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Letter #40: John Collison and Stan Druckenmiller (2022)
Co-Founder of Stripe and Founder of Duquesne | Sohn 2022 Conversation
Hi everyone – it’s been a while since I rolled this newsletter into Cloud Valley, but somehow people are continuing to discover this newsletter and I frequently get asked to restart it. I’m thinking about if it makes sense to reboot it (please reach out if you have any suggestions or ideas or just want to see it back!).
In the meantime, I recently watched the Ira Sohn conversation between John Collison and Stan Druckenmiller and enjoyed it so much I transcribed it for easier consumption and revisiting, and thought I’d share it here. (Any errors are mine.)
I hope you enjoy this conversation as much as I did!
John Collison: I'm delighted to be joined today by Stan Druckenmiller. And look, you could say that certain people in the investing world need no introduction. And in a lot of cases, it might be an exaggeration. But I think Stan is probably, if you were to ask investors for their role models, Stan would probably be one of the top three names that people give you. And his performance over the last couple of decades, probably makes that very, very deserved. Stan is also a macro watcher, and there is no more relevant time for us to be talking about that. And in fact, Stan, maybe the place to start is that, last year you gave an interview, and you said investors are going to stay disregarding the looming signs of inflation. You can't find any period in history where monetary and fiscal policy were this out of step with economic circumstances, and that there was a raging mania in all assets. And so you said this last summer, when everything was still kind of hunky dory, in terms of the markets. And so I don't know, maybe you're pretty good at this, this macro thing. And so if that was your prediction, last summer, which has since more or less come to pass, what are you predicting now?
Stan Druckenmiller: Thanks, John. It was nice of you to cite a period that's actually turned out the way I've said, because in my career I've said many things that didn't turn out. So your selective picking was quite nice. Look, I did say all that, and I would just say that a number of things happened since then, some which didn't surprise me, some which did. A) The inflation was actually a little higher than I thought it would be, although I thought it was going to be above 6%, which at this time seemed quite radical. B) The bubble has really burst with a vengeance, a lot more than you can see in the S&P. A lot of very good companies have been de-rated 60, 70% without a whole lot of change in fundamentals. So, valuations have improved relative they were. And then C) I'd say the biggest surprise, since I talked last spring was how slow the Fed was to recognize the problem. I thought they were slow, not recognizing it in April of 21. But they were still buying bonds in March of 22. And they were still not even pivoting verbally until November. I think that period was incredibly costly. Because a lot of assets were purchased during that period that I think a lot of people moving out the risk curve will lose a lot of money on. I would just say, where are we now? It's hard to believe, given the extent of the monetary policy the last 10 or 11 years, I think globally we had 30 trillion of QE. Even as late as I think a year ago, there was 18 trillion of debt that was still negative yielding when the world was about to experience 8% inflation. It's pretty, it's pretty extraordinary. So it's hard for me to believe you could have unwound all that that created in terms of a misallocation of resources in six months. So my best guess, and this business is about guessing, there are no certainties, is that we're six months into a bear market that has some room to run. For those tactically trading, it's possible the first leg of that has ended. But I think it's highly, highly probable that the bear market has a ways to run.
John Collison: Is it going to be a soft landing or a hard landing?
Stan Druckenmiller: Well, the answer is, I don't know. But the probabilities of being a soft landing are pretty remote, John. Historically, I think we've only pulled off two or three in history. The one I lived through and remember so well was the 94-95 one. But we've never had a soft landing after inflation has gotten above 4.5%. And the situation we face now is extraordinary, where the Fed, um, where are we these days? I guess we're at 75 basis points, I can't keep up. But even the projections of 2%, you're so far behind the inflation rate. And there's so much wood to chop. And there's been such a broad asset bubble going into it. It's very hard for me to say that the probabilities favor a soft landing, indeed. I think they aggressively point to a hard landing. Anything's possible. As I said earlier, I've been wrong plenty of times in my career, but betting on a soft landing, to me is a real, it's a real long shot.
John Collison: So you think once inflation goes above 5%, it's very hard to tame this in a way that's elegant.
Stan Druckenmiller: Well, that's what history says. It's, there's an interesting historical fact, which, in fact, I think is going to be violated. But two undefeated records are number one, once inflation gets above 5%, it's never come down unless Fed funds have gotten above the CPI. Well, since the CPI is 8, that would call for a Fed funds rate of above 8. Frankly, I don't think we'll get there because the extent of the asset bubble, and the damage that would be done, think about the fact that we have virtually no bankruptcies. And look at this, probably the most disruptive period since the 1890s. I don't need to tell a founder of Stripe that. But if you look across the landscape, there should have been many, many, many bankruptcies which have been buried by QE. So if in fact, Fed Funds ever got to 8%, which, by the way, I don't think is going to happen, the destruction would be quite material. The other statistical fact is, once a once inflation's got above 5%, to use your word, it's never been tamed without a recession. So if you're predicting a soft landing, you're going against decades of history. It could happen, anything's possible. But I don't think it's probable.
John Collison: I think those historical examples are quite sobering. Was it you said that, once inflation goes above 5%, it has never come back down without the Fed funds rate going above the CPI?
Stan Druckenmiller: Yes. And the CPI is currently eight, year over year. I actually think we are we going to violate history, and it is going to come down. I don't know how far, but without that happening. The second one, I think history is going to win. That's once inflation gets above 5%, it's never come down without a recession. And I think a recession is in the cards. I just don't know when. We have about, depending on who you listen to, 1.5-2 trillion of excess savings now. So it may take some time to work through that savings. But given the extent of the asset bubble and the destruction in the markets, given what's going on in Ukraine, given zero COVID policy in China, I don't take a lot of comfort from that. So I assume, and pretty strongly assume, we're going to have a recession sometime in 23. I just don't know whether it's going to be in the early part or the later part. And again, it's a guess, it's not a fact.
