1/ My notes from the recent interview with Stanley Druckenmiller -
2/ Druckenmiller is probably one of the greatest macro investors in history. He had 30 consecutive up years with only 5 down quarters out of 120.
3/ Historically, Druck's strategy was based on patterns between price action and news.
4/ Every 15-20 years, there is a regime change where a new relationship between price action and news emerges. Recently in currencies this is risk on/risk off but before that it was interest rates.
5/ Druck's strategu focused on slugging percentage whereas most money managers focused on batting percentage. This meant they would make thesis on the current regime, pricae action and news and as momentum behind that thesis built, they would pile in.
6/ Normally Druck would go in with about 1/3rd of his target position and then when he got a positive signal would pile in the rest of his position.
7/ More recently, this strategy got distorted by the algos because the algos were based on historical data not the current regime so it became hard for Druck to see what was happening.
8/ Druck thinks freestyle chess with humans aided by machines is the future of how money managers will work with only a few really talented managers being better than just the computers alone.
9/ He also talked about the current macro dilemma
10/ Interest rates are low which is making debt explode and if we don’t normalize, debt will accelerate and we will have bigger problems down the road. However, if we do, it could cause a very painful deflationary recession.
11/ He thinks that The Fed should raise interest rates every meeting until markets react then back off to try and gradually get to a higher interest rate environment without triggering a recession.
12/ Druck went short earlier this year and got his nose bloodied. His working assumption is that at some point, one of these interest rates hikes is going to be a trigger. The European Central Bank, Fed or another large central bank could start it.
13/ As Fed starts to raise interest rates, likely to lead to big boost in US equities initially because worst malinvestment with easy money was in emerging markets so that money should flow into US equities as actors get out of emerging markets.
14/ However, eventually the liquidity crunch will hit US and we will find out who has been swimming naked. There are more zombie companies right now that will not survive the next cycle than at any time in history.
15/ If Trump gets re-elected or a far left populist candidate gets re-elected things could get really bad for US by 2024 when world loses trust in American system and US entitlement liabilities really start to get crazy around the same time.
