July 21, 2023
By Steve Blumenthal
“I am so tired of being a bear.”
– Stanley Druckenmiller, Chairman & CEO of Duquesne Family Office
Stanley Druckenmiller is a well-known American investor and hedge fund manager whose investment style is often described as macroeconomic and global macro investing. In early June, he spoke with Bloomberg’s Sonali Basak at the Bloomberg Invest New York 2023 conference.
I spent some time earlier in the week listening to the interview and want to share some of my high-level takeaways with you. Honestly, I wanted to listen to help my own understanding as much as yours because it’s been difficult for me to watch the stock market continue to rise smack in the face of the most aggressive Fed rate hike since the early 1980s. I vividly remember the tech bubble in 1998-2000 and what followed when it burst. It sure feels like that again today. I don’t believe it’s different this time—but, of course, I could be wrong.
Before we dive in, here’s a brief summary of Druckenmiller’s investment approach:
- Macro Investing: Druckenmiller’s investment strategy is focused on analyzing and predicting macroeconomic trends and events. He pays close attention to global economic indicators, interest rates, inflation, and other significant macro factors that can impact financial markets.
- Top-Down Approach: Using a top-down approach to investing, he starts by analyzing the overall macroeconomic environment before narrowing down to specific sectors and individual companies. He seeks to identify big-picture trends that can lead to significant market moves.
- Flexibility: One of Druckenmiller’s strengths is his ability to adapt quickly to changing market conditions. He is known for being flexible and making bold moves based on his analysis of macro trends. He’s not afraid to take large, concentrated positions in the market when he believes there’s a strong opportunity.
- Risk Management: While he is willing to take on significant risks when Druckenmiller sees a compelling opportunity, he’s also very focused on risk management. He emphasizes protecting capital and cutting losses when necessary.
- Long/Short Positions: Druckenmiller may take both long and short positions in various asset classes, including equities, fixed income, and currencies, depending on his macroeconomic views. This allows him to profit from both rising and falling markets.
Druckenmiller is a self-made billionaire. He gained prominence for his impressive track record, particularly during his tenure as the lead portfolio manager for George Soros’ Quantum Fund. He achieved remarkable returns during the 1980s and 90s and since. In 40 years, he’s never had a single losing year.
Characteristically, when he feels he is wrong on a trade, he’s quick to cut his losses, and when market conditions change, he’s quick to change his view. Overall, he is patient, open, and flexible.
There are a handful of exceptional global macro thinkers/fund managers: Felix Zulauf, Dr. Lacy Hunt, Ray Dalio, Paul Tudor Jones II, David Tepper, Paul Singer, and Bruce Kovner, among select others. Stanley Druckenmiller is one of the very best. He has a deep understanding of the global macro system and the important bit players in the game. When he speaks, I take notes.
I thought Druckenmiller’s Bloomberg interview was excellent. He addressed the current state of government debt and the challenges it presents for our economy, as the rising costs will crowd out better uses of capital. He also shared his thoughts on the long-term debt and entitlement problems we face and advised that investors should not trade on it in the short term.
So, grab your coffee and find your favorite chair—or put your sneakers on, pop in those headphones, and listen to the full interview (linked below) while you get some exercise. You’ll find my notes below. I hope you find them helpful.
Here are the sections in this week’s On My Radar:
- Stanley Druckenmiller June 2023 Bloomberg Interview
- GMO 7-Year Real Asset Return
- Random Tweets
- Personal Note: There Is Power In The People You Surround Yourself Wit
- Trade Signals: Investor Sentiment Extreme
(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
Stanley Druckenmiller June 2023 Bloomberg Interview
On the whole, Druckenmiller is worried about the long-term fiscal situation in the U.S. due to rising entitlement spending and debt. However, he says this is a long-term problem, and investors should not trade on this in the short term.
Here’s the long-term picture, according to him:
- While the officially reported U.S. debt is around $31 trillion, the true size of government debts, including entitlement obligations like Social Security and Medicare, is around $200 trillion. If you were any corporation in America, you would report your debt as $200 trillion.
