June 24, 2022

By Steve Blumenthal

“Do not, do NOT invest in the present; the present is not what moves stock prices, change does.”

“It’s not about whether you are right or wrong, but about how much you make when you are right, and how much you lose when you are wrong.”

– Stanley Druckenmiller, investor, hedge fund manager, and philanthropist

Stanley Freeman Druckenmiller is an American investor, hedge fund manager, and philanthropist. He is the former chairman and president of Duquesne Capital, which he founded in 1981. At the time of closing the fund in 2010, Duquesne Capital had over $12 billion in assets. From the late 1980s to 2000, he was the lead portfolio manager at George Soros’s Quantum Fund. Stan’s track record? Approximately 30% per year. Never had a down year.

Our collective access to information is amazing. This week’s OMR highlights a must-listen interview with Stanley Druckenmiller on the state of the economy, the Fed, and asset markets (stocks, bonds, crypto, gold, currencies, etc.). Below, I share with you my select notes and provide a link to the interview held earlier this month at the Sohn 2022 virtual conference.

Grab that coffee and find your favorite chair. This week’s post is a good one. Hope you find it helpful.

If you are not signed up to receive the free weekly On My Radar letter,
you can sign up here.

---

Stanley Druckenmiller

Zulauf, Dalio, Grantham… The theme of what the great investors think about the macro-outlook and how they are investing continues. As you listen to the Druckenmiller interview, I encourage you to step back and take in the information with no emotion. See it as data and think in terms of probabilities. Also, consider the opportunities that will present. One doesn’t need a bull market to make money. It’s a question of investment positioning and avoiding the really big mistakes. That’s what will come through when you listen to Stan. My notes on his insights follow.

Steve’s Summary Notes:

Stan said the biggest surprise was the slowness of the Fed’s response to combat inflation.

Notable comments:

• “It’s highly, highly probable that the bear market has a ways to run.”
• “It’s very hard for me to say that the probabilities favor a soft landing. Indeed, I think the signals aggressively point to a hard landing.”
• “We’ve never had a soft landing after inflation has got above 4.5%.” “It’s a real longshot.”

Two statistical records for context:

1) Once inflation gets above 5%, it’s never come down unless the Fed Funds rate is higher than the CPI (consumer price index). Druckenmiller thinks inflation will come down without the Fed Funds rate being higher than the CPI. (SB here: at the time of this post, the current Fed Funds target rate is 1.50% to 1.75% and CPI is 8%. We have a ways to go.)
2) Once inflation gets above 5%, it’s never been tamed without a recession (emphasis mine).

Stan believes this record will remain.

“Given the extent of the asset bubble and the destruction in the markets, given what’s going on in Ukraine, given the zero-COVID policy in China … I pretty strongly assume we’re going to have a recession sometime in ’23.”

The Market as an Economic Indicator

• Druckenmiller looks at industries that lead the economy (housing, retail, transportation, etc.) and he listens to company quarterly calls, then performs a bottom-up analysis of these leading economic industry companies. Are they turning up or down? He uses that information as an indicator to make decisions.
• Today the homebuilding industry is down 50% despite good fundamentals; trucking is down 40% despite record earnings; retailers are down.
• He concluded, “There are signs that there is economic trouble ahead.”

The Bond Market

• The bond market hasn’t signaled anything in the last decade because the central bank has manipulated the prices of bonds
• One of the advantages of using the stock market as an economic indicator is that it doesn’t get tainted like the bond market

New Tools, New Tool Kit

• “Things are a lot harder now because we are now getting definitive signals that the economy may be weakening, particularly on the front end. While I’m not comfortable owning bonds, I’m much less comfortable being short-fixed income to the degree I was three to six months ago when it looked like a much better risk-reward.”

On the Dollar

• “I’ll be surprised if in the next six months I’m not short the dollar” because of extensive tightening by the Fed.” (SB here: Higher US interest yields relative to other developed country yields have resulted in an inflow of foreign capital into the dollar. You can find several dollar charts in the Trade Signals section. The dollar has been in a bullish uptrend. Stan’s saying that run may be coming to an end and he is looking to short the dollar.)

Crypto’s Effect on Other Asset Classes

• He expects crypto to affect other asset classes
• Sees a strong correlation between crypto and NASDAQ
• Will be surprised if blockchain isn’t a real force in the economy in the next five to ten years

Bitcoin vs. Gold

• In the bull phase of irresponsible monetary policy and inflation, choose BTC
• In the bear phase of irresponsible monetary policy, choose gold
• “If I thought we were going to have a bear market, stagflation type of thing, I would want to own gold”

Work Ethic

• Stan believes passion fuels work ethic

Mobile Investing

• He thinks it’s like a blinking slot machine game, getting people involved for the wrong reasons

Conviction and Being “Hot & Cold”

• Druckenmiller doesn’t believe in heavy diversification; likes to be highly concentrated or positioned in his highest-conviction ideas
• He said, “Sizing is 70–80% of the equation” (sizing of a position)
• Believes in hot and cold streaks (just like in baseball or any other sport/profession). Stan turns up the risk he takes when he is hot, and eases back when he’s cold (humbles himself)

Stan’s Advice to a Young Investor

• If you don’t love this stuff, don’t do it
• Learn all asset categories and how they integrate into the bigger picture, look deeply into blockchain
• “Do not invest in the present. The present doesn’t move stock prices, change does.”

