Everyone Will Be Wiped Out In 21 Days : Stanley Druckenmiller

Stanley Druckenmiller - Back in late 2003, I remember we had 9% nominal growth 7% real growth, the economy was very, very strong. But we had 1% interest rates. And we also had a tag on them, that they were going to remain there for a considerable period. And I just felt at the time that fed policy was unnecessarily easy. They wanted to ensure that the economic recovery got enough momentum. I was more fearful, because historically, I've done a lot of work analyzing central banks and subsequent activity. And we've had problems in the past when monetary policy was too easy. And I just thought it was unnecessary. I was worried that some trouble might be brewing.
But I didn't, I couldn't put my finger on what it was I just knew that we're running an unnecessarily loose monetary policy, and it may have consequences down the road. And that's kind of how I feel now.
I think we're taking a terrible risk reward in terms of zero rates. Everyone keeps asking me, Well, how is this going to manifest itself? I don't even know whether it is going to manifest itself. I just know that the rates are unnecessary. And again, it's sort of the same language, oh, the risk of going too early is greater than going too late. We need to ensure the recovery. And I'm more worried about things down the road than looking in the near term. And I think a lot of the dialogue about this is far too myopic, rather than trying to look at things from a longer term perspective. So are you saying whether they raise in June or September isn't the issue, it's the fact that rates have been so low for so long, that's the real problem.

I don't want to describe this as a real problem. What I'd like to describe is a situation where we went through a financial crisis, immediately as that financial crisis unfolded, the Fed took dramatic and aggressive steps, which were hindsight, were about as close to perfection as you could achieve. I say that because we were in the initial stages of a balance sheet recession, and we have one in the 30s. That turned into a depression. So the Fed took aggressive measures to rebuild the consumer, and, frankly, the whole country's balance sheet. So the reward was tremendous if you could get asset prices back up and not have the meltdown in economic activity you had in the 30s. And there was very little risk. So it was sort of a no brainer. Today, if you look at the situation, stock prices, household net worth per capita are at record highs, by the way, they went to record highs in 2013. And they've been going up for two straight years. So I'm not sure exactly what the Fed is trying to achieve. In terms of the reward here, particularly since if you look at what is going on, we've had a tremendous amount of debt growth, particularly in the corporate sector. And unfortunately, the productivity of that debt, if it was measurable, I would apply to say, isn't an all time low. Why do I say that? Because there's good debt growth, and there's bad debt growth. Good debt growth, is when you borrow money, and it goes into the real economy. You do capital spending, you build businesses, but by most calculations, almost 98% of the current debt growth has gone into m&a
corporate buybacks, by the way, at record prices, leveraged buyouts, so where it's going is in financial engineering. And I can't prove it. But I would pretty much feel very confident that a trillion dollars in buybacks and dividends in the last year and 4 trillion is the forecast this year for m&a Is the job reducer and an atomic reduce. Sure. So I don't know exactly what they think they're getting out of the 0% rates. Well, these are CEOs who are worried who know that they have to answer to demanding shareholders possibly activist investors. Larry Fink has come out and said these companies need to reinvest need to grow and it's not what they're doing.

Yeah, well, we live in a culture where you go through various periods of something being in fashion and something being out of fashion activism is in fashion right now, listening to activists is in fashion. But I would say, if you're the Fed, you have to take that into account. And if what you're getting for zero rates is just a bunch of financial engineering, rather than demand. And by the way, you're getting a real leveraging of an economy that never really de leveraged the last time, you're setting up the possibility, the possibility of another asset bubble investment bus. Now, I want to be very clear, I'm not forecasting an asset bubble investment bus two or three down years down the road. What I'm saying is, if you're a policy maker, the risk reward is so skewed, right now, because the zero rates aren't getting you anything substantial, in my opinion, in terms of economic growth, as opposed to the reward when they went into this stuff five or six years ago, but the debt growth is accelerating.

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