- Entitlement spending—mainly Social Security, Medicare, and Medicaid—already makes up around 70% of the federal budget, but that percentage is rising rapidly due to our aging population and higher healthcare costs.
- The high debt levels and rising interest rates will make the interest on the debt a huge expense for the government, crowding out other spending and private investment.
“America is an amazing country with an amazing system,” he said, referencing the innovation we’ve led the world in since 1980: PCs, the internet, the cloud, mobile phones, and now generative AI. At the same time, he noted, we’ve been the world’s reserve currency. And we’ve been eating so much seed corn lately (i.e. piling on debt, printing money) that he’s worried about the future.
- Both political parties say that touching or cutting entitlements is off the table, despite the fact that it’s already such a high percentage of the federal budget and only going to keep growing. Not ever cutting them, he says, is a fantasy—or rather, a lie. It’s a matter of when we cut them, not if. The longer we wait, the more the debt piles up.
- Right now, the interest expense is about 2% of the GDP and about 6% of outlays. The CBO estimates the interest expense will grow to 27% of outlays by 2050.
- If those estimates are correct, entitlements and interest expenses alone will equate to 100% of all taxes by 2040 and 117% by 2050. That leaves no room for defense spending, running the government, funds for the disadvantaged, or anything else.
- He believes we have two options: (1) Raise all taxes by 40% immediately and forever, or (2) Cut all spending by 36% immediately and forever.
- Higher taxes reduce the amount of money available for private investment, which has fueled innovation and growth in the U.S. economy. Rising interest expenses on the debt will consume a huge portion of the federal budget, crowding out other spending programs and private investment. The high level of government borrowing reduces the amount of capital available for private businesses to invest and grow.
Think of it this way: If more of your income goes out of your pocket in the form of taxes, you have less money left over to invest. That steals from your future and it steals from future innovation your capital may have enabled. We’ve borrowed from the future, and while the debt problem is bad, with the promised entitlements, the problem is bigger than most have been led to believe. This is happening to all of us. Collectively, the problem weakens our society. Most developed countries have a similar problem.
For the investors out there, he says, “This is the tsunami out on the horizon.” Don’t trade on this in the short term. He sees no current investment “fat pitches” as “there are many shoes to drop.”
On the asset bubble:
- There’s a 500-year history of asset bubbles that is well-documented in the book The Price of Time. Every time there’s been a significant asset bubble, economic trouble has followed. We currently have the biggest, broadest asset bubble ever.
- “When you have 11 years of free money, people do stupid things. All you have to do is look it up and see somebody paid $80 billion for Dogecoin, which was invented as a joke. I mean, that can only happen in the world of free money.”
- This was arguably the most disruptive economic period we’ve had since the late 1800s, and yet there were no bankruptcies until recently, which tells us there’s a lot under the hood. Silicon Valley Bank and Bed Bath & Beyond are likely just the tip of the iceberg.
While Druckenmiller has been bearish for some time, he has not changed his view that a “hard landing” recession is still likely by the end of 2023.
- He expects corporate profits to fall by 20-30% and credit tightening in the next 6-9 months as the Fed continues to raise interest rates and tighten.
- He thinks some areas, like AI and Nvidia, could still do well even in a recession if they have sustainable earnings growth. But many AI startups will likely not survive.
Overall, he recommends investors stay cautious and wait for better opportunities to emerge as market conditions and liquidity change in the next 8-24 months. He does not have any high-conviction trades currently.
In fact, Druckenmiller has never had a down year in his 40-year career, but he’s not sure if he has actually made money on his short positions. As he shared, shorting can be difficult, and the odds are against the short seller. He said that when he shorted internet stocks in 1999, he lost $600 million in just three weeks, covering his shorts at a huge loss. This was a big lesson in the risks of shorting.
He still shorts stocks based on his economic forecasts and the situation he expects in 12-18 months, but he acknowledges that he’s been wrong many times before and could be wrong again. His approach is more about knowing when not to make big bets rather than timing the market perfectly.
Following is the link to the video interview. If you process things like me, you might want to digest the above notes, then put on your walking shoes and listen to the entirety of the interview.
