WHEN: Today, Wednesday, November 1, 2023
WHERE: CNBC’s “Squawk Box”
Following is the unofficial transcript of a CNBC exclusive interview with Duquesne Family Office Chair & CEO Stanley Druckenmiller on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Wednesday, November 1. Following is a link to video on CNBC.com:
All references must be sourced to CNBC.
ANDREW ROSS SORKIN: Good morning and welcome back to “Squawk Box” right here on CNBC. We’re live at the Nasdaq MarketSite in Times Square. I’m Andrew Ross Sorkin with Becky Quick and Joe Kernen. Take a look at U.S. equity futures at this hour. Let’s show you where things stand. A lot of red to show you this morning. About 104 points on the Dow, down. Nasdaq would open up about 50 points. We’re looking at S&P 500 expected to open off about 15 points. We’re about to talk about treasuries with a very big guest in just a moment. The 10-year, though, sitting at 4.910, and the two-year at 4.071. Joe?
JOE KERNEN: In studio, hedge fund titan Stan Druckenmiller had some harsh words for Treasury Secretary Janet Yellen. Not issuing more long-dated treasuries when interest rates were low could be the biggest blunder in the history of the Treasury. He even said all the way back to Alexander Hamilton. Who founded “The New York Post”? I can’t get my head around that. Here to talk more about all this, Stanley Druckenmiller, chairman and CEO of Duquesne Family Office. We just said you’re liking bonds and welcome. Thanks for joining us in studio. I like the way you think about bonds. If we were inverted, and we were at 100 basis points and the normal thing is the opposite way, 150 basis points, isn’t that the biggest no-brainer in the world, just a short one and go long and the other? That’s kind of what you’re doing, isn’t it?
STANLEY DRUCKENMILLER: I’m kind of disappointed, maybe it’s my fault, that that statement has sort of taken over the more important narrative. It was just —
KERNEN: No, we’re going to get to that, but we introed you with that. So, I wanted to stay —
DRUCKENMILLER: It was just a small piece of a litany of stuff that’s been going on for 13 years. But I’d rather get it in the sequence.
KERNEN: Okay. We’ll do it in sequence. But we introed it with what you like in bonds. I don’t want people just to think that all of a sudden, the bond —
DRUCKENMILLER: I know the media loves one-sentence stuff. And maybe it was the most radioactive thing I said that day, but it’s definitely was just one piece of a big puzzle
KERNEN: But the most radioactive thing you said in recent history is a ten-year flat stock market, which you said at Delivering Alpha, and we’ll get to that, too. And it’s all actually starting to happen. We’re watching it. Let’s talk about Janet Yellen and that’s what we’ll do.
DRUCKENMILLER: Okay.
KERNEN: Everyone and their brother termed out, except for the Treasury.
DRUCKENMILLER: I promise I’ll talk about it in a few minutes if that’s okay.
KERNEN: Okay.
DRUCKENMILLER: Look, I’d like to go back to actually 2011.
KERNEN: Okay. Your college tour.