John Collison: As we talk about what's going on in the economy, one thing I find really interesting about your style is, people like to trot out the phrase: the stock market is not the economy. But you have been on the record a number of times talking about how you use the stock market as a signal for what's going on in the economy. And so you have this distributed team, if you look at all the stock analysts out there, covering all these different stocks and all these different sectors, they're kind of like the engineer in the cockpit of the train. And when the dials starts flashing, it's a sign that you investigate more. So I'd love to talk about this approach where you are using movements in stock prices to know that hmm, something's going on there. Maybe I should go investigate.
Stan Druckenmiller: Yeah, one of the ironies of my style, maybe it's because I was a dropout of a Ph. D. program in economics at University of Michigan, is that I don't use what traditional economists use to predict the economy, which is things like employment, and a bunch of macro top down statistics. In fact, I started my career as a bank and chemical analyst. And over time, I learned that the inside of the stock market had a very, very prescient message about future economic activity. And for whatever reason, stocks tend to lead the fundamentals by somewhere between 6 and 12 months. And you can even go beyond that and look at industries that lead the economy and industries that lag the economy. The obvious one that everyone knows about is housing, has traditionally been looked at as a leading industry. Retail has a slightly capital goods lag. And what we've done historically, is actually, even though you refer to me as a macro investor, and many people have, is we do the macro by a compilation of listening to companies and doing a bottoms up analysis of industries that lead the economy and industries that lag the economy. And if the leading industries are turning up or turning down, that's a signal. And that's worked beautifully historically. The other signal, which I have found quite prescient from markets, is the bond market. Unfortunately, the last 10 or 11 years, the bond market has not signaled anything, because the central banks took it upon themselves to manipulate bond prices, which to me, is the 10 year Treasury has sort of been the most important price in the world. And they took that price out of the equation. I remember last summer, when certain forecasters had a different forecasts than my own, kept talking about, well the bond market is saying this, the bond market is saying that, when the 10 year dropped all the way from 170 to 115, which, by the way, I did not anticipate. But the bond market wasn't saying anything. What was going on is, central banks were buying trillions of dollars and manipulating the price of bonds. So there was no signal. I don't think you get that tainting if you look inside the stock market. You could get it in the stock market as a whole. But if you do this approach, where you look at industries and which lead, which lag, and you put the puzzle together, it's been prescient over time, and it's certainly allowed us to consistently, the last 20 or 30 years, outperform the Fed in terms of economic forecasts.
This is the first time I’ve heard Stan reference this bottoms-up approach to macro in a media appearance. It’s something near and dear to me, because back in college I had the opportunity to spend 45 with Stan where he shared this approach with me. And it’s stuck with me ever since.
Interestingly, I’ve found that this (mostly) works for people too — to understand people, read everything they’ve ever published, and listen to every talk they’ve ever given. This was actually part of the reason I started sharing my compilations.
John Collison: I find that really interesting...equities acting as a kind of this synthesized predictor for certain industries. And so say, if you think about understanding what's going on in housing in the economy now, what, kind of concretely, what have you been looking at? Is it publicly traded REITs, is it the stocks of construction companies? What does that process look like for you?
Stan Druckenmiller: Well, you don't need to get real fancy here. You can just do the home builders themselves. And with supposed good fundamentals, they've all declined 50% from the high. Another industry that's been incredibly prescient has been trucking. And they're down 40% from the high despite the fact that they're all reporting record earnings. An industry that is not that much of a leader, but it's more of a leader than a laggard, is the retail industry. And there's been a lot in the news lately, whether it's Walmart or other companies. Retail, that one's a little taintage. Just can't take these things blindly, John. That one's a little tainted now, because in COVID, retail went to 100% of the wallet from about 85%, because we weren't going outside and traveling and going to football games. But even taking that into account, retail appears to be much weaker than it should be, given what the so called GDP numbers are printing. So right now, there's a signal, albeit early, that there may be trouble ahead.
John Collison: Yeah, so you look at trucking stocks being down 50%. And you say, hmm, okay, this probably does not bode well for trucking volumes. It has to be the case.
Stan Druckenmiller: Yeah. And if it was just trucks, fine, but it's not just trucks. It's housing. It's retail. It's all over the place. And by the way, you can't get too carried away and say that means we're gonna have a recession tomorrow morning. A lot of these things have longer lead times, like six months to a year.
John Collison: Yes. One thing you're also getting at here, kind of when you reference that you used to be able to look at the bond markets, and kind of now you can't is, it seems very true that the investors who perform really well over multiple decades have to shift stylistically over time and become new kinds of investors. I kind of love the stories of the value investors back in the day, where if you look at what Ben Graham was actually doing, you're hunting for companies where the book value is greater than the market cap of the company. There was a famous case of Northern pipeline where they were trading at $65 a share, and they just had $95 a share of stuff, and railroad bonds or whatever, on their balance sheet. And he bought a bunch of their stock and then just yelled at them and complained until they finally dividend it out, $95 a share of their assets. But that doesn't work anymore, obviously. Markets have gotten a lot more efficient, and you can't just buy companies that own more assets than their market cap. So value investing has to change. And similarly you're describing here, especially the relationships with bonds, relationships with currencies, have to change. And so I'm curious, can you talk a bit more about how you, stylistically, have had to change the tools in your toolkit?
