Letter #235: Stan Druckenmiller and Nicolai Tangen (2024)
Letter #235: Stan Druckenmiller and Nicolai Tangen (2024)
Duquesne Founder & Quantum PM and AKO Founder & Norges Bank CEO
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Stan Druckenmiller is the Founder of Duquesne Family Office, which originally started as Duquesne Capital, in 1981. While managing Duquesne, Stan concurrently became a consultant and managed outside funds, most notably for Dreyfus, where he was the Head of the Dreyfus Fund, and for George Soros’ Quantum Fund, where he was the Lead Portfolio Manager. He is perhaps best known for 1) “breaking the Bank of England” alongside George Soros while managing Quantum, and 2) achieving 30% returns for 30 years without a single down year for Duquesne. Stan started his financial career as a management trainee at Pittsburgh National Bank, where he was initially tasked with being a loan officer. He quickly found it wasn’t a good fit and was joined the trust department as a research analyst covering bank and chemical stocks. Just one year later, he was promoted to Head of Equity Research. Before entering the financial industry, Stan worked in the construction industry for six months after dropping out of his PhD, operated a casino inside a fraternity house, and ran a hot dog stand with a fellow student (Larry Lindsay, who later became a Federal Reserve Governor).
For more on Stan, I would recommend starting with
’s three-part series on him: Part 1, Part 2, Part 3.
Nicolai Tangen is the CEO of Norges Bank Investment Management, where he manages the Norwegian Sovereign Wealth Fund, the largest publicly held financial fund in the world (has $1.74tn AUM; owns ~1.4% of the world’s listed companies.) Prior to joining Norges, Nicolai was the founder of AKO Capital, which he grew from launch to $18bn AUM in 15 years. Before launching AKO, Nicolai was a Partner and Senior Analyst at Egerton Capital (one of the UK’s first hedge funds, as well as a Tiger Cub), where he was twice voted Best Individual European Small Cap Fund Manager. He started his financial career as an equity analyst at Cazenove & Co., where he built up and headed the Nordic department. Prior to his career in finance, he served in the Norwegian Armed Forces’ School of Intelligence and Security, where he took Russian language studies and was trained in interrogation and translation.
I hope you enjoy this conversation as I did!
[Transcript and any errors are mine.]
Related Resources
Soros Fund Management
Duquesne Family Office
Macro
Transcript
Nicolai Tangen: Hi everybody, I'm Nicolai Tangen, the CEO of the Norwegian sovereign wealth fund. And today, I'm here with Stan Druckenmiller, a proper legend in the investment world. Stan, what a pleasure to be here.
Stan Druckenmiller: Happy to see you, Nicolai.
Nicolai Tangen: Now, what are the most important data you're looking at these days.
Stan Druckenmiller: Currently? Interestingly enough, I'm known as a macro investor--but I do our macro from the bottom up. So we're listening primarily to companies. And we're not seeing any material signs of weakness, other than maybe in the housing market--but that's from a very elevated price level. So we're not seeing bottom up and information indicating to us that there's an economic problem any time in the next three to six months. I would also say I'm revealing now that I'm more of a market animal than an economist--that we look at financial conditions. They've been very, very loose. I mean, there is looser, looser than they were when the Fed actually started tightening. They've tightened considerably in the last four or five weeks, ever since, ironically, ever since the Fed cut. Because the dollar has rallied, and obviously interest rates have gone up. But they're still they're still quite above normal. So that's pretty much the data we're looking at. I'd say the other thing I'm focused on--I've been obsessed with whether we were in the 70s, really, since 2021, when this whole inflationary episode started. And I'd say, two years ago, or a year and a half ago, I was very confident that inflation was going to come down, which I was right on, but I was worried about the economy, which I was completely wrong on. More recently, and you can take this with a grain of salt since I had one right and one wrong there, I've switched to being more worried about inflation going forward than the economy itself. Why do I say that? If we go back to the 70s, there was an episode with OPEC that set off inflation, you had a recession, and inflation came down, I think, from about eight to three--
Nicolai Tangen: And then went back up again.
Stan Druckenmiller: Yes. And what's bothered me, and what I have wanted to see--you're exactly right. It went back up again. It went back up again. And the number of months would correlate to the bottom being right about now. So my confidence a year, a year and a half ago, was we're going to have that period where we came down again, and then we'd see. And I'm a little worried that the Fed has declared victory too early. I don't have conviction like I had in '21 that inflation was going to go up--that's when the money supply was growing 40% and all sorts of things were happening. But I also don't have conviction that they've snuffed this thing out and won the battle. And to cut 50 basis points with credit spreads tight, gold at new highs, equities roaring, no sign of weakness, material weakness in the economy--of course, there are some spots. That just makes me nervous that this thing could turn up again.
Nicolai Tangen: What would make it turn up again? What would be the factors?
Stan Druckenmiller: I think what I just said: easing into financial conditions. Let's say Trump wins. If Trump wins, you could have animal spirits from the business community who are dying for deregulation. You could have tariffs, which are on the margin inflationary. Immigration has been a great boon to this country. Maybe not the way it was done, but it certainly enabled us to have growth without inflation and labor. Materially the last two or three years. So the combination of animal spirits recovery doing better than it is. I'm just open minded to it. Again--
Nicolai Tangen: Why is it so urgent for the central bank to cut? Given this?