DRUCKENMILLER: Two things were going on at that time. A, I was going on a college tour, 15 universities because I was terrified about the federal debt situation, particularly from 2025 to 2035. What I was looking at is entitlements had grown from 30 percent to over 60 percent of the budget, but more importantly, baby boomers like me were going to be turning 65 in the near future and we were going to have a gray boom starting in 2020. So the payments to that cohort were going to go up, while workers shrunk. And that gave sort of a dire forecast, looking forward to the federal budget. Something else was going on at the same time. Chairman Bernanke at the Federal Reserve embarked upon QE2. If you know my past, I very much supportive of — in favor of QE1. It was a brilliant policy in an emergency state. QE2 was when they put QE in the tool kit of monetary policy. I think it’s been a disaster. And it led to fiscal recklessness. But if you remember, when Bernanke introduced it, he assured us when the Fed balance sheet was $800 billion that this was a temporary measure, we weren’t going to monetize the debt, there’s no way this would be increased in the balance sheet over the long-term. Here we are, 13 years later, the balance sheet has just shrunk from $9 trillion to $8 trillion. Alright? So, that, to me, that monetary policy, which was then followed up by Janet Yellen as Fed chair, led to all kinds of fiscal recklessness because it checked the markets, it disallowed the markets check on fiscal behavior because when rates are zero, you think you can spend forever and there was this MMT rates, the whole thing. The Mnuchin/Trump administration did something that had never been done before in history, they run a full employment, trillion dollar deficit, 5 percent of GDP. I love the way Trump uses the term RINO. Trump is the true RINO. What kind of a Republican administration would run a trillion dollar deficit in full employment? Okay? The next thing that happened is COVID. So, when COVID happens, the Trump administration and the Fed go into high gear because we have another emergency like ’08, ’09, very different, but it’s definitely an emergency. And to be frank with you, none of us knew, particularly me, whether we were going to black hole, what was going to happen. So, the monetary and the fiscal response at that moment, like QE1, to me, was totally appropriate. Then the problem started, it became apparent very soon that we weren’t going into a black hole. Worldwide supply chains were challenged, the economy – we had a vaccine confirmation by October of that year. The economy, to me, was very clearly booming and this was going to be more like we had a heart attack than we had cancer. So much so, if you remember, I came on your show, right after I wrote an editorial in “The Journal” in April of ’21 to say, look, this monetary policy has got to change. This is crazy having zero rates and buying bonds with what’s going on. The next thing that happened, Trump loses the election, and Biden comes in, and now we have Bidenomics. Okay? So you take the Trump/Mnuchin running full employment deficits, and Biden comes in and we’re still doing QE, and rates are still zero and the economy is booming. So he doubles down and the spending goes absolutely nuts.
KERNEN: The $2 trillion deficit.
SORKIN: Or more.
KERNEN: More.
DRUCKENMILLER: Yes. But, again, with unemployment now, you know, under 4 percent. Under the Biden/Yellen administration we moved on now from Trump/Mnuchin to Biden/Yellen, they grow the federal deficit, the federal debt $4.7 trillion, while nominal GDP over that period, three years, grows 25 percent. It’s like crazy. The economy is booming. We never had deficits of any kind of meaningful magnitude before Trump, and the spending is going on. So you increase the debt $4.7 trillion. By the way, the Fed is monetizing in a way, and it’s happening with GDP growing – I’m sorry, nominal GDP growing at 25 percent. Alright. Now we’re going to get to what you’re salivating over, Joe.
KERNEN: I’m going to let you do it, you go in the sequence you want. I just — they introed it like that. Go ahead.
DRUCKENMILLER: So, at this point in 2021, in the second half —
KERNEN: Yes.
DRUCKENMILLER: — interest rates on the 10-year are, like, 1.1. On the 30-year, despite having been corrected in a tweet, and I was right to be corrected, it was not 70 basis points under the Biden administration, it was, let’s use 1, 1.1, that’s a more reasonable estimate. By the way, the tweet that corrected me on the 30-year is incorrect, it was trading at 166 as a low that period, and it was under 1.8 plenty of the time. The tweet that said that Treasury has never managed the maturity of the debt is also historically incorrect, as most of you probably know. The Treasury Department suspended 30-year options in 2001 because term premium was high, yield curve was steep, and they thought it was a useless use of money. So, they were reinstated five years later. One more thing on this issue, in terms of the maturity of the debt, Treasury will have you believe and the tweet used this, that the maturity of the debt is 72 months. That conveniently leaves out $8 trillion that is funded overnight, in the repo market. That’s the Fed balance sheet.
KERNEN: Right.
BECKY QUICK: How much overnight?
DRUCKENMILLER: Eight trillion dollars, that’s the Fed balance sheet. We at Duquesne use the consolidated government debt because we’re looking at what the taxpayer is on the hook for. In fact, when the Fed was making profits, they remitted the money to Treasury. So why you would leave out in terms of government debt $8 trillion? Under that, the maturity of the debt, which was 63 months pre-COVID, is now 57 months. So, the statement by the Treasury Department and others that the maturity of the debt has increased since pre-COVID is absolutely incorrect. Alright. You guys —
KERNEN: That’s like we created 12 billion, that’s the same kind of —
SORKIN: The question I have, putting aside the Yellen-Mnuchin —
DRUCKENMILLER: I want to get to his answer, though.