Stan Druckenmiller: That's really an excellent question. And it's very, it's right on point, because when I got in the business, you could almost guarantee, if a company reported lousy earnings, opened down that day and close up big, that stock mark was going to be higher six months from then. And vice versa. You could almost always guarantee, if the economy looked great, and bonds were rallying, that meant the economy was not going to look so great. We used to call it price action versus news. And it used to be an incredible indicator of security prices. Partly because of the efficiency, partly because, I think the growth of hedge funds, we all learned these roles, and partly because of central bank manipulation, price versus news is a very weakened tool versus 20 years ago. Much to my chagrin, because I always found it a great warning signal and now, a lot of times, it may be warning of nothing, or warning of something that doesn't exist. So that's been one thing I've had to adopt to. I mean, frankly, when I started in the business, I'm showing my age here, which was the mid 70s, I started in equities. And I also learned, particularly in bear markets, that I had to morph into bonds, into commodities, into foreign currencies, things like that. I mean, one of the most challenging things for me right now is, maybe it says something about my dysfunctional personality, but I've always made even higher returns in bear markets than bull markets. But the way I did it was just pretty much ignore equities. Take them off the table, buy bonds, buy treasuries, and go home. Well, I've never been presented a cocktail where you have 8% inflation, you think the economy might weaken, and bond yield's 3%. It's an analogue with no precedent in history. So for the golfers out there, going into the situation we're describing, I feel like I'm about to play a round a golf without a driver and without a 60 degree wedge, because bonds, which had been my go to asset in terms of a recessionary bear market atmosphere, they may work, but there's good reason to believe things may be different this time because we've never had central banks with situation in Europe, for example, we have negative rates with 8% inflation. Or even here, we've never had anything like this. So you always, you can't get into black and white, that it's an art form investing in. From cycle to cycle, you have to constantly innovate, and not just be a slave to past models.
John Collison: So how are you positioning the fund given that maybe you don't feel so good about going long equities, but your normal bond toolkit is not working quite well. Is the golf thing top of mind because it's actually hard to do too much? How are you positioning things?
Stan Druckenmiller: Well, currently, I'm very challenged. We were lucky enough to have made some money up until now, the last six or eight months, primarily by having a, let me call it a matrix of short fixed income, short stocks, and not doing a whole lot in currencies and owning some of the key commodities, particularly oil and, mistakenly gold but copper. Things are a lot harder now because we're now getting definitive signals that the economy may be weakening, particularly at the front end. And while I'm not comfortable owning bonds, I'm much less comfortable being short fixed income to the degree I was 3-6 months ago when it looked like a much better risk reward. And even stocks. So many companies have been de-rated by 60 or 70%. And I've lived through enough bear markets, that if you get aggressive in a bear market on the short side, you can get your head ripped off in rallies. So currently, I'm coming in every day, and I'm looking at my screen, but I'm pretty much taking a break. I'm waiting for a fat pitch. I'm not shooting any at pins, to use a golfing analogy. My anticipation is, I will be going back to the short equity position at some point if the market affords me. If not, hopefully, I'll just sidestep a decline. That's not the worst thing in the world. But the fixed income market has become much more complicated. And I'm lucky enough, since I play in a lot of asset classes, to have the luxury of not playing in one. And I don't think I'm going to be playing much in that one going forward. The currency market is incredibly interesting to me. I haven't been doing much there. And I'm not currently positioned aggressively there. But I will be surprised if sometime in the next six months, I'm not short the dollar. $14 trillion has come in here because we were the first to tighten. There's a story about American exceptionalism. I'm not sure we're so exceptional anymore and if we are, I'm not sure I'm excited about what we're exceptional in. So, foreign exchange looks interesting. We still own energy, and other commodities. Ukraine sort of gave that trade an extended life. Although I must say the energy, because of the transition to ESG, we'd love to be short energy for 5 or 10 years. So that could last a while.
John Collison: It's so interesting to hear you talk about this stuff, because you so fluidly move between all these different asset classes. And one thing that makes me think of, is crypto. Obviously, you've done kind of a little bit in crypto before. I remember you saying that it's just hard to get the size of position that is interesting to you in crypto. One thing I was wondering, are you seeing crypto start to affect other asset classes and other currencies?
Stan Druckenmiller: I don't know whether I'm seeing it, but I expect it to. You can't take, you can't build over 2 trillion in wealth in purchasing power, and then take 1 trillion of it out and not matter, John. I also have high frequency signals, and there certainly seems to be a strong correlation between crypto and the NASDAQ. I don't think it takes a genius to figure out why. So I'm looking at it as an indicator that way. Crypto, everything that Charlie Munger says about it, I'm sympathetic to. Everything that Bill Miller says about it, I'm sympathetic to. So I think that's a movie that has yet to be played out and one that I don't want to bet on with conviction. But I will be very surprised if blockchain isn't a real force in our economy, say, 5 years from now to 10 years from now, and not a major disrupter with companies that will have been founded between now and then that will do very well, but that will also challenge things like our financial companies and do a lot of disruption. So I find crypto interesting. My 69th birthday is in a couple of weeks. I'm probably too old to compete intellectually with the young people in this space, but I'm certainly monitoring it.
John Collison: I was gonna ask that, do you think younger Stan would be kind of diving into crypto more energetically?
Stan Druckenmiller: I think a younger Stan would be diving into everything more energetically than I'm talking to. Age is a funny thing. I feel my predictive power, and forecasting power, is as good as it's ever been, the last three to five years. I'm certainly not making 30% net returns per year, like when I had clients. So I think it's two things. Yes, I think younger people understand new asset classes better. But B) I'm just not playing anything as aggressively as I used to.
John Collison: I want to get back to that because that's interesting. But one other crypto related question. As I think about Bitcoin, the closest analog is clearly gold. And you've been talking about digital gold, by which I mean, if you want to remove yourself from cash, if you want to be independent from inflation, your government in whichever country you're in, traditionally gold would be the assets that you would want to pull back into. Nowadays, that can be Bitcoin. And so you'd expect their cyclicality to be similar. And yet, Bitcoin is highly cyclical. Gold is counter cyclical historically. Why is that?
Stan Druckenmiller: I'm not sure why other than NASDAQ type risk play takers are the ones that send to play in Bitcoin and curmudgeons that are gold bugs and want the world to fall apart, playing gold, but there's no question. And this I've watched, and it's gone on long enough now that I believe it, that if you believe we're going to have irresponsible monetary policy, and inflation going forward, if it's in a bull phase, you want to own Bitcoin. But if it's in a bear phase, for other assets, you want to own gold. And I think I just start articulated the reason, but sometimes, John, I don't care. This is going long on enough that I'm starting to believe what I'm observing. And for sure, if I think we're going to have an inflationary bull market, I'd want to own Bitcoin more than gold. And if I thought we're going to have a bear market, stagflation type thing, I'd want to own gold. It doesn't mean I'm going to believe that in a year, but that's my assumption going forward from this point.