Stan Druckenmiller: Honestly, I don't take the nefarious view that Powell is doing it for "political reasons." I do think he's obsessed with a soft landing, and I think he's obsessed with his legacy, and having made the mistake he made in '21. And he's being egged on by other economists in the press. To me, the Fed's job is to avoid the big, big mistakes, like the 70s, like the great financial crisis, like the big inflation we just had. But all this fine tuning and worrying about a soft landing--that is not the job of the Fed, in my opinion. It's to maximize employment for the long term, not for the next three months or the next four months. But I think the Fed's obsession with nailing this so called soft landing--I would remind everybody that the reason we're having a landing is because they let inflation go from 2% to 9%. So there was no need for a landing for 20 years. But... I think that's what they're obsessed with. I don't really--I don't know.
Nicolai Tangen: How much of a problem is the forward guidance?
Stan Druckenmiller: It's a huge problem. My friend Jim Grant says they're forward guidance dependent, not data dependent. It's a problem because once you do forward guidance, you eliminate your optionality. And I think, Nicolai, you and I being in this business, we know we have to change our mind when we're wrong. This Fed has shown over and over again that they think if they change their mind, they're losing credibility, so it makes them have their hands tied behind their back. I'm wrong all the time. I think my record is mainly because when I'm wrong, I changed my mind, not that I'm always right. I'm certainly not. Forward guidance seems to tie them into positions and eliminate flexibility they need.
Nicolai Tangen: How big a problem is the budget deficit?
Stan Druckenmiller: As a practitioner, it's something I can't be obsessed with on a three to six month basis. As an American, It's something I'm really obsessed with because debt/GDP can't go up forever, and to me, we have a reckoning. But I don't know how to time when that's going to take place. I will say that because the reserve currency, we've been permitted to engage in behavior that say the Brits couldn't have behaved in. There's a new term I have: Getting Liz Trussed. We haven't been Liz Trussed because we are the reserve currency, even though, if you look at everything we're doing, it's much more radical than the Brits were doing. What's that old saying? How do you go bankrupt? Slowly, and then suddenly. Running deficits with full employment at--basically it's 7% of GDP--is a recipe that can't last forever. One of the reasons we haven't paid for it is in COVID, the entire private sector, 80% of individuals refinanced their mortgages, so the average mortgage rate is still under 4% even though at the margin it got to 8%.Corporations termed out their debt. That stuff rolls over in 25 and 26. If we're going to have a problem, it's probably more like late 25, early 26. But you just don't know.
Nicolai Tangen: And what is it that can create this kind of Trussed moment where people suddenly change their mind in terms of the price they want to have to lend money to?
Stan Druckenmiller: It could be a failed auction. It could be if the Fed is wrong about inflation and it turns back up again because they're easing financial conditions into a melt up. If they were to have to start increasing interest rates again, which is why I think they should be so cautious about their optionality. Now that they've forward guided to a series of cuts, that could cause it. My best guess would be a failed auction. But honestly, it could be six months, it could be six years. I just don't know.
Nicolai Tangen: So if rates start to go up, how high can they go?
Stan Druckenmiller: Well, that's a great question, because right now, the 10 year--I guess it's around four and a half--it can go to nominal GDP. So let's say inflation went to four, four and a half, and real growth was two and a half or three, ten-year could go to six or seven--I'm not predicting that, but that would be consistent. If inflation did turn back up again and the economy wasn't weakening, I think you could get there. It's interesting. That's what happened in the 70s. The bond market didn't really respond until we went back up from like three to 12, and then it responded in spades. Again, I'm not predicting this, but I'm--as a practitioner, I'm very open minded to it, and I've got a--it's like on my radar.
Nicolai Tangen: Well, you say you've made the most money from Fed mistakes. So is this the way you are positioned now?
Stan Druckenmiller: I'm short bonds--I'm not like mega short. I actually had good timing for once--I shorted them literally the day the Fed cut. It's been kind of an easy ride since then. I should have been much bigger. Now that they've moved so much, I'm a little worried about, if anything, being too big. But yeah, no, that's the way I'm positioned. If I thought what we are talking about was happening, and I don't see a sign of it yet, I'm just open minded to it, I would be much bigger. I'm like 25% NAV short to 10-year equivalent.
Nicolai Tangen: Stan, moving on to stock market, the leadership is very narrow. It's led by not so many stocks. Just how do you read this narrow leadership?
Stan Druckenmiller: It's never been great, but the leadership's not as narrow as it was last April. So you're starting to get some broadening out. The financials are doing better. It's not great. We've never had a bear market start without the leadership narrowing. And it's narrowing enough that you're starting to get toward a necessary condition being satisfied. But it's early. But it's a yellow light, it's not a red light. That's how I read it.
Nicolai Tangen: So how do you think the tech sector will develop? What kind of science are you seeing there?