SORKIN: My one question is, do you believe that there would be a market for selling much longer term duration bonds?
KERNEN: Either price —
SORKIN: Either many more 30s or going up to 50s or 100s. And the reason I ask is, that was the implication I think of what you were saying. I made a bunch of calls yesterday and I know, then I started reading all these studies and other things that folks inside the Treasury Department, including under Mnuchin, looked at doing that 50-year. In fact, I looked and found an interview that Mnuchin did with me at a deal book thing years ago, where he wanted to do it, but then realized or thought that he couldn’t do it because he didn’t think there was enough of a market and that it would sort of pervert the rest of the market otherwise.
DRUCKENMILLER: Currently, no. I think that market would be very challenged in the current environment. Don’t forget pre-COVID, we were spending 20 percent, federal government was 20 percent of GDP in spending.
SORKIN: Right.
DRUCKENMILLER: It’s now 25 percent of GDP. As outlined in “The Wall Street Journal” editorial this morning, my father told me if you’re in the hole, stop digging, Stan. Alright? So, I was actually happy to see when the announcement, the support for Ukraine and Israel, $106 billion, and I was waiting to hear what the offset was going to be. Was it going to be entitlements? Where were the cuts going to be? And the next thing I knew, two days later, there was not only no offset, there was $56 trillion in emergency spending. I have kids, I have grandkids. Childcare is not emergency spending. It’s a priority that maybe should be on the table or not. But we are spending like drunken sailors, okay, so —
QUICK: So do you agree with the House Republican plan, which puts forth spending for Israel, but cuts it in the IRA through funding to the IRS? Is that an appropriate offset in your mind?
DRUCKENMILLER: Becky, I want to go after entitlements. It’s where the money is. And —
KERNEN: You’re not going to solve —
DRUCKENMILLER: At some point, it’s going to happen. I’m going to give you some numbers to tell you why it’s going to happen no matter what. Anyway, getting back to the question, and then I really want to leave it because that’s something that’s in the past. We can’t fix it. We missed a once in a century opportunity, and let’s just not discuss it.
KERNEN: That’s your point. Everybody you know extended mortgages —
DRUCKENMILLER: No. So here’s the thing, yesterday Steve Liesman said I wanted treasuries to trade like a hedge fund, okay? I do not want treasuries to be trading and messing around maturity of debt. All I’m saying is in 2021, Janet Yellen, okay, and Mnuchin before her, we spent $5 trillion. The idiots were lined up out there, wild to buy treasury debt, at 1.80, 2 percent, whatever you want to call it. Let’s not play gotcha on this, okay? Or 1, 1.1 percent with nominal GDP growing at 10 percent.
KERNEN: Right.
DRUCKENMILLER: Ten percent. Okay. So, look, it is not like it took Stan Druckenmiller to figure out you’re at like a 700-year low in interest rates, okay. Nominal GDP is growing 10 percent, that the risk/reward of issuing debt at 1.1 percent in the ten-year is off the charts. How off the charts was that risk/reward? Eighty percent of American households, 80 percent refinanced their mortgage. They lengthened the maturity, the average maturity of mortgage debt from 3.5 years to eight years. As a consequence, it is going to take five years for that maturity to go up to get back to like 4 and 1/2. So, it’s just huge in terms of what they saved. So I told my office just for fun, let’s run a hypothetical. Let’s give Mnuchin a pass because like Bernanke, he canceled all notes issues, by the way, in late 2020. Alright? Obviously, by hindsight, if you’re a hedge fund, but, you know, I got to be honest, none of us knew what was going to happen in 2020. So let’s give him a pass for not issuing any notes and just issuing bills. And for the same reason, let’s give Janet Yellen a pass for the first half of 2021. Let’s start the meter in July of ’21 and then let’s do the following. Let’s instead of going ahead of with what we did, let’s do the opposite of what Mnuchin did and instead of issuing notes, all right, let’s issue, I’m sorry, he suspended the issue of notes and only issued bills. So, let’s suspend the issue of bills and only do notes for a year, alright? We took every auction where the 10-year was, and this is squishy and I’ll get why it is squishy. How much would the government have saved per year if they had done that relative to if they had to pay 5 percent, had to pay the rates we paid then, and then 5 percent now until now the end of ten years? Andrew, you want to guess?
