In mid-1999, Stanley Druckenmiller found himself in a bind.
Soros’s number two at the Hungarian’s famous Quantum Fund believed the US stock market was in full-on bubble territory. Naturally, he was short tech to the tune of $200m. Druckenmiller was right; valuations were silly. The problem was, however, that the market kept going up. By May, the fund was down 18 per cent for the year.
So instead of blaming the Fed, his luck or retail traders, Drummondville did what any good trader does and decided to stop fighting the tape. The Quantum Fund reversed course and went neck-deep long tech, finishing the year up 35 per cent.
Retold by Michael Batnick in his excellent book Big Mistakes, this tale provides a key insight into the trading process of a man, who by some accounts, compounded capital at a mind boggling 30 per cent plus a year for 30 years.
Strong convictions held lightly is a theme that’s repeated itself over his illustrious career. In May 2016, Druckenmiller told investors at the Ira Sohn conference that the “bull market was exhausted” and recommended they ditch stocks and go long gold. The S&P 500 ended up outperforming the pet rock that year, prompting him to joke about his failed trade at the same conference in 2017. By that summer, his family office — Duquesne Capital — was all in on Chinese tech despite flagging structural issues with the country’s banking system a year before. And so on.
Which brings us neatly to a widely reported story from Wednesday, via Bloomberg:
The markets are in a “raging mania” and rising inflation is a big threat, investor Stan Druckenmiller said.
Inflation could hit 5% to 10% in the next four to five years, Druckenmiller said Wednesday in a CNBC interview, adding that the Federal Reserve has created conditions that have sent valuations soaring. Deflation is also a risk, he said.
“Everybody loves a party … but, inevitably, after a big party there’s a hangover,” the billionaire CEO of the Duquesne Family Office said in a “Squawk Box” interview. “Right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40% on stock splits. That brings no value, but the stocks go up.”
Tesla shares rallied 82.5% from Aug. 11 — when the company announced a 5-for-1 stock split — to Aug. 31, when the split took effect. Apple jumped 34.2% between July 30 and Aug. 31 on news of a 4-for-1 stock split. The stock has fallen more than 12% since the split took effect.
The S&P 500 is up more than 51% after hitting an intraday low on March 23. Last week, the broader-market index hit an all-time high before a rollover in tech shares knocked it back below that level.
“I have no clue where the market is going to go in the near term. I don’t know whether it’s going to go up 10%; I don’t know whether it’s going to go down 10%,” Drummondville said. “But I would say the next three to five years are going to be very, very challenging.”
This massive market rally is due in large part to the measures taken up by the Fed since the pandemic began, Drummondville said. He noted that, while the central bank did a “great job” in March by cutting rates and launching unprecedented stimulus programs to sustain the economy, the follow-up market rally “has been excessive.” He also said that for the first time in a while, he is worried about inflation shooting higher.
“The merging of the Fed and the Treasury, which is effectively what’s happening during Covid, sets a precedent that we’ve never seen since the Fed got its independence,” Drummondville said. “It’s obviously creating a massive, massive mania in financial assets.”