Stan Druckenmiller: The AI boom is going unabated, Nikolai. I think the private sector just sees it as an existential threat to their business, because if they don't spend money on it, and their competitors do, and their competitors are right, they're going to have a big competitive problem. And of course, the hyperscalers, they're all in, and their demand is just continuing. So look, you've got very rich prices in the tech sector--stuff like Apple selling 25x or 30x times earnings--it's certainly not growing at 25% or 30%. But we don't have that much exposure to the tech sector, and we're not short it, so I'm not really involved, because--
Nicolai Tangen: But you were very early into it. How do you spot these early trends? What is it that you look at?
Stan Druckenmiller: Honestly, I've got young, really good analysts here--
Nicolai Tangen: Yeah, but a lot of people have a lot of young analysts.
Stan Druckenmiller: Who are on top of things. And they started--we noticed about three or four years ago that the kids that go to Stanford and MIT, the engineers, were shifting from crypto to AI. That was the first sign. Then my young partners started talking more and more about AI. I asked them how to play it. They mentioned the company called Nvidia, which I thought was a gaming company--and I hadn't done work on in a long time. I bought a pretty good chunk of it, and then, like a month later, ChatGPT happened. It was just total luck. I had no idea ChatGPT, but the AI drum around here was big enough, and the stock was down, I think, from $400 to $150 or something. So that's how I got started in it. Once we invest in something like that, then we really start to dig deeper. And then there was a whole chain of things. We knew it would affect power, we knew it would affect uranium. We just went through the whole chain. It was a pretty easy trend to spot. Not unlike the cloud was. These things come in waves. But AI--the question with AI now that I'm wrestling with, and the reason our exposure is really neither long nor short, is how to play it. Because we started with picks and shovels, which is Nvidia, and to some extent, Microsoft. But now we're seeing just massive amounts of capital being spent by these modelers. And if AI is for real, and I think it is, they're all going to give you the same answers, so we're going to have four or five companies who will spent massive amounts of capital, but I don't see it as a winner take all model. On the other hand, I think there are applications that I haven't even thought of--and nobody's thought of--they're going to spring up. I mean, who would have thought of Uber or Facebook when the internet started? So we're very bullish on AI, but we're not bullish currently on exactly where we're supposed to be and how to play it aggressively--not unlike the internet in 2000, 2001. You could have believed in the internet, not been exposed, and then got your exposure on a more timely basis. Or I could just be wrong--which is, wouldn't be that unusual.
Nicolai Tangen: But you also early into the anti-obesity drug producers.
Stan Druckenmiller: Oh, that was easy. I mean, I don't know what it's like in Norway, but in America, if you go to Disney World, everything--and if you know the American psyche, if you tell an American they got a way to lose weight without doing any work--and I knew the drug worked early on, just because we were exposed to it. And then when I heard if you get off the drug, you gain the weight back, then I knew it was sort of a razor blade business, because people would have to stay on the drug.
Nicolai Tangen: Yeah, but you say it's easy--but I mean, hey, it's not like you were the only one who is walking around in Disneyland and looking at these kind of things, right? So, but you--you actually act on your intuition, or all the data that's in front of you.
Stan Druckenmiller: I do. But it's not all brilliance. I bought Nvidia very well, but I sold it 800 or 900, right when the party was really getting going, and I sold my Lily in the high 700s. Granted, had a nice profit, but--yeah, I look for for big trends. I'm not a Buffet guy that holds for 20 years, but I look for 2-4 year stuff, and both fit into that category. And frankly, we're looking now for AI applications that might not have been recognized yet. I think--I'm on the board of Memorial Sloan Kettering, have been for almost 30 years, and the applications in cancer are unreal.
Nicolai Tangen: And just FYI, Memorial Sloan Kettering is the leading cancer hospital in the world. And they have a lot of money in the endowment, partly, because you are on the board of the investment committee.
Stan Druckenmiller: Well, they have a lot of money in their endowment, I wouldn't say partly because I'm on the board, but thank you.
Nicolai Tangen: Now, when we last met, you mentioned the concept of Buy first, Analyze later. Tell me about that.
Stan Druckenmiller: Yeah. Soros used to call it Invest and then investigate. I think I just gave a classic example. I didn't know that much about Nvidia. I just knew that AI--and I had some people here tell me how to play it. So we bought Nvidia, and then we were in the process of doing a lot more work, and then ChatGPT happened. But I've always had the view that markets are smart, they're fast, and they're getting much more so with all the communication and the technology we have today, and that if I hear a concept and I like it, if I wait and spend two or three months analyzing it, I may miss a big part of the move and then psychologically be paralyzed. It's hard to buy a stock you're looking at at 100--it's 160--even if it's going to 400, somehow your head is screwed up and you're waiting for the pullback. So we will buy something, a meaningful position, but not earth shaking, and then really do the work. And if I think we made a mistake, I'll sell it. And if I don't think we made a mistake, we'll add to it if we have to.
Nicolai Tangen: Yeah, no, I happen to have worked exactly the same way in my life. It really focuses in your work and your efforts and your thinking. But have you always believed in your own pattern recognition?
