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text transcription of Stanley Druckenmiller talk at Lost Tree Club, including Q&A w/Ken Langone
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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] | |
END OF FILE | |
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