the bathroom. I mean all this stuff
going on to supposedly prevent the next financial
crisis. And if you look to me at the real root cause
behind the financial crisis, we're doubling down.
Our monetary policy is so much more reckless and so
much more aggressively pushing the people in this
room and everybody else out the risk curve that we’re
doubling down on the same policy that really put us
there and enabled those bad actors [ph.] to do what
they do. Now, no matter what you want to say about
them, if we had had five or six percent interest
rates, it would have never happened because they
couldn't have gotten the money to do it.

KL:
What's the future of the euro?

SD:
The currency or the union?

KL:
The currency

SD:
I think the euro needs to continue to go down because
eight of those countries have such a cost
disadvantage versus Germany right now. It's about 40
percent because they haven't been behaving themselves
since the euro was put together that you have severe
outright deflation not like pretend deflation like we
talk about on the board. It’s real deflation. And
they've got sclerosis. I can't see Europe surviving
without the euro going down to somewhere in the
mid-80s. And if you think that's a ridiculous
forecast, when I restarted Duquesne in 2000, the euro
was 82. Now, that was extreme. But let me ask you
this, think of the Europe and United States back in
2000 and think of them today. Do you think Europe
has made incremental gains versus the United States
or declines? So, to me it's not unreasonable to see
the euro continue to go down.

The other thing I‘ll say, I do analyze currencies,
and it would be almost unprecedented to have a
10-month currency trend. Because all the
dislocations happen when your currency is overvalued
and it’s up long enough, it takes years to unwind
those dislocations. And it's hard to argue the euro
is not in a trend. It's down from 140 to 117. And
using the rule of time, I don't think it’s
unreasonable to expect it to break 100 sometime in
the next year or two.

In terms of the euro region itself, there’s still a
lot of questions. That was put together for
political reasons really to create political unity.
And as most people in this room know, it's doing just
the opposite. It's creating political disunity. So,
I don't think it's even a given that that thing stays
together.

KL:
Okay. You put money out with other managers. What
qualities and characteristics do you look for in
those people that you place money with?

SD:
Number one, passion. I mentioned earlier I was
passionate about the business. The problem with this
business if you're not passionate, it is so
invigorating to certain individuals, they're going to
work 24/7, and you're competing against them. So,
every time you buy something, one of them is selling
it. So, if you‘re with one of the lazy people or one
of the people that are just doing it for the money,
you're going to get run over by those people.

The other characteristic I like to look for in a
money manager is when I look at their record, I
immediately go to the bear markets and see how they
did. Particularly given sort of the five-year
outlook I've given, I want to make sure I've got a
money manager who knows how to make money and manage
money in turbulent times, not just in bull markets.

The other thing I look for, Kenny, is open-mindedness
and humility. I have never interviewed a money
manager who told you he'd never made a mistake, and a 
lot of them do, who didn‘t stink. Every great money manager I've ever met, all they want to talk about is
their mistakes. There's a great humility there. But
and then obviously integrity because passion without
integrity leads to jail. So, if you want someone
who's absolutely obsessed with the business and
obsessed with winning, they're not in it for the
money, they're in it for winning, you better have
somebody with integrity.


KL:
You've expressed concerns about entitlement. What's
the solution? You got a loaded crowd here now. Be
careful.

SD:
That's a rough one. So, if you go back to 1965, the
senior poverty rate in this country was 30 percent,
and it’s 9 percent now. I think everybody can
applaud that's a great achievement. The problem is
you go back to 1965, your child poverty was 21

percent, and now it's 25 percent. So, all the gains we've made in terms of poverty the last 40 years have accrued to the
elderly. If you look at the average per capita
income in this country, we're spending 56 percent of
every worker’s dollars on the elderly, and we're
spending 7 percent on children.

So, how would I solve it? Well, I couldn't because
if I wanted to do it, nobody would ever vote me in
office. But I would just say that some solutions are
a combination of tax reform dealing specifically with
the problem because the longer this goes on, the more
you're either going to have to raise taxes or cut
spending down the road because of compounding. I
would freeze — forget COLAs. I would freeze all the
entitlement payments right now because they've
already taken such a tremendous share away from the
rest of our population.

You know, it's funny. if you go back to as late as
1970, entitlements were 28 percent of all federal
outlays. Now they're 72 percent. And when you start
talking about oh my God, we can't freeze this stuff,
why not? You just picked up 50 points of share on
everybody. Why not freeze it? And, you know, Ken
and I have talked. I mean it's ridiculous that our
Social Security is not means tested. It's
ridiculous. I mean the fact that he's getting - what
is your monthly check?

KL:
Twenty-five hundred dollars a month.

SD:
It's ridiculous.

KL:
And Elaine gets another thousand.

SD:
While we have 24 percent of the kids in this country
in poverty and probably, you know, the elephant in
the room is obviously the health care system. You've
got to get the market into the equation so people see
the cost and they have to make an economic decision.
A lot of this goes into end-of-life payments. You
wonder if you had to pay 30 to 40 percent of the bill
instead of not even knowing what the bill is, whether
different choices would be made.

But you talk about entitlement. The federal debt
right now is $17 trillion. The reason it‘s
$17 trillion and not higher is because all those
payments that are promised to Kenny, a lot of the
people in this room, myself not too far in the
future, they're not on the government balance sheet.
Any company in America if you owe payments of that
certainty, it would be a debt. In the U.S.
government accounting it's revenue.

If you present valued what we have promised to
seniors in Medicare and Social Security and Medicaid
payments, the federal debt right now under gap
accounting would be $205 trillion, not 17 because we
have a demographic boom, which is the other side of
the baby boom. As everybody knows in this room, it's
the grey boom. We are creating 11,000 seniors in
this country every day. Every day we're creating
11,000 new seniors, and we're only creating about 18
percent of youth employed to support those payments
to them. So, we've got a big problem, and it really
doesn't start until 2024, 2025, but if you wait 'til
2024, it's too late. It's not unlike climate change.

It's probably not a problem for 30 years, but if you
wait 30 years, you can't fix it. So, you got to
start now.

KL:
This is my question, is there any way possible you
think that we could have a soft landing from all the
excesses we've had in the last 10 or 15 Years?

SD:
Anything's possible. I sure hope so.
And I haven't committed. I'm not net short equities. I mean the
stock market right now as a percentage of GDP is
higher than - with the exception of nine months from
'99 to — it's the highest it's been in the last
hundred years of any other period except for those
nine months. But you know what, when you look at the
monetary policy we're running, it should be - it
should be about where it is. This is crazy stuff
we're doing. So, I would say you have to be on alert
to that ending badly. Is it for sure going to end
badly? Not necessarily. I don't quite know how we
get out of this, but it's possible.

KL: Okay. Stanley, fabulous. Thank you so much.

SD:
Thanks, Ken.

KL:
Great, great night. [applause]

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