Stan Druckenmiller: Yes. When I started in the business, I got promoted too early. So before I had really learned the nuts and bolts of the analysis to the extent that I should have, I was promoted to a leadership position, and I had to rely a lot on charts, and I had to rely a lot on intuition. But I found it's not that hard. If you're dealing with a cyclical company and they're losing money, or they're not profitable, and everybody in their industry is shutting capacity down, it doesn't take a rocket scientist to try and envision 18-24 months out, if nobody's adding capacity, they may not be losing money anymore. They might be making a lot of money. I have found it's very important never to invest in the present. Always try and envision the situation as you see it in 18-24 months, and then see--if you feel things will be differently than they are now, would security prices reflect that? I think that's probably the biggest mistake investors make--is they invest in the present rather than forward looking and looking where the puck is going instead of where the puck is.
Nicolai Tangen: Yeah. Now a few people believe in other people's gut feel. Did Soros believe in your gut feel, or did you have to show him analysis?
Stan Druckenmiller: Soros and I had a rocky start. I went there, I had some significant success running public funds at Dreyfus. And he told me I was his successor, but I don't really think his mind was completely made up when I got there, and the first six months were quite rocky because it wasn't clear who was in charge. Frankly, we were both trading badly. And I was flying to Pittsburgh because I still had Duquesne--I was running both. And when I got off the airplane--I think we had pay phones back, then we didn't have cell phones--and the head trader there told me he had sold out my bond position. So--I probably had a higher opinion of myself at the time than I should have--I was young, and I had always been in charge, so I was quite upset, and basically, expressed extreme displeasure. And he said, we'll talk about it when you come back to New York. I implied that I wanted to quit, and he said that maybe there were too many cooks in the kitchen, and he was going to Eastern Europe for four or five years--he'd be out of touch. And then he'd find out whether he had been in my hair or if I really was incompetent. That's sort of the way he talks, the way we think, except he actually says it. And luckily for me, while he was gone, the Berlin Wall came down, I invested in the Deutsche Mark. But I think it was lucky for both of us. I went on like the best run I've had, before or since, for like four years. So he kept seeing the results. So I think he trusted my intuition, only because the record started that way.
Nicolai Tangen: Do you trust the intuition of your colleagues now?
Stan Druckenmiller: I trust their analysis. They're so much deeper and better at analysis than I was, but I can see the intuition developing that--I'm probably as bullish on the talent, the equity talent in my firm, as I've been in 45 years. So I guess that's an answer of yes--but partly brain, partly analytics, and then partly intuition. They're not as intuitive as I am because they don't have to be. I was sort of forced to be intuitive because I never acquired their analytical skills.
Nicolai Tangen: You mentioned some examples, though, where you had sold a bit early. Do you generally sell early?
Stan Druckenmiller: No. I mean, embarrassingly, I did an interview on Nvidia--I think it was like 370 or something, and I said, This is one we're probably going to own for a few years. But I didn't think it was going to go to 900 in a year. And to over a $2 trillion market cap. I think it had started like 100bn or 150bn. It was something crazy. So no, I don't necessarily so early. I'm a technician, so I usually wait for tops. Nvidia had no top. I just thought--
Nicolai Tangen: What does that--just want to explain what does it mean to have a top?
Stan Druckenmiller: A top is something--the rate of change, if it's going up, changes, and it tends to flatten out for quite some time. The trick is, in the technical world, that can end up being a bull flag, where it just consolidated for a bit and then it did a new leg, or it could be a top where that was it.
Nicolai Tangen: How do you know which is which?
Stan Druckenmiller: You don't. You have an opinion, and you express it. Sometimes you're right and sometimes you're wrong. With Nvidia, there was no top, but I just--I've analyzed the semiconductors industry, not particularly well, but since the 1970s. And it's a cyclical industry. And I knew Nvidia had staying power, and was--they had 4000 software engineers, so it wasn't just hardware--they have this thing called CUDA software that they do to make their GPUs. But I just thought once it went through 2tn, this is just too much. And worst case, it'll have a big correction, I'll get another chance. And of course, I didn't get another chance.
Nicolai Tangen: Oh, you may.
Stan Druckenmiller: Yes, I may.
Nicolai Tangen: You think you will?
Stan Druckenmiller: I don't know. From this price, I assume I will, or I would have bought it back. I don't mind buying something back higher than I would. I don't like it, but I'm perfectly willing to buy something back higher than I sold it.
Nicolai Tangen: Some people can't get themselves to do it.
Stan Druckenmiller: Oh, I can. I'm--the one thing I'm strong on is I'm not emotional.
Nicolai Tangen: But--you never had a down year.
Stan Druckenmiller: No.
Nicolai Tangen: A the stupid question: why is that important?
Stan Druckenmiller: No good reason. I think it's important because other people talk about it--and my investors loved it. When I had investors, because--they have this stuff in our industries called risk-weighted return--I'm not big on that, but I will say, it's a stressful job, and there's less stress if you don't have big drawdowns. I have had significant drawdowns in inner years, so part of the down year is just luck.
Nicolai Tangen: What does a drawdown do to you?
Stan Druckenmiller: I get anxious, upset.
Nicolai Tangen: Do you get upset even though it's only your money?
