Stanley Druckenmiller Top Insights! FED, Euro, Credit, Bubbles and Market Lessons

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Stanley DruckenmillerA super trader and legend Stanley Druckenmiller, gave a speech in January at the Lone Tree Club which was released now.

As you know Stanley Druckenmiller is a person we have featured in our Gurus list. He is a person we would love spending an year or more with, if we just had the chance. He is so insightful that we would put him in the top 10 people on the planet to learn from and be mentored by. He is one of the best traders and analysts, a person who just broke the code of capitalism and markets. Stan Druckemiller was George Soros’ partner when they bet and broke the BOE back in 1992. Stan’s Duquense Capital Management now DUQUESNE FAMILY OFFICE LLC  achieved the impossible annualized returns of more than 30% during the 30-years active trading career period of Mr Druckenmiller.

$1,000 invested with Stan when he started would be worth $2.6 million for a 2600% return!

Here are the key points more from his speech! A must-read for every serious trader and investor but also helpful for every businessman or person who doesn’t want a headache in case the liquidity-fueled FED, ECB, BOJ bubble comes to an end.

Stan was a pig. Bet Big. Diversification is Misguided Concept

“The first thing I heard when I got in business was bulls make money, bears make money and pigs get slaughtered. I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching in business school today is probably the most misguided concept everywhere.”

Only maybe one or two times a year do you see something that really, really excites you… and if you really see it, put all your eggs in one basket and then watch the basket very carefully.”

He goes on to show some great examples from his career but he also had this warning.

“I’ve thought a lot of things when I’m managing money with great, great conviction and a lot of times I’m wrong. And when you’re betting the ranch and the circumstances change, you have to change, and that’s how I’ve managed money.”

This is someone George thought him. When he Stan said George Soros about his idea to short the pound with 100% of their hedge fund’s capital: “George, I’m going to sell $5.5 billion worth of British pounds tonight and buy deutsche marks. Here’s why I’m doing it, that means we’ll have 100 percent of the fund in this one trade.” And as I’m talking, he starts wincing like what is wrong with this kid, and I think he’s about to blow away my thesis and he says, “That is the most ridiculous use of money management I ever heard. What you described is an incredible one-way bet. We should have 200 percent of our net worth in this trade, not 100 percent. Do you know how often something like this comes around? Like once in 20 years. What is wrong with you?” So, we started shorting the British pound that night. We didn’t get the whole 15 billion on, but we got enough that I’m sure some people in the room have read about it in the financial press.

Central Banks and Liquidity Drive the Markets (Not Earnings or conventional measures)

Speros Drelles’s first mentor, investment chief at Pittsburgh National Bank, taught Stan that earnings don’t move the market. Its the FED and the liquidity changes. And whatever Stan does he focus on central bank actions, and the moves of liquidity. He believes analyst wrongly focus on conventional measures such as earnings and others. Its the liquidity that drives the markets. Today we have the FED, BOJ, ECB all-in in the liquidity game.

Stan made most of his money trading what the central banks are doing. Going back to the lesson he learned from his mentor Speros Derlles, Stan Druckenmiller notes that probably 80% of the “bib, big money” he’s made has been on an investment somehow related to central bank polic

Most of the money he made are from central bank actions. The FED’s mistake and bubble 2007-2008 is like a deja vu for him.

FED Building Stan Druckenmiller

“I’m experiencing a very strong sense of deja vu.” “…The Fed is absolutely obsessed with Japan … I’m sure you’ve heard the word ‘deflation’ more than you’d like to hear it in the last three or four years. We’ve never had deflation.

Despite Stan’s worries, he said that he was not “net short” stocks at the moment.

“You have to be on alert to that ending badly. Is it for sure going to end badly? Not necessarily. I don’t quite know how we get out of this, but it’s possible,” he pointed out.

Mr Druckenmiller doesn’t know how it will end but there is a high change to end very badly

He is very worried about the eventual impact of the Fed’s very loose monetary policy on the economy. He thinks this bubble could go crazy and then crash the economy.

“The problem with this is when you have zero money for so long, the marginal benefits you get through consumption greatly diminish but there’s one thing that doesn’t diminish, which is unintended consequences.

“I know that it’s so tempting to go ahead and make investments and it looks good for today, but when this thing ends, because we’ve had speculation, we’ve had money building up for four to six years in terms of a risk pattern. I think it could end very badly.”

He thinks the EURO will reach 0.8 to the USD in 1-2 years. He is bearish and the bear trend is active. 

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

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

EURUSD Probably Going down to 0.8 Stanley Druckenmiller

Source: Rightedgesystems + Octafinance Interpretations

The Eurozone could break and the Euro disalocations

I think the euro needs to continue to go down because eight of those countries have such a cost disadvantage versus Germany right now. It’s about 40 percent because they haven’t been behaving themselves since the euro was put together that you have severe outright deflation not like pretend deflation like we talk about on the board. It’s real deflation. And they’ve got sclerosis.

I can’t see Europe surviving without the euro going down to somewhere in the mid-80s. And if you think that’s a ridiculous forecast, when I restarted Duquesne in 2000, the euro was 82. Now, that was extreme. But let me ask you this, think of the Europe and United States back in 2000 and think of them today. Do you think Europe has made incremental gains versus the United States or declines? So, to me it’s not unreasonable to see the euro continue to go down.

The other thing I’ll say, I do analyze currencies, and it would be almost unprecedented to have a 10-month currency trend. Because all the dislocations happen when your currency is overvalued and it’s up long enough, it takes years to unwind those dislocations. And it’s hard to argue the euro is not in a trend. It’s down from 140 to 117 [it was at 117 at the time, now 1.07]. And using the rule of time, I don’t think it’s unreasonable to expect it to break 100 sometime in the next year or two.

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

Stan Druckenmiller biggest mistake was how how he played the tech bubble 

During the Q&A Session after Stan’s speech, he was asked what was his biggest trading mistake.

He shared how he knew that tech equities were way overvalued in 1999, so he shorted them and lost $600 million, but then went long on tech to end up 35% the year. Stan said he still knew things were crazy overvalued, but he eventually bought in just before the tech boom crash in 2000, and lost almost $3 billion.

To view the full interview

Update:  Stanley Druckenmiller Believes Greece Will Leave The Euro-Zone And Likes China.

Watch the wonderful 40 minutes interview with Stan about the markets and the world.

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