John Collison: And is that because of some fundamentals of the underlying assets or just based on what you've observed in their behaviors to date.
Stan Druckenmiller: It's 85% what I've observed, but I would also say it's the type of investor. Over the counter, FANG-type investors, if they believe in inflation, and they tend to be younger, they want to play Bitcoin. Old curmudgeons that secretly want the world to fall apart, they don't own Bitcoin, they own gold. So, but that's kind of cheating, because that's kind of a reason I've made up for what I've observed, I think. You've gotta, you gotta know your own biases.
John Collison: Yes, going back to how you work and, kind of the young man's game and things like that. I talked to someone who worked for you, who says maybe an underrated aspect of your performance historically, is you just work way harder than everyone else and there's few people who have been in the market since the 70s working with your work ethic and across such a broad range of assets. How relevant do you think that is, or how much truth do you ascribe to that?
Stan Druckenmiller: I think it's very relevant. I was pretty lazy in college. And I never considered myself a particularly hard worker. But I'm so passionate about our business, that it's almost like a compulsive gambler that has a way to channel his compulse. And the fact that every event in the world affects some security price somewhere, and the fact that I'm so intellectually stimulated trying to imagine the world 12 to 18 months from now, versus the way it looks in the present, and security prices, how they would reflect that. I just find it so stimulating, it makes everybody think I'm a hard worker, because I'm attracted to the game. So in this game, I am a hard worker. But I actually think there's a life lesson there. I've seen young people who, when they find their passion, who had kind of looked like they were lazy, or lost their way or weren't very driven, become very driven. I just happen to be passionate about this particular discipline. So I don't know whether I have a word hard work ethic, but that's the end result of my passion.
Stan often emphasizes these two points: 1) imagine the world in the near future, not as it is now, and 2) when you’re passionate about something, it’s a lot easier to “work hard”.
Interestingly, in media appearances past, Stan’s referenced time frame was often 18-24 months — I’m curious if the shortening to 12-18 months is the result of changing market dynamics, investing philosophy, or just an off-the-cuff comment about the near future.
For more relevant quotes from Stan, see my quotes compilation here :)
John Collison: Are you then excited about the growth of mobile investing and approachable retail investing for kind of a younger crowd? Because it might pull more people into this? Or do you think it might get people in for the wrong reasons, and it's a bit more of a blinking slot machine game?
Stan Druckenmiller: The latter. I mean, given what's gone on the last 11 years with central bank policy and the breadth of the bubble, I do fear for...one of the sayings I'm sure you've heard it, but I probably heard the first week I was in the business 50 years ago, it still applies: Bull Market Geniuses. I think there's a lot of bull market geniuses around. And it's not that they love the game. They love winning, but they were surfing with a hurricane behind their back that was giving them these nice waves. They may become very discouraged. So, I don't embrace, I've heard a lot of people embrace the fact that all these people are investing now and all these and how great it is. I don't think it's so great if the story doesn't end well.
John Collison: Yeah, and certainly we may see an interesting scenario play out over the next year or two. Going back to your style, the thing I find very interesting in how you work is your philosophy of put all your eggs in one basket and then watch this basket is very carefully. And you've described how you just develop conviction, 3-4 times a year, and act based on that. And I'm curious if you could talk a little bit more about that, like the spidey sense going off. And you're clearly in a low conviction time right now. But I think that's just very stylistically interesting, where you even know how to size up and down your trades.
Stan Druckenmiller: Yeah, it's, it's completely contrary to what they teach in business school, which is, if you're highly diversified, you have less risk than if you're highly concentrated. I don't believe that at all. As an investor, when I think most people get into much trouble is when they have stale longs or stale shorts. When you've got 15, 20% of your asset base, or some of the time in macro positions, I'll have 200-300%. Believe me, they're not getting stale. And you have to have ruthless discipline, and you're coming in every day. Just, to quote Andy Grove, you could not be more paranoid. And you're constantly reevaluating. And I think it leads to an open mind. So yeah, I would also say, people ask me what I learned from George Soros. I thought, when I went there, I was gonna learn what made the Yen and the Deutsche Mark go up and down, and that kind of thing. No, what I learned was, sizing is probably 70 or 80% of the equation. 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. I've also found, as an investor, I believe in streaks. You see it in baseball, you see and everything else. I see it in investing. Sometimes you're seeing the ball, sometimes you're not. One of my number one jobs, is to know whether I'm hot or cold. And when I'm hot, I'm supposed to turn the dial way up. Not say, okay, I'm a 40% this year, let's go, this will look good at the end a year ago, take a break. No, you got to make hay while you're hot. And then when you're cold, the last thing you should do is try and make big bets to get back to even. You should tone yourself down. So believe it or not, that's part of the all your eggs in one basket. Not only do I have to see the investment that really excites me, I also have to see myself sort of being in a good trading rhythm.
John Collison: I think this is so interesting, this notion of, first off, having hot and cold streaks. Because I think some people will take issue to that. People debate whether Hot Hands exist in basketball, and all this sort of stuff, but, kind of believing that, but also being self aware to know that, I am cold, I'm going to do trades, but just small ones to keep myself from doing anything stupid. And then, as you say, when you're hot, really being able to kind of size your conviction based on that. Do you know when other people are hot, by the way? So people at the firm now, at Duquesne, do know when to egg them on to size up their positions? Because you can tell they have it together?