Stan Druckenmiller: Yes. Yeah, I'm just--I'm a very competitive person, even if it's just my own money. I wish I wasn't, but I am, and it's probably one of the reasons my results are as good as they are. But I'd prefer myself not to be. It's a bit of a sickness, but it works for me.
Nicolai Tangen: Who do you compete against?
Stan Druckenmiller: I compete against what I would call the opportunity set. And if there was a great opportunity set that year and I missed it, I'm disappointed in myself. Like if I'm up 20% and I think I should have been up 50%, I'm disappointed myself. If the opportunity set was basically to be up 10 or 15 and I'm up 20, I'm thrilled.
Nicolai Tangen: I mean, the good thing about being an investor is always a good reason to hit yourself in the head, right?
Stan Druckenmiller: I don't know if that's a good thing about our business, but it's probably the bad thing about our business. And for some reason, I like to hit myself in the head. I always measure from the top.
Nicolai Tangen: But you are quick at selling your losers. What's the key to that?
Stan Druckenmiller: If the reason I bought a stock is no longer the case, I don't care what I paid for it. And if I bought it at 60 and it's 50 because the markets discovered the problem before me, I have I have no emotion whatsoever. Soros was the same way. I didn't really learn it from him, but it was certainly reinforced. After a while, Nikolai, you also develop enough confidence that you're not afraid to clean the slate and start over because you have the confidence that you'll be successful again and you're not going to sit there in a lazy position that you're not that sure about anymore. Just clean house. And if you've been doing it for decades, and it's worked, you kind of have the confidence to take a loss and not worry about it too much. Once I'm out, I'm out.
Nicolai Tangen: You said you don't have feelings. What do you what do you mean by that?
Stan Druckenmiller: Did I say I don't have feelings? I have a lot of feelings. You mean about taking losses?
Nicolai Tangen: Yeah, just--
Stan Druckenmiller: What I mean by that is, I think one of the reasons charts work, we have--the reason there's support and there's resistance is the resistance is a bunch of people that bought it at 60 and it went down and they've been waiting for three or four years for it to get back to 60 while they could have been in something else that was going up the whole time. I just don't care what I paid for a stock. It's absolutely irrelevant in terms of my investment process going forward.
Nicolai Tangen: Now, this combination of being on the one hand, stubborn, but the other hand being able to change your mind is pretty rare.
Stan Druckenmiller: I'm told it is. I'm told by my friends and other investors that I'm entirely unemotional and--Yes, I am told it's rare.
Nicolai Tangen: Is that the key to your success?
Stan Druckenmiller: One of them. I think it's a big part of it. I think again, being open minded and having humility--the only reason you can change your mind is if you're not arrogant about a position--has mattered. I think I had some great mentors. The one in Pittsburgh, and then Soros in terms of sizing. And I think I learned some lessons very early on--concentration--not to be afraid of concentration. That's a big reason for my success. And probably the other big reason was sort of self taught--is being willing to go into other asset categories. And if you're going to concentrate, it's better to have five buckets to plan than to plan one. So I was brought up in the equity market, but sometimes the risk reward in the equity market is not that clear when it actually is clear in the bond market or the currency markets. And it's a coincidence. You asked about never hanging a down year--part of it is the most action in bonds and currencies tends to happen in bear markets in equity markets. So you can put the put the equities in the drawer for a while and just concentrate in those markets. I think that's been a huge part of my successes--it gives you the discipline not to play in areas that you don't have a lot of conviction in. Because if you got credit to play in, if you got commodities to play in, currencies or bonds, you can usually find something that you think there's a great risk reward in. It's also they tend to be more liquid than equity markets. So to our earlier conversation, you can change your mind when you're wrong.
Nicolai Tangen: What did you learn about sizing from Soros?
Stan Druckenmiller: I don't know whether you know about--do you know baseball at all? Or would your listeners?
Nicolai Tangen: I know about it, but I don't play it.
Stan Druckenmiller: When I went to Soros, I thought I would learn what would make Deutsche Mark go up and the Yen go up--and modestly, I found I was better at that than him. In baseball terms, I had a very high batting average, he had a much higher slugging percentage. So what I learned from Soros is when you have conviction, you should bet really big. I know your listeners have probably heard it before, but probably the best illustration is the pound.
Nicolai Tangen: Yeah. So what happened? So let's go back. So you are in the office, what's happening in the UK?
Stan Druckenmiller: So I'm in the office in New York, and Scott Bessent, who was a partner of mine in Europe, mainly trade the European area--he's in London, and he tells me the London housing market is in big trouble and the British economy is in trouble, because like most Anglo-Saxon economies at the time, it's very much driven by housing and so forth.
Nicolai Tangen: Just paint it out a bit. So your office--are you like overlooking Central Park?
Stan Druckenmiller: I'm not overlooking Central Park, but I'm near it. I'm in the Soros office on 32nd floor, but it's not a corner office, it's nothing fancy.
Nicolai Tangen: And the UK economy is going down the toilet.