Investment Inefficiencies

• There are so many obvious over-earners. Specifically in brick-and-mortar companies.
• The homebuilders are down more than 50%. (That’s telling us something about the economy.)
• Stan said he can envision a world in which global trade isn’t blossoming in two years.

Stan has a bias toward growth stocks

• Big Tech – Druckenmiller is too bearish on the world to go into big tech right now, but big tech stocks are too cheap right now to short sell

Energy

• “We are looking for demand destruction in the energy world, but we don’t see it yet.”

Stan’s Market “Pain Scale” and Possible Scenarios

• Central bank policy over the last ten years leaves the possibility of something bad happening (not a prediction, a possibility)
• Deflation has followed every asset bubble

Conclusion:

• Stan said he doesn’t know for sure what will happen and wants to keep an open mind.
• “Every time oil is up, interest rates are up, and the dollar is up (just like now), things don’t tend to go well.” He cited the 2000 and the tech bubble.

Grab your walking shoes, plug in, and click on the photo to start the video. I promise you are going to enjoy the discussion.

 

---

Trade Signals: Hard Economic Landing

June 23, 2022

Market Commentary 

Notable this week:

There have been ~ 10 times in the last 22 years when NDR’s Crowd Sentiment Poll dropped below 42. The current level is 41.7. This is saying that we are at or near peak “extreme pessimism.” The last reading below 42 was March 2020 (the Covid crash low in the S&P 500 Index). The other nine ranged from 30.9 to 40.5. The all-time, not surprisingly, was March 2009 (the Great Financial Crisis bottom). Expect a bounce in the markets.

Financial tweet of the week from Camp Kotok fishing friend Danielle DiMartino Booth,

 

 

I shared a debt chart with you last week (here in On My Radar: Investing Like Harvard and Yale.) High debt, high-interest rates, and high inflation, along with a cease-and-desist of the Fed’s monthly Treasury and Mortgage bond-buying program, you get the above chart. My best guess is that we are halfway through the bear market that began in January. Hard economic landing ahead.

The Dashboard follows next. More red than green.

Not a recommendation for you to buy or sell any security.  For information purposes only.  Please talk with your advisor about needs, goals, time horizon, and risk tolerances.

---

Personal Note –  A Crack In Everything

“There is a crack in everything, that’s how the light gets in.”
– Leonard Cohen

Leonard Cohen was a Canadian singer-songwriter, poet, and novelist. He began his career as a poet and novelist during the 1950s and early 1960s, and launched a music career in 1967. Susan sent me a text message yesterday and a link to the song. Poetic indeed.

With the airlines a mess, I decided to drive six hours across Pennsylvania to Ohio to be a guest speaker at an advisor event. Phone calls and podcasts made the ride go quickly. It was the second time I listened to the Stan Druckenmiller interview.

Much of Pennsylvania, especially central PA, is Penn State country: logos on cars, shirts, and hats… everywhere. Cross the border into Ohio and the colors switch. I packed nice slacks and a button-down for my talk but learned the attire was more casual. That enabled me to wear some blue and white, which seemed appropriate in the land of scarlet and grey. I did receive a faint “We Are” from the only other Penn State fan in the room. Hard to be loud surrounded by frienemies in the heartland of your arch-rival. I do love the fun banter the love for our teams creates. Brings people together. New friendships except on one special Saturday every fall.

A special hat tip to Bob, Dave, Tyler, and Dillon, and a special nod to their client, Tom. We met Tom for coffee at Bob’s office Thursday morning prior to golf at Bob and Tyler’s golf club. Tom’s a retired electronic engineer. He ran his own business and sold it. I’ve found that most business owners get how the economic machine works. Up late at night thinking about how you are going to make payroll and other lessons learned in the “school of hard knocks” are invaluable in terms of ongoing success.

Bob’s a low handicap golfer and his son Tyler is a near scratch golfer. Dave’s short game was exceptional. My game was off. Way off. Ten dollars from my pocket to Tyler’s. Spend it on a good beer, my friend, and not that lousy stuff you used to drink in college.

Speaking of college, I’m working on today’s missive from beautiful Happy Valley (Penn State’s campus). The epicenter of all things blue and white. I decided to drive Interstate 80 east from Ohio breaking, my trip home to Philadelphia into two segments. Dinner with son Kyle and step-son Conner last night. Salmon and a cold IPA. Kyle and I met this morning for coffee. One shot of espresso and a tall iced, please.

Kickstart to the day.

Great finish to the day… golf with Kyle – priceless.

I sure appreciated the depth of the quote and hope that it’s going to be easier for the light to get in. I’ll leave you this week with a link to “Anthem,” and if you have an extra moment, the following is guaranteed to lift your heart. Talk about light getting in.

 

I hope this note finds you relaxing and doing something fun this weekend. Hold that glass up high – Here is a toast to light getting in.

Wishing you a great week!

Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.