Bloomberg’s Sonali Basak and Stanley Druckenmiller at the Bloomberg Invest New York 2023 conference.
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
GMO 7-Year Asset Class Real Return Forecasts
According to GMO, Emerging Value has the highest potential return profile for Stocks. Emerging Debt has the highest return profile for Bonds. The U.S. Large Cap Equities has the lowest return profile for Stocks at -2.6% per year over the coming seven years. Of course, no guarantees.
In case you missed it, following on valuations.
CMG’s Brian Schreiner asked me to walk through the most recent OMR valuation report. Click on the photo to listen to the Podcast (21 mins).
(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)
If you are not signed up to receive the free weekly On My Radar letter, you can subscribe here.
Random Tweets
No Random Tweets this week.
Personal Note: There Is Power In The People You Surround Yourself With
I remember the words framed on the wall above our kitchen table: “Make new friends, but keep the old. One is silver, and the other is gold.” Mom put the sign there and made sure us kids would think about its message often. I’m sure you know it too.
It’s simple but has big meaning—particularly when faced with loss and perspective.
Susan and I were up late last night. It had been a good week of coaching for her but an exceptionally sad day yesterday. We celebrated the good, drank wine, and we cried.
A few months ago, Susan got a call from the mother of a former player on Susan’s girls’ team, both of whom have stayed in close contact with Susan. The player was one of those kids that advanced quickly from the third team to the second team to the first. She just finished her freshman year in college this spring. In this phone call, the mom asked Susan to look out for her daughter. The lung cancer the mom believed she had beaten had returned, and she wanted to make sure her daughter had Susan and other guardians in her life just in case things took a turn for the worse.
Susan spoke with both the mom and daughter separately last week. The mom was on a new experimental drug. Spirits were high, everyone was optimistic, and the daughter told Susan not to worry. “Mom’s a fighter,” she said. But the fight ended yesterday afternoon. An infection of some kind took hold, and her vital organs shut down.
Life. This one—this friend—was gold.
Amid our grief, we talked about Susan’s coaching, specifically about the seniors on her high school boys’ team. Training went well this week, and the vote for captains will come soon. I told Susan how much I love what she is doing and how proud I am of her.
A little bit more wine, a few more tears.
We were quiet for a bit, and then Susan pulled up three short Instagram videos. They were perfect, and I want to share them with you.
This first was simply beautiful—about what a great captain should look like (make sure your volume is on!):
The second featured basketball great Dawn Staley talking about love and allowing failure:
The third video was Coach Jay Wright discussing attitude and being prepared for life:
Earlier this week, I hosted clients and several institutional money managers at—a large dinner for 18. The conversations were fantastic. Some new friends and some old . . . some silver and some gold.
Ever forward!
Wishing you the very best,
Steve
Trade Signals: Investor Sentiment Extreme
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Subscribers can find the chart by clicking the log-in button below. If you are not a subscriber and would like a sample, reply to this email “send me a sample Trade Signals letter.”
Click on the “Subscribe to Trade Signals” picture to log in or sign up.
TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
TAMP Advisor Client Webiste – www.cmgwealth.com
If you are not signed up to receive the free weekly On My Radar letter, you can sign up here. Follow me on Spotify, Twitter @SBlumenthalCMG, and LinkedIn.
Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
IMPORTANT DISCLOSURE INFORMATION
This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing, and transaction costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice.
Investing involves risk. Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CMG), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CMG. Please remember to contact CMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CMG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.
No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, has not been independently verified, and does not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods. See in links provided citing limitations of hypothetical back-tested information. Past performance cannot predict or guarantee future performance. Not a recommendation to buy or sell. Please talk to your advisor.
Information herein has been obtained from sources believed to be reliable, but we do not warrant its accuracy. This document is general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, or other such purposes.
In a rising interest rate environment, the value of fixed-income securities generally declines, and conversely, in a falling interest rate environment, the value of fixed-income securities generally increases. High-yield securities may be subject to heightened market, interest rate, or credit risk and should not be purchased solely because of the stated yield. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). Investment-grade investments are those rated from highest down to BBB- or Baa3.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professional.
Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.