Stan Druckenmiller: I size up their views. And the answer is yes. So, the dark art of technical analysis. There are technicians out there. They're all rational. They all look at a lot of history. No one runs more hot and cold than technicians. One of your main jobs, if you follow technicians, is to know when they're hot, and know when they're cold. Some of them get so cold, you can actually fade them and go the other way because they've got themselves all twisted up. It's more fun to follow one who's hot and make money with them. But yeah, absolutely, I see guys within my own firm, analysts who recommend things, and they go on streaks too, or they get an area and they're really hot. And my job as a trigger puller is to size them up.
John Collison: The other thing I find so interesting about this dynamic, in terms of working with your team, is the "invest, then investigate" idea and I remember talking to someone else who works at Duquesne, who described the terrifying feeling of having joined and telling you about an idea before lunch, and then they go out to lunch and they come back and they find that you've put on a massive position based on this idea that they thought they were telling you, and you're actually trading on. And so can you talk a bit more about why that matters, why it makes sense from an EV perspective and any stocks where it worked particularly well?
Stan Druckenmiller: Well, you mentioned earlier that the business has gotten a lot more competitive than it was 20 or 30 years ago. There is so much information out there, and so many smart people in our industry have come in since 2000, when the financial renumeration went crazy, that you just don't have the time you had when I got in the business. When you hear a good idea, if you wait two or three weeks, a lot of times now, believe it or not, 60 or 70% of the move will have taken place. Maybe not the long term move, but entry price is important. And it's important psychologically as you add overtime. So yes, look, if some analyst comes in with a great idea, or an idea, I don't just buy it, and then go tell them to do the analysis. But if they have an idea that appeals to me intuitively, and I really like it, and it might fit in with the macro matrix we described earlier, it might tick a bunch of boxes. I mean, let's just suppose somebody came in today, with a copper company, not because they were bullish on copper, this particular company had a new mine coming on, and for whatever reason, they love the management. It would matter a lot if before they ever came in, I was already bullish on copper going 3-5 years out. So yes, I might put on a very large position, and then over the next two or three weeks, tell them to really do their homework and really grind down. And if the story panned out, add to it. If it didn't pan out, just get rid of it. I've just found, John, particularly the last 10 or 20 years, you just don't have time anymore to do deep dive analysis. The world—you do— but if you have the intuition, you buy it, and then you do the analysis, and then get rid of it if it doesn't pan out, as opposed to wait and do the analysis.
It’s important to have familiarity with names to be able to trade them. I wouldn’t be surprised if Stan knows the names he trades better than most “fundamental” or “value” investors. I often see new analysts at pod shops get immediately tasked with getting up to speed on 50-200 names—I’d be surprised if any of them really know 10 or even 5 of those companies really well. This is why I think it’s worth doing a deep dive on every company you cover—it makes it easier to track and trade them because you already know what the key drivers are.
John Collison: And it's part of the idea here that if you're wrong, the position is probably net zero when you exist. If you're right, then you got in a favorable time, so there's some asymmetry there.
Stan Druckenmiller: Yeah. And when you enter it, there's no story out there. So hopefully, in 10 days, if you're wrong, there's still no story. There's not going to be some bear story because the guy's giving you a bull story. But if there is a bull story, it's quite likely that somebody else is gonna discover it over the next two or three weeks. These analysts go out to dinner with each other like four nights a week and try out their ideas. And a lot of times they don't wait for the portfolio manager because they're trying to make themselves look good with the other guys at dinner, too. I used to do that when I had more energy.
John Collison: And then are there any cases where this memorably worked quite well?
Stan Druckenmiller: Oh, sure. I'd say there are a number of them. I mean, there's so many of them, I don't really need to point them out. But yeah, it works. It's a much better method, or I still wouldn't be using it. I've had 40 years of test cases to do it with.
John Collison: Yeah. The other thing on the hot and cold thing that I think is so interesting is, so everyone knows the famous story of you in 2000, where you were getting frustrated watching others in your firm earning like 8% a day during kind of the go-go, last days of the tech bubble. And you thought all these tech stocks were crazy, you had been short the tech markets, and you, against your better judgment, you kind of maybe knew deep down, it was a bad idea, you put on a long trade or a few long trades, very briefly before the market crashed. And then you kind of knew you shouldn't do it, and then you did it. And you did it and it kind of worked out poorly. And famously, you said, what did I learn from that, I learned absolutely nothing. I knew is a bad idea at the time. I mean, that's the version of the story that everyone knows. I think the longer version of the story of both being kind of significantly up and being kind of right on the shorts is super interesting. And then the kind of cold period followed by the hot period that came after that in 2000. So I was wondering, could you talk about the longer version of that, because I think that's really interesting, and get to this, the importance of not only being right, but knowing that your right when it comes to being a trader.
