Stanley Druckenmiller (Trades, Portfolio) is an iconic investor and the founder of Duquesne Capital Management, which transitioned to a family office in 2010. His is perhaps most well known for his idea to short the British pound back in 1992, along with George Soros (Trades, Portfolio) at the Quantum Fund.
In a rare 2023 interview with Norges Bank Investment Management at its annual investment conference, Druckenmiller discussed his thoughts on the economy and how best to invest during uncertain times. I have summarized this talk and provided some of my own commentary on the subjects; let’s dive in.
Unprecedented times
Druckemniller says he likes to look at history and use lessons from the past to inform his macroeconomic forecasts. He says this is a particularly difficult period to analyze due to the free money for the past 11 years, which caused a broad asset bubble, followed by jacking up rates 500 basis points in 12 months.
In May 2023, the Federal Funds Rate was raised by 25 basis points to the 5% to 5.25% range. This is up massively from the less than 1% level between 2020 and early 2022. The effective Federal Funds Rate is the weighted average of all the rates charged by banks to borrow to other banks, as per the chart below (which is only showing up to April 2023 at the time of writing due to data lag). This rate hike has increased the borrowing costs for those with mortgages and floating-rate debt. Druckenmiller believes we will see a “hard landing” later in 2023, due to the impact of rate hikes.
How to invest
Druckenmiller says he tends to invest in around six “asset buckets,” but he believes discipline is the key to success. It's best to “not to play” until you see a “fat pitch... "When you really see the ball, swing big... and when you don’t see the ball, don’t swing."
This is similar to Warren Buffett (Trades, Portfolio)’s philosophy (also using baseball as an analogy) related to waiting for the right pitch (investment opportunity) to hit the sweet spot.
Druckenmiller tends to use do both fundamental analysis of a company’s revenue, earnings, cash flow etc. as well as technical analysis of the charts. He looks for opportunities that are strong on both factors.
Interestingly enough, Druckenmiller says he is more in the camp of investing or trading if he has a “strong idea” and then doing an in-depth analysis after. This is the opposite of most mainstream value investing advice, which suggests deep analysis before investing. I believe Druckenmiller's strategy works for him due to his years of experience in pattern recognition and the fact that some of his investments are momentum trades. He is also careful not to “get married” to his ideas, and if the analysis says he is wrong, he sells.
Shorting the U.S. dollar
Druckenmiller admits he is short the U.S. dollar, which is an interesting trade. The U.S. dollar previously saw major strengthening between May 2021 to a peak in October 2022 against most other currencies, including the Euro and British Pound.
The U.S. dollar became the world's reserve currency after the Bretton Wood agreement was signed in 1944. This was a long time coming as World War 1 and War World 2 had cause many Allied nations to deplete their gold supply through the purchasing of weapons and supplies from the U.S. The prior global superpower, the U.K., had gotten into debt thanks to the war, and this paved the way for the U.S. to become the global superpower. According to BIS, approximately half of global trade is invoiced in U.S. dollars.
However, recently there have been signs of a possible de-dollarization, which could impact the U.S. dollar's place as the global reserve currency. I would point out that the U.S. hiking interest rates even as many other countries, even in Europe, held back and embraced inflation further contributed to the influx in demand for the U.S. dollar from an investment perspective, exacerbating the strong dollar problem and making having to buy the currency for trade more painful for other countries.
China has announced deals with Brazil and Russia to do trade in local currencies as opposed to the U.S. dollar. The Reserve Bank of India also approved special Rupee accounts with central banks from 18 countries, including Kenya, Uganda and Tanzania. This would enable these countries to settle payments directly in India Rupees as opposed to U.S. dollars.
By diversifying away from the U.S. dollar, countries also benefit from not being vulnerable to U.S. sanctions. For example, since February 2022, the U.S. has implemented a series of sanctions on Russia’s largest private bank Alfa Bank and largest financial institution Sberbank. This sanction freezes any assets which touch the U.S. financial system. Therefore it looks are though other countries may be (understandably) fearful of the power the U.S. has over its dollar assets, no matter where those assets are located in the world.
Druckenmiller admits to being long gold, which is an obvious trade given de-dollarization. Gold coins were first cited as money back in the year 550 BC, though it was certainly used much further back than that. Gold was used by the Egyptians, the Romans and many great ancient civilizations.
According to the International Monetary Fund, gold still accounts for around 10% of the reserves held by central banks worldwide. Therefore if the U.S. dollar declines, more funds could transition into gold. This is a classic TINA (There Is No Alternative) scenario. In previous talks, Druckenmiller has mentioned that other “safe currencies” such as the Swiss Frank are “too small." He says his fixed income position is minimal and there are still more equities he likes.
Assuming a “hard landing” and a “bad recession," Druckenmiller is focusing on “not losing money." This may seem obvious but it really speaks to a conservative style. In addition, Druckenmiller cites mathematics as a key influencing factor. If a stock falls 50%, it must increase by 100% just to get back to even.
Moving forward, Druckenmiller believes it's best to be patient as there will likely be some “rocky roads ahead." He wouldn’t be surprised if the stock market is not higher in 10 years, which would indicate a lost decade period. However, there are still opportunities to make money in individual assets and take advantage of the “big swings." This would likely be similar to the 1976 to 1978 period.
Final thoughts
Stanley Druckenmiller (Trades, Portfolio) is an incredible investor and one of the few who publicly admits to which type of investments he is doing outside of the SEC-mandated 13F filings. His strategy is also fairly rare in that he uses both fundamental and technical indicators as opposed to just one or the other. Druckenmiller says he “hasn’t seen this movie before” with regards to the current state of the economy, but has faith there will be lots opportunities thanks to stock market volatility.