SORKIN: I don’t even want to try.
DRUCKENMILLER: $1.2 trillion, $120 billion a year, $120 billion a year. It’s squishy because if we had sold 10 years, okay, maybe they go to 1.3.
SORKIN: Price is going to be higher, right.
DRUCKENMILLER: But you get the point. It was a missed opportunity. That’s all I was saying. I don’t want to talk about it anymore.
KERNEN: Okay.
DRUCKENMILLER: I want to move forward.
KERNEN: Let’s talk about something really positive and that is where we’re going to be in terms of debt to equity by 20—
DRUCKENMILLER: So, here’s the problem, so I was looking at entitlements back in 2011. Now we have a monster bigger than entitlements. It’s called interest expense.
KERNEN: Yep.
DRUCKENMILLER: And that interest expense is just incredible, it happens. If you go and you assume interest rates are going to be 5 percent going forward which one could argue is low, one could argue it’s high but that’s where they are, so let’s just say where we are. Right now, revenues to discretionary expenditures, that’s all that’s everything but entitlements, are 41 percent.
KERNEN: Right.
DRUCKENMILLER: Okay?
KERNEN: Yep. We have problems.
DRUCKENMILLER: In 2033 at 5 percent, I’m sorry, interest rate expense for it. In 2033, that number goes to 82 percent of all discretionary expenditures. In 2043, it goes to 144 percent of all discretionary expenditures. Anything but entitlements is off the table. Everything, defense, childcare, whatever you want to talk about, even economic statistics, the whole thing. So, the constant assertions by both parties and I kind of blame Trump and Hillary for taking it off the table that we’re not going to cut entitlements, is just, it’s a lie. It is not going to happen. Because interest expense alone—
KERNEN: Is going to do it for you.
DRUCKENMILLER: Is going to wipe out everything but entitlements, so entitlements are going to get cut. That’s—
QUICK: For people at home, you can, you know, for people who are not as experienced in some of these things, it’s like looking at credit card debt, which is now jumped the interest expense on that about 20 percent. Try to continue to be able to live your life with 20 percent interest if you’re not stopping the credit card spending.
DRUCKENMILLER: Yeah. So far, Becky, because households termed out their mortgage, you pointed out, it is the biggest asset of households this morning, it really mitigated the effects. But the stuff you’re talking about with the higher rates is going to start to bite. But it’s interesting because it is not going to bite nearly as hard on the private sector as the public sector because corporations refinanced. The public refinanced.
KERNEN: The families refinanced, right.
DRUCKENMILLER: So here’s another un-fun fact. By 2030, interest expense for the public is going to go up to 6 percent of disposable income. Okay? That’s not too bad, Becky. It’s only up from, like, four now.
QUICK: Yeah.
DRUCKENMILLER: The government, which is a little less than 10, is going to go up to 30 percent, because they didn’t refinance and their debt is so much bigger. That’s, it’s very interesting. Thirty percent, when I started Duquesne, rates were 12 percent and that number was 15 percent. So, we’re going to be at 30 percent with rates materially lower than 12 percent obviously.
QUICK: By when?
SORKIN: 2030.
DRUCKENMILLER: 2030. It just, the chart is frightening, it just, it just goes like this. All this stuff is ahead of us because we didn’t extend maturity of our debt. So, all this debt is going to roll over in four or five years, and you’re going to replace the 1 percent stuff with, like, 5 percent.
KERNEN: One of the points that you made to me is that American exceptionalism has a lot to do with being a reserve currency, obviously. And I don’t know whether you think that’s going to continue, whether you think that’s at risk. I don’t know how long it would take for the dollar. But also, we’ve led in every technological, you know, innovation.
DRUCKENMILLER: Yeah.
KERNEN: This country has. If this country is only, if all our capital is being used to service debt, we’re not going to lead at anything in the future.