Stan Druckenmiller: The long version is very simple. It actually started quite a while before I...I didn't do it in the beginning, but sometime I believe in like, March of 99, I got the brilliant idea to short like 10 Internet stocks, which were up like 7 or 8 fold at Soros. And I think I put 200 million into the Quantum Fund short. And within about four weeks, the 200 million investment was a $600 million loss. I didn't just mistake that, I lost three times my investment, because the 200 million went to 800 million, then I covered it. So I was very bruised, I was down mid teens, I'd never been down double digits before, and I was exhausted. And then I kind of backed off. And for a few months, I realized Greenspan was doing this huge easing program because of the Asian financial crisis. But there was no crisis in the United States, but we were pumping all this money in. And I could see the tech revolution, I said, Oh, my God, I've got to go long. So one of the things I did, was hired two people in their 20s, who were sort of gunslingers, because I knew, gets back to Bitcoin now, I knew the younger people knew the new companies like Veritas and VeriSign, and that kind of stuff, I didn't know how to spell them. So we then, I'm down like 16%, or something, we pivot into this stuff in the summer. And by the end of the year, we're up 42%, net. We have this massive year, I go into George, in January, and I said, This is crazy, we're in a bubble, I'm selling all the technology stocks, so I sell them. This is January. And then the two gunslingers are still there. They have little small accounts, so I can size them up when they're hot or cold per our other conversation. And as you just said, they're making like 8% a day. And it's driving me out of my mind, because I'm out of the market. So we're now getting into March, and there's a little devil here going, March of 2000, the little devil here is going do it, do it. And the little devil here is saying, don't do it, don't do it. And I think I missed the top buy an hour and you said I bought a few things. I didn't buy a few things. I put like, I think 6 billion, which turned into a massive loss, 2 or 3 billion. I knew like, five days after I did it, but the whole exit, it was messy. So now I'm down, like 18% again, and I had just been down 18% the year before. And I'm literally like, an emotional mess. And to your point, I know I'm an emotional mess. So I go into Soros and I say, I'm quitting, I need a break, I'm exhausted. I write a letter to the Duquesne investors. I had two firms going. And I said, I'm going on sabbatical. I might come back, I might not. Right now, I'm a mess. If you want your money, here's the number. Just call, we'll send you all your money back. I did cheat a little. I said, if you take your money out, I might not let you back in, but you're free to take it all out. Okay, so I go to Africa with my kids. I don't allow myself to see a TV or read a financial newspaper. So I don't know where anything is. So it's a true break, which is something I'd advise some traders to do. If you take a break, take a break. Don't sit there and like trade your own account and mess around. So I come back on Labor Day because my kids are going back to school and I'm sure my wife doesn't want me around the house. So I open up a newspaper and I can't believe it. The NASDAQ has recovered like 70 or 80% of their losses. The S&P is almost back to the high. But oil is up. Interest rates are up. And the dollar is up. By the way, that might sound a little familiar. And this has always been terrible for corporate earnings looking forward. So I mentioned this to my good friend Ed Hyman, I go, what's going on? And I said, oil is up, interest rates are up, and the dollars up. Why is the market up? In the meantime, I'm calling on my ex clients who are small businessmen, I didn't have big fancy clients, and they're all telling me their business is terrible. Okay, so Ed sends back a regression thing two days later showing that if you have oil interest rates, he plugged in the percentages, and the dollar up this amount, earnings the next year forward based on history go down 35% And the average earnings estimate of the Wall Street guys is up 18. So I then get the idea, and I'm down, and one of my trading rules is, you don't trade a lot when you're down. But I've had a break, my mind is fresh. I just love this idea. So I put 350% 10-year equivalent of the fund into treasuries, betting that Greenspan was a tightening director, we'll reverse and we'll go into a recession. And to make a long story short, I make 40% in the fourth quarter, even though I had given up on the year and decided I was finally going to have a down year. That's the end of the story.
Pretty funny that Stan went to Africa to get away from everything — this is exactly what the legendary comedian Dave Chappelle did in the midst of all the craziness surrounding the success of his hit show Chappelle’s Show. You can read more about that here.
John Collison: But importantly, you think you wouldn't have had the conviction to actually do those trades, at least in the proper size, had you not taken...
Stan Druckenmiller: I will go to my grave believing, if I had sat in my office all year, grinded away, looked at the screen, I would not have had...my brain was too messed up in May and it would not have gotten unmessed up watching that price action. I will go to my grave believing it was my stepping aside and clearing my head that enabled me not only to see the trade, but to have the gumption to put it on in size because I needed that 4 months to rebuild my confidence.
John Collison: You kind of talked about being low conviction now, you're not actually short equities, though maybe you'd like to be or you think you might be in future. What do you think getting to higher conviction in the current environment might look like?
Stan Druckenmiller: Oh, I think if the market were to rally 15 to 20% from here over the immediate term, I'm going to take a shot because six months bear markets preceded by asset bubbles don't exist, historically. And I think we still have a lot of wood to chop.
John Collison: You're waiting for the dead cat bounce, you're waiting for the defaults...
Stan Druckenmiller: It might not be so dead. That's why I'm not still invested the way I was two or three weeks ago. I was quite short. Interest rates...I want to hear where the Fed is, I want to follow the company data. We're following to see how this thing is unfolding. And then of course, there's this whole inflation debate. And I could see, like the Fed says food and energy don't count, because they're core. Well, tell that to a labor union, who, what do you think, they're gonna go in there and they're gonna negotiate and say, Okay, guys, don't worry, we only need 3% because the core PCE is only up 4%, we're not worried about the fact that our own cost of living is up 16%. So I want to see if that's embedded. I want to see all this. By the way, one of the reasons, in addition to low conviction, is back to what we're talking about. I'm taking a mental break, I'm at work, but I want to be fresh. And this has been a lot of activity the last four or five months, and it may be in a week, it may be in three weeks, it may be three months. I'm in no hurry here. I don't need...
John Collison: You're tapering before the marathon, you're giving yourself a break before you expect to get pretty busy.
Stan Druckenmiller: Or I'm in the marathon and I'm not running full out on mile 16.
John Collison: Yes, yes. If you were...what do you think 20 year old Stan Druckenmiller today would be getting into or doing differently, as you just look at, or maybe this comes up in, as you give advice to, I know you talk to college students a bunch and things like that. But again, the investing game has changed a lot. And so maybe it made more sense to get into bonds back when you could do interesting things there, back when the markets weren't so wacky as they are today. You have a particular skill set, you're not going to learn entirely new domains at this stage. And so if you have a very sharp, very hardworking investor who is looking at what should they become an expert in to be really successful, where would you be steering them that is maybe different to where you play?
