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Hedge fund manager Stanley Druckenmiller comes out to say he sees trouble ahead

Sunday, March 10, 2013

Stanley Druckenmiller
Benedicte Gravrand, Opalesque Geneva: - American hedge fund veteran Stanley Druckenmiller came out of the woodwork recently. He spoke on Bloomberg TV to give his bearish stance, warn about an upcoming demographic bubble, and comment on the subsidization of equities, global monetary stimulus trends, and the short-term stance of politics and of hedge funds.

Another big storm

Druckenmiller is a forecaster rather than a historian.

Back in 2004, he saw a big storm coming when looking at the subprime market. He presented his negative outlook to two policymakers and a congressman, who did not agree with him. He later regretted not having gone public then. He is apparently making up for this now by “coming out of hiding” and announcing on Bloomberg TV last week that he is seeing a big storm coming, which would probably be worse than the 2008-2010 crisis.

The root of this upcoming storm would be in the demographic bubble, he says: “We are right at the first ramp up of this.” Entitlements, or transfer payments, went up from 28% in 1960 and 50% in 1994, to 67% now. Not only because of demographics, he adds, but because of the seniors’ powerful lobbies. But the demographic storm is just starting now. The current workforce is paying for the benefits seniors, he explains, and from about 4 or 5 workers per retiree now, there will be 2.4 workers per retiree by 2050. “By 2030, the average population in the United States is going to be older than the average Floridian right now,” he sums up. He does not know the timing, he notes, but it will certainly happen within the next few years.

Everything is subsidized

One of his pet peeves is hearing people on TV say we have to go into equities because they are so cheap relative to bonds. “Everything is cheap relative to bonds,” he points out, as indeed everything is priced at zero interest rate and subsidized. He, for one, does not believe equities are cheap. The demand in the current economy is unsustainable, what with a 9% deficit to GDP and a “huge debt on timer”, so demand will be lowered one way or another.

“If you normalise margins and you normalise demand, equities don’t look so cheap,” he told Bloomberg. He adds later that currencies is the one area that is not subsidized.

All central banks are doing the same thing

Japan is now committed to fighting real deflation and record trade deficit. It is doing what everybody else has been doing in the last 15 years, he states, and it is appropriate for them to do so. Their policy is not extreme, and it is very much needed. Every central bank in the world – except for Brazil, for now – is engaged in stimulus monetary policy, which is in fact modelled after the Fed.

“We’re not in a currency war, we are in a stimulation war,” he says. He is amazed that currency war talks started with Japan’s recent monetary actions.

Short termism

Three things that are not on the table this sequester, he says, are Medicare, Social Security and medicate. And it is because of short term politics. He also believes the U.S. is “in major need of major tax reform,” and suggests taking the corporate tax rate to zero and taxing dividends and capital gains at the normal rate.

He thinks that hedge funds' short term thinking is “just a manifestation of our entire society… whether it’s the Fed, the Administration, Congress… no one bothers to think about the long term anymore. Hedge funds are just one more manifestation of that.”

He is critical of the idea that one must invest in risk caskets because rates are zero: “they will rue the day one day. The music will stop.” Although not just yet.

He will probably “disappear again” but not before trying to bring to awareness the coming storm, he concludes. That will include talking to young people.

Background on Druckenmiller

Stanley Druckenmiller, who began his financial career in 1977, is the former Chairman and President of Duquesne Capital Management LLC, which he founded in 1981 at the age of 28. From 1986 to 1985, he also managed money for Dreyfus and from 1988 to 2000, he managed money for George Soros as the lead portfolio manager for Quantum Fund - while still managing the Duquesne Fund.

In August 2010, Druckenmiller shut Duquesne (with $12bn in AuM), saying he was tired of the stress of managing money for others and frustrated by his failure in the past three years to match returns that had averaged 30% annually since 1986. He converted the firm into a family office, which he still manages. George Soros, Carl C. Icahn, Chris Shumway, John Arnold and others did the same thing in the last few years (see Opalesque article: Managing other people’s money is no longer fun for some hedge fund managers).

Druckenmiller had an estimated net worth of $2.5bn as of September 2011 and was ranked by Forbes as the 149th richest man in America. He is reported to have made $260m in 2008. As for his involvement in U.S. politics, he was said to have supported Gov. Chris Christie ahead of the 2012 presidential elections.

For his 1992 book called The New Market Wizards, Jack Schwager interviewed Druckenmiller. He told Schwager that he relies a lot on technical analysis and that he never uses valuation to time the market. To do that, he uses liquidity analysis and technical analysis. When asked what he had learned from Soros, Druckenmiller said: “the way to build long-term returns is through preservation of capital and home runs. You can be far more aggressive when you’re making good profits.” <

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