Stan Druckenmiller: We think the UK economy is going down, but I need to take you back about three years. When the Berlin Wall comes down, it probably saved me my job, because I probably would have been fired at Soros six months after he went to Eastern Europe, had the Berlin wall not come down. But the Deutsche Mark went down for two days, dramatically, because the theory in the market was the Ostmark, which was the East German currency, was going to pollute the Deutsche Mark. I knew German history and knew they were obsessed with inflation, because the Weimar Republic, and then that led to Hitler and so forth and so on. So I knew the Germans were absolutely obsessed with inflation. I knew that bringing all these East Germans into the labor supply was going to cause a boom in the economy. So we were very bullish on the overall German economy, and we were very convinced that there is no way the Bundesbank would let inflation, so we were very convinced it would be accompanied by tight monetary policy. So we had shorted the Italian Lira successfully during that period. So when Scott called me, we were already sort of on this Deutsche Mark journey we've been for a few years. And the British economy is going down, and the two currencies are linked, so--
Nicolai Tangen: This was a peg, right?
Stan Druckenmiller: It was a peg. So I called and asked how much it would cost me to short the pound versus the Deutsche Mark for six months--it was a half a percent. I think the fund was around $7.5bn at the time--Quantum Fund--and I decided to do an invest and then investigate position. So I did $1.5bn, or like 20, 25% of the fund, short the pound, long the Deutsche Mark, figuring I'd probably lose a half percent because the peg and it won't break within six months. But I wanted the position on. Fast forward probably about five or six weeks, the day, I believe, was September 15--not that I would remember. I read The Financial Times, and the Head of the Bundesbank--now I'm showing my age, but I'm pretty sure it was Tietmeyer--has written an editorial in the Financial Times, basically, in more proper language, but he's basically saying that the Deutsche Mark and the Pound should no longer be linked. So I decide to take Duquesne and the Quantum Fund to 100% long the Deutsche Mark short the Pound. Because it's still a half percent, unbelievably. Now you're going to hear vintage Soros. So he happens to be in New York at the time, which he wasn't always. I go into his office and I explained to him why I'm going to 100%. And he had a rather large personal account--that's how we kept each other out of each other's hair. He traded that. And it was 90, 95% overlap. Told him why I was doing this. And he had this unpleasant, puzzled look on his face when I'm telling him my thesis that this one economy is booming and they need higher rates, this other economy is falling apart, they need lower rates, that these two currencies shouldn't be linked. And I'm thinking, What does he not understand about this? Because this guy pretty much understood everything. And he says, Look, this is a one way bet. They come along very, very rarely. It's ridiculous doing 100%--we should put 200% of the fund in this trade. So there you have it.
Nicolai Tangen: So that means that you borrow money in the bank and double up.
Stan Druckenmiller: Yeah. On a $7.5bn fund, he thought we should have $15bn short the pound long the Deutsche Mark. It turns out we never got there, but it shows the way the man thinks. I saw it over and over again.
Nicolai Tangen: Because once you were trading, the thing happened?
Stan Druckenmiller: Yeah. Unfortunately, we had a we had a pretty strong reputation, and when I started selling it that night, I noticed a lot of other hedge funds started selling it--the gossip community in the currency markets. And by midnight to one o'clock, the forwards had blown out. They'd started the day at a half percent, they were like 6% or 7%, and it basically wasn't trading after one in the morning. Then the British raised rates, I think, from six to nine, to try and stop the bleeding--and then they went to 12. I knew it was over. But the forwards were out so much it didn't matter. And it was done by noon the next day.
Nicolai Tangen: And you were sitting at your desk looking at the Reuters screen.
Stan Druckenmiller: Yes, or whatever the screen at the time was. We only got $7.5bn done, ironically. Had it not been for Soros, I probably would have not got to $7.5 because intending to do 15, I was in a bigger hurry.
Nicolai Tangen: So what did you feel when? When it broke?
Stan Druckenmiller: There was a lot of adrenaline. It was exciting. I didn't feel bad because I thought the British economy needed it. I was gratified years later when they changed it from Black Wednesday to White Wednesday. Then I went into action after it broke, because the gilts were down two points, which I thought was ridiculous. British needed lower rates. There's some theory in the academia that if you have a weak currency, your interest rates have to go up. So I bought gilts. I bought British stocks. There was a whole--
Nicolai Tangen: Because what happened was that the currency depreciated and it was good for exports, right? So the stocks went up afterwards.
Stan Druckenmiller: Yup. The stocks went up. The gilts went up. Because they needed lower rates and they'd been held artificially high. So there was all kinds of other stuff I did around it, which is kind of the way I trade. You get a theme, and then you look at the concentric circles or the or the dominoes that fall because of the theme. But the point was, with Soros, if he really believes something, the position could never be big enough, particularly if it's in a liquid market. And I learned from him--I like to play the turn, maybe my ego--in a big turn in something. He was perfectly happy to play from the third to the sixth inning. If we go back to baseball terms, if it's a nine inning game, he was perfectly happy to play the third to sixth inning when there was more certainty on much greater leverage. He had more courage than I did in terms of sizing positions. I don't think it totally rubbed off on me, but it certainly helped, and it was a huge learning experience. I think the major thing I learned with him is it's not whether you're right or wrong, it's how much you make when you're right and how much you lose when you're wrong. And that's what he was--probably as good as anybody who's ever been at.