Stan Druckenmiller: Well, the first thing I tell them is, if you're not really passionate, if you don't love this stuff, go do something else. And I've hired guys with IQs 50 or 60 points higher than me who stink in my business, because...and by the way, they could be off inventing or starting new companies that could do very well. But I actually think the next 4-5 years are going to be tailored to the skill set that worked for me in the 80s and 90s, which was all sorts of macro chaos, and I would encourage them to learn all the asset categories and how they integrate. Not easy. If I was a tech investor, I would certainly be learning...we had the internet wave, we had the cloud wave, cloud doesn't look like it's over yet. But I would certainly be looking into blockchain very deeply, into the possible disruption it might take. But I think fundamentals are fundamentals. Look, when companies are losing money, capacity is always going to shrink and their margins are gonna look better in three years. When companies are over earning, their margins are going to come down in three years. I think all that stuff will be out there. I think the great thing about my original mentor, Spiros Drelles in Pittsburgh, was he made me focus on what moves the stock price. Like you can't just say, Stan, okay, this is a great company, and the earnings are great. He said, tell me how people are going to think differently in 18 or 24 months about the situation than they're thinking now. That would be my number one advice to the young peopl. Do not, do not invest in the present. The present is not what moves stock prices. Change moves them. And I want you to try and envision a different world in a year and a half from now and where these security prices would trade versus now, given the world you envision. That would be my number one advice to a young person getting into the business.
John Collison: Didn't that happen to a surprising extent during COVID? That...
Stan Druckenmiller: Yeah.
John Collison: people were all investing in the present where airlines will never make money again. Oh, actually, airlines are fine. A bunch of internet beneficiaries are the greatest stocks in the world. Oh, actually, maybe they're just kind of normal companies. But why...It kind of, it seems like the stock market was pretty inefficient over COVID. Why were people investing in the present rather than two years out?
Stan Druckenmiller: I think it's what you said earlier. I think a lot of new investors, particularly retail, came in, and they were rewarded immediately in the early parts of COVID. Supposedly, there's like 400 billion in retail in the market now that wasn't there two years ago. So they were rewarded immediately by buying Amazon and buying the stuff...huge, obvious immediate Peloton, COVID beneficiaries, but they'd never played the game. I didn't have...I don't have the nerves I used to have, but this was the was the best short selling period I've ever seen, the last year or two. Because never before were there such obvious over earners, like particularly brick and mortar retail. You see companies that don't grow for 15 years, and all of a sudden, and I'm not talking about Amazon, I'm talking about old brick and mortar companies, all of a sudden, the stocks have quadrupled. It didn't take a rocket scientist to figure out, two or three years from now, oh, people will start traveling again, companies will will overspend, all this stuff that typically happens. So I think COVID was a unique opportunity. I think the fact that all this new money came into the market made it even more unique and exaggerated in terms of opportunity.
John Collison: Is that a common way you make money in equities? Spotting mean reversion or noticing where people are maybe valuing the company based on last year's results, as opposed to the steady state performance of the business?
Stan Druckenmiller: I have a bias toward growth stocks. Luckily, not so big of a bias that I didn't ignore it the last year or two, but I think if you can envision a company that three to five years from now, is going to be in a much, much better situation than it is today, long term, that's my bias where to go. But yes, on a cyclical basis, I've always done what you said. Maybe because one of my first groups was chemicals. And they were really easy, John. When they were losing money, you were supposed to buy them because everybody shut capacity down the next two or three years, but people were still going to need chemicals. And when they made a bunch of money, this was when markets weren't efficient, they used to announce all these capacity expansions, so you knew what was gonna happen. I've taken those lessons forward 30 or 40 years and they still work. So yeah, I do a lot of counter cyclical stuff. But really, I'd say the biggest money I made in equities have been in growth stocks over time.
John Collison: And when you talk about your bias for growth stocks, is big tech getting kind of too cheap for you to not be in it, as you look at a lot of the GAFAs. I mean, they earn very large amounts of money, and so is that something that's starting to become attractive to you?
Stan Druckenmiller: Not yet. I'm just too bearish on the world to go there yet, although I will say that they've gotten too cheap for me for them to be my shorts anymore. They were widely regarded as over earning and over earners in COVID. And maybe they were early on. But it was so widely broadcast. The true over earners were things to me like retail, trucking cox, or today, ocean shipping companies. Just have these massive margins. I can envision a world where World Trade is not booming in two years, by the way. So I think it wasn't obvious. It was obvious who the overs were the first six months. All you had to do was go down the chain and pick them off the last year and a half. It's gotten much harder, because 80% of that set is already down to a place where I'd rather not play. And I don't have my sandwich. I don't have bonds to go to and just ignore that world.
John Collison: Yeah. And how about energy? You mentioned the world being short energy, how do you actually put that into...How do you actually trade that?
Stan Druckenmiller: We're there. I mean, it's been widely publicized, people looking at 13-Fs, by the way, which I would caution against, because that's old data. And in this case with us, it's true. Very nervous, because it's not the unique thesis it was six months ago in terms of looking out 18 months where these companies might be. But I think the reasons we're still there is we just see this thing as being more sustainable because of ESG and all the reasons we all know about, that it can last a while. And that doesn't seem to have been priced in the stocks. But it's not a classic Duquesne play because it's now become widely recognized. But I don't just sell something because, people talk about pain trade, I don't care about pain trade this or that. We think these companies are still cheap relative to what we see a year or two out. The big problem would obviously be if you have a horrendous worldwide recession, but we'll look for...we're looking for demand destruction in energy, but so far, we don't see it.
John Collison: Makes sense. Makes sense. Maybe to, to close out, if we go back to one other prediction, I don't think I'm cherry picking good predictions, I think you just had a lot of them. But obviously, you were warning, at this very conference in 2005, 17 years ago, you were warning about the prospect of a great financial crisis. And you were you were very bearish at that conference. And so, kind of like doctors or nurses use the pain scale, 1-10 in terms of what you're feeling, if we say 1 is everything's great, feeling super excited about the economy and the market just couldn't be better, and 10 is max on the bearishness scale in this context where maybe you were at a 9 back then when you were warning about this back in 2005. How would you describe where you are today?
Stan Druckenmiller: I'm glad you asked this, because this is my 45th consecutive year as a chief investment officer. And in 45 years, I've never seen a constellation while I was a practitioner, or frankly studied one, where there's no historical analog. So right now I probably have more humility, in terms of my views going forward, than I've had, maybe ever. But I would say, if I have an objection out there, in 2009, I made a statement inside the firm was, well, we won't have another financial crisis for 30 or 40 years. Because once you have one of these, everyone learns from it and we get discipline and it takes them that long to screw up again. The last one we had was obviously, '29. I'm not so sure I buy into all this stuff about bank balance sheets and this and that. What the central banks globally have done the last 10 or 11 years...I'm not predicting this, John, but it leaves me open minded to something really bad. So that's the guy on this shoulder we wee talking about earlier. The other shoulder is saying, this is an analysis harder than you've ever faced in 45 years. So please be open minded, because this is not a story we've seen before. So the ending is not as predictable as it has been in other parts of your career. 2005 was a no brainer, I thought. By the way, I didn't make much money '06.
John Collison: Why was it such a no brainer?
Stan Druckenmiller: Because I looked at a housing chart, and for 50 years, it went up like this. And then in five years, it went like that. And I knew that people had taken 800 million home equity loans out and spent it. And I knew that all this stuff was going to come back on the bank balance sheets, because they had securitized this stuff with CLOs and stuff, but they had done it in a way that it could come back. And I had a brilliant analyst from Lehman Brothers come in, sort of your story earlier, probably the best example of it, lay out the whole subprime thing for him. And he said, by the third quarter of '07, all hell's going to break loose. And by the way, by the time he left that meeting, over the next two days, I shorted everything to do with housing. And '06, I was wrong for six months, it drove me crazy. But the analysis was consistent. So the deeper we dug, the more confident we got.
John Collison: So, you said after the GFC, that we won't have another financial crisis like this for 30 or 40 years. Now, you're not predicting it, but you're just saying, you're not so sure. What could that look like? Is this tied to money printing? Is this a dollar losing reserve currency status issue? Is this another banking crisis? But, again, I know you're not saying this will happen, but as you think about the grim scenarios, what could they look like?
Stan Druckenmiller: I'm really not predicting this, but think of the 30s. A post asset bubble, just absolute destruction in buying power going forward, and then, do we have the Fed pump it all up again? And we get some kind of horrible sort of stagflation thing? Or do we actually get deflation? I hate to be a hedger, but somebody always asks, Is this going to end an inflation or deflation? I go, I don't know. 70% inflation, this was a year and a half ago, 30% deflation. They go, what do you mean, deflation? I said, Well, we've never had inflation because we were too close to the zero bound. That's why I was so angry at the Fed, worried about 1.7. Every deflation has followed asset bubble. And since the Fed has created the biggest asset bubble, and by the way, there's other central bank rhythm in history and the broadest, even though a lot of the errors have been led out of the balloon, it's so big, I just have to be open minded the consequences. So we've had two really bad ones in the last 100 years, the US in the 20s, and Japan in 89. They're still suffering. So, it could be just no growth and sideways for 15 or 20 years, like 66 to 82 in terms of the markets, or it could be something more pernicious, like we had in Japan. Frankly, I don't know. I'm just trying to be open minded.
John Collison: I am, you're reminding us, as you kind of talked about some of these scenarios, and you think we're maybe not being imaginative enough in our pessimism, and I think about your various predictions. I also enjoy reading Paul Singer's letters at Elliot, and he's always complaining about NIRP and ZIRP and the profligate policies of governments around the world. But it feels to me that macro watcher or macro investor, is kind of synonymous with macro pessimist. Why is that?
Stan Druckenmiller: Um, for some reason it's like, intellectually stimulating, but I would say one practical reason is, in bear markets, that's when macro make all their money, because that's when you have the, or used to have the biggest bond moves, and the biggest currency moves. This stuff really moves in chaos. So a macro investor sort of helps root for chaos, and we're all competitive fanatics. So you also outperform everybody on an absolute and on a relative basis. I think that's one. And I would also say that Paul and I have this same disease, which is, I started in the business of 76, the first five years were a bear market. I did well. I have a bearish bias. I know it. One of my jobs is to manage myself and know that that bias exists, but it does exist in me. And your listeners should be aware of that. So maybe all this pessimism I'm spewing isn't going to happen.
John Collison: Well no, but you're interesting, right, because you're bearish bias, but you're also perfectly happy going long equities, growth stocks, everything like that. And so you have plenty of options in a bull market.
Stan Druckenmiller: Yeah. And I, I frankly made a fortune from 82 to 87. I was a Ronald Reagan nut and I was wildly bullish, and I was bullish...
John Collison: And as you described earlier, you were massively up in 99.
Stan Druckenmiller: Yep. And, frankly, from 95 to 99, I did really well. Yeah, I, look, there was an old timer, most your listeners won't know this guy, Robert Wilson, one of the greatest short sellers ever. It's really cool to make money in a short, because it's different, but any great short seller will tell you they made 90% their money on the long side. The math is with you.
John Collison: Well, I think you've given me lots of reasons to sleep worse tonight, and new things to worry about, so that is exciting. But I do think it's very thought provoking that maybe we are not being imaginative enough about the things that could go wrong. And again, tying back to your story about the year 2000, when oil is up, interest rates are up, the dollar is up. It has not historically tended to portend well for the economy.
Stan Druckenmiller: I would also say that, two guys, Warren Buffett and Ken Langone that have done quite well, say never bet against America. So I think the audience has to keep that in mind, too.
Interestingly, one of the last (or at least more notable) times that Druck has disagreed with WEB (publicly) was on the strength of IBM’s business.
John Collison: Yes, though, that has always been true over the long term.
Stan Druckenmiller: Yes. Underlining the long term.
John Collison: Yes. Well Stan, listen, this has been an absolute pleasure. I have found this fascinating. And so, just really thank you for your time. And excited to see you at the next one.
Stan Druckenmiller: Thank you, John. And I think we're both happy to do anything for Ira Sohn. Their contributions have been immeasurable. So, appreciate it. Thanks, John.
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