Nicolai Tangen: Stan, many people have heard about the pound, but not many people know that you also did the Swedish Krona.
Stan Druckenmiller: Yes. My memory is a little less clear on that one as to the reasoning, but it was just another victim of the Deutsche Mark. I assume there was some kind of divergence between the two economies and there was a peg that I thought was inappropriate, and it turned out. So that worked out too.
Nicolai Tangen: So you took that back too. But you took another peg, too, which is, I thought you were also involved with the Thai baht.
Stan Druckenmiller: Yeah, the Thai baht was easy. They--
Nicolai Tangen: But nobody knows about this, right?
Stan Druckenmiller: No, I think Sebastian Mallaby wrote a book called More Money Than God--there's a whole chapter on the Thai Baht. That was--
Nicolai Tangen: But not on the Swedish Krona.
Stan Druckenmiller: No, the Swedish Krona, no. I'd prefer nobody knew any of this stuff, but--
Nicolai Tangen: Well, we need to get it right for the history books.
Stan Druckenmiller: I'm happy to talk about it 25 years later.
Nicolai Tangen: Any trades you regret not making?
Stan Druckenmiller: Oh, there's trades I regret not making, constantly. I'd say one of the biggest mistakes I made was having predicted the inflation really early and feeling so strongly about it I wrote a piece in The Wall Street Journal with my partner, Christian Broda, in the spring of '21. I had a massive short, for me, in two years, sort of like we just talked about with the pound. It was a one way bet. They were 15 basis points, and I was so mesmerized by where they'd win, where they'd been, I took most of it off at like 150 basis points. It seemed like a great win, from 15 basis point to 150, but as you know, they went to 500. I regret, deeply, not holding that position. There's probably 30 others, but I prefer to forget my mistakes.
Nicolai Tangen: Do you think machines can take the place of humans when comes to investing?
Stan Druckenmiller: No, I don't, but I think they can work as a copilot--and the combination can beat anything a mere human could be. I'm lucky enough to have known Garry Kasparov for a long time. I'm cofounder of the Kasparov Chess Foundation--for no good reason. I can hardly play chess. My nine year old daughter was beating me--that's how I started with Gary. But he was probably one of the first guys to use machines to train himself and work with them. I could see the same thing happening with money management. So I don't think the pure machines--they'll make money because they have a discipline process and there's math, but I think if you could find an intuitive investor who's using AI and other things to supplement--I think that would probably be the top investor in the world--not a machine.
Nicolai Tangen: Now, you took sabbatical in 2000. What was the reason behind that?
Stan Druckenmiller: It's a painful but really fun story. It really starts in 1998--well no, it starts in the spring of 1999. I shorted, I think, it was 11 or 12 Internet stocks--not the leaders like AOL or Yahoo, but the alsorans. And I believe the position was like $200mn. And in like four weeks, I had lost like $600mn. So it was the first time I'd ever had a big drawdown. I was down like 16 or 17% in the spring of '99. I then pivoted and realized that Greenspan easing because of the Asian financial crisis while our economy was strong and we had the internet and all this behind it, I went out and hired a couple of young managers to buy tech stocks that I didn't know how to spell. They had their own little accounts and like I would plow in on top of their positions. And we ended up the year, I think, something like 42 net or something, after being in this deep hole because I rode this crazy NASDAQ wave in '99. So then in January, I just said, This is ridiculous. And I sold out all my tech holdings. Like, I can't remember--it was like, they had grown to, like, $6bn. It was enormous for that period of time. And I actually went and told Soros why I had sold them out. And next thing that happens, the two little satellites inside, they don't sell out. They're gamblers. I don't really care because Quantum's huge, and there this little thing, they're not going to affect the performance that much. But Nikolai, they're making like, 4-5% a day. I mean, the market is still roaring going into March. And I'm watching this, and I'm getting really annoyed with myself that I'm not still in this trade. And then around early March, I can't take it anymore. And I told you earlier I'm not emotional. This was a real emotional, really dumb move. I buy everything back. I think I missed the top by about an hour. So I buy back all these tech stocks, and within a week, I know I'm dead. And Quantum goes from like up 14% to up 1% in a week. And I go in and I--now I've already been through the trauma of the spring before. I recovered from it, but it had a big effect on me--the stress. I had young kids. And it's like a repeat of the year before. So I go into Soros, and I tell them two things: a) I'm getting out of all this stuff, b) I'm quitting. We can't tell anybody because I got to liquidate this portfolio. But the NASDAQ is in the beginning wave of a down 90% move and you can't get out. So by the time I get out, takes a few weeks, the fund is down like 17%, and Duquesne is down 17%, and I'm just exhausted. I've been running this high profile fund for 12 years. So I sell everything out--everything--of Duquesne, send my investors a letter and say I'm going on a sabbatical. I don't know whether I'm coming back or not. You can take all your money out, but if you take your money out, if I decide to come back, I can't guarantee I'll let you back in. I think I had like 200 clients. One of them pulled their money. I remember who it was, but they'll remain anonymous--for now. So I shut everything down. I go to Africa with my wife and kids. And the best thing I did is, during the summer, I refused to expose myself in any way to something that would tell me where the markets were. So I'm not allowed to watch TV. I'm not allowed to see the Wall Street Journal prices. Nothing. So I come back in Labor Day--I think my wife couldn't have handled me being around once the kids go back to school--sort of humor, maybe not. So I come back, and it's remarkable, because the S&P has rallied back almost to the high, the NASDAQ's retraced about 85% of decline, but the dollar is up, interest rates are up, and oil is up. Three death knells for markets, if you look at history. So I then start calling all my clients who are basically small businessmen--they're not fancy institutions. And all their businesses are terrible. So then I call Ed Hyman, and I say--
Nicolai Tangen: He's an equity strategist, microeconomist.
Stan Druckenmiller: Yeah, he was probably the number one institutional guy, whatever that rating is, institutional investor economist. And I say this is very odd. And I've been out of touch. Dollars up, blah, blah, blah, blah. And two days later, in his daily missive, he has a regression analysis, and it says it's 50% I think currency, 25% oil and 25% interest rates, and it looks one year forward, and it predicts earnings. And it's predicting that earnings are going to decline 36% the next year, and the Wall Street consensus is going to go up 18%. So combination of that, listening to my clients, the fact that Greenspan's got a tightening directive on which I think is inappropriate, I start buying all these treasuries. And the market doesn't go my way, but all the information keeps coming, so I keep buying more and more and more and more. So now I have a 350% 10-year equivalent in the fund. And then I get lucky with the Gore-Bush fiasco. Economy falls apart. I end up making 40% in the fourth quarter. So I had written the year off--when I came back, I'm down 18, I assume, okay, at least I got don't have to worry about this anymore. I'm finally going to have a down year. And it's like the best quarter I ever had. And to this day, if I had stayed managing money, I think I'd have been tied in knots, and there's no way I would make that trade. It was the fact that I was away for four months, had a clean slate, had a clear head, and just looked at the new evidence. So it was a very, very horrible beginning, and a very lucky ending.
Nicolai Tangen: Now, you don't take four months off very often. You work very hard. When do you wake up in the morning?
Stan Druckenmiller: Four.
Nicolai Tangen: Four in the morning?
Stan Druckenmiller: Yeah.
Nicolai Tangen: What do you do? You have an office at home, right?
Stan Druckenmiller: Yeah, I immediately go to the Bloomberg and--
Nicolai Tangen: Four o'clock--do you make a cup of coffee before you go to Bloomberg or straight to the device?
Stan Druckenmiller: Yeah. I make a cup of coffee, I go up. I don't shower yet. Check all the markets. Read the Journal, skim the Financial Times, skim the New York Times. Check all the emails overnight. When I say check, I mean skim them for the important ones. Then it's probably 5:15 or 5:30. Take a shower, go to work, start all over again.
Nicolai Tangen: When do you go to bed?
Stan Druckenmiller: Usually around 8:30, quarter to nine. As soon as I see Japan, what's happening.
Nicolai Tangen: You basically live according to financial markets.
Stan Druckenmiller: Yes. My mother-in-law said a long time ago I'm an idiot savant. She thought she was joking, but she's correct. It's the only thing I'm really good at. I really enjoy it. It keeps me young. I'm dealing with brilliant young people here as analysts, but also I'm forced to read the newspaper and forced to learn about these waves, and it keeps me stimulated. I love it.
Nicolai Tangen: Well, you're 71, right?
Stan Druckenmiller: Yes.
Nicolai Tangen: And you will continue until you until you die, you think?
Stan Druckenmiller: Yes. Hopefully it won't be tonight.
Nicolai Tangen: No, I think probably not. Stan, last thing. We got tens of thousands of young people here. Now, they want to be like you, make a lot of money, be successful in financial markets. What should they be doing? How should they enter--what should they think about?
Stan Druckenmiller: First of all, if they're going in it for the money, they should go elsewhere. There's too many people in the business like me that just love the game and the passion for reasons I just articulated, and they're not going to be able to outwork the people that are passionate in the game. And it's not a fun game if you're losing. It's horrible. I just told you how I respond to draw downs. But if they have a passion for it--if I was a young person, I would not get an MBA. I'd go find a mentor. And if they didn't want me, I would just relentlessly bug the hell out of them, which a couple have done with me, until they finally accepted me to go and work for them, learn what I could from them. If they still like the business, just keep trying to grow your knowledge base. I would say an analyst skillset in our business is completely different than a portfolio manager skill set. Once in a while you'll get an overlap. But I would be careful if they really love the analyst part, which is where we all start, of thinking they have to become a portfolio manager. I've seen it ruin people's lives--who weren't built for trigger pulling. So they should be open minded. I got in the business because I wanted intellectual stimulation. And you're going to get plenty in either one. But that would be my advice to them. And be open minded.
Nicolai Tangen: Stan, this been a an epic conversation.
Stan Druckenmiller: Thanks, Nicolai. I think I said more than I should have.
Nicolai Tangen: No, no. You said exactly the right things.
Stan Druckenmiller: But I don't think we can get in too much trouble.
Nicolai Tangen: Thank you.
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