DRUCKENMILLER: Well, I talked about this in a speech at USC last May, which has been memorialized in international economy, a piece I wrote called “The Coming Fiscal Horror Show”. And the first thing I led with, unfortunately, it was a little too prescient, was if you’re spending all the money on this stuff, it squeezes out the ability to do things defense spending to take on your adversaries, it squeezes out money for people who want to do climate change. It squeezes out money for people who want to do disadvantage. And then exactly, Joe, I pointed out that we led the world in PC revolution. We led the world in the Internet. We led the world in companies that distributed the Internet through these great products like Uber, other things. We led the world in the cloud. We’re leading the world in AI. If you look at Japan, I think we’ve all forgotten unless you read “Chip Wars” recently, they were a technological innovator like you would not believe through 1990. Nvidia, nobody ever heard of, I don’t think it had been started yet, but America did not lead the world in semiconductors back in 1990. Once Japan went down this, went down this route that they have gone, which basically the government spending takes over everything, they just have been kind of a zombie place. And that’s my great fear is that if you contributed more and more money to the public sector, and especially to interest rates, you crowd out the great innovative machine in this country. Look, I don’t think it will, I don’t think it is going to stop. It is just, it just worries me that we, that we lose that over time if we become zombie nation in terms of what we’re funding and what we’re not funding.
KERNEN: Are you still in terms of secular view of the stock market, are we only in year two of what could be flattish returns? Do you not want to talk about that?
DRUCKENMILLER: No, I’m happy to talk about it because I think it’s important. But this, what we’re talking about is one of the reasons I was so concerned, that and the fact that multiples were high. Look, we’re at, we’re at 20 times Duquesne’s estimates–
KERNEN: For next year.
DRUCKENMILLER: For next year. In a pre-QE world, 15 was about normal. When I got in the business, it was 8. Those were the days. It was, like, going into a candy box. I don’t, it seems that bonds are adjusting to a post-QE world. But for some reason, equities haven’t. So, that’s part of the problem. I think, given everything I just talked about and given the geopolitical situation, everything else, I don’t think it is unreasonable to think that we’re not going to continue to sell at 20 times earnings over a long period of time. And then, again, this crowding out of the government sector into the stock market and innovation. Look, I think they’re going to be great companies and great stocks, like a lot to do, stock picker’s market. A lot of people made money in the stock market in the ’70s. It is just not going to be like surfing with a hurricane behind your back. You’re going to have to really do work and figure out, you know, which equities are great, and which are not. Not frankly unlike what’s happening in the last year. Stock market hasn’t gone much of anywhere, but it’s funny, the one thing I’m not very good at, but I got young partners who are very good at it on a relative basis to my other skill sets is picking stocks, and we’ve done fine in our shorts this year, we’ve done good on our longs. The problem is I didn’t believe it, so I didn’t have the big allocation like I should have because I never imagined. In some ways being right on the bond market, which I was, and being right on earnings, which I was, made me completely wrong on the stock market. And I was completely wrong because if you had told me, and it happened, that rates were going to be where they are now, January 1st, and earnings would be flat, you told me the S&P was up, what is that, 12 percent or 13 percent? I mean, that’s just, that’s not part of my process. So, yeah, I, Joe, I still have a long-term forecast. By the way, I have been wrong on a lot of things and, you know, a 10-year forecast, you know, they are what they are. But that’s our working assumption. But it’s also a working assumption that with all the innovation going on and all the disruption, it’s going to be a stock picker’s market and you’re going to be able to make money in stocks.
KERNEN: But is there any way around monetizing these debt levels? Is there any way inflation is not here to stay?
DRUCKENMILLER: Yeah. I, yeah. We could have a—
KERNEN: Long-term?
DRUCKENMILLER: Look, I don’t have to worry about the long-term in my day job.
KERNEN: Right.
DRUCKENMILLER: But I will say this, we could have an event, I don’t know whether hopefully, it’s not a war of major powers that bring us together, and you get sacrificial behavior like we got after the depression in the World War II. We could have a financial crisis due to everything I’ve been talking about. And finally my generation, I think Paul Jones made the point, we’ve given nothing, we’ve given nothing, and now we want to screw our grandchildren. Finally, we get the memo. So, no, I’m not that pessimistic. And I’ll say the other thing I’m optimistic about, Jerome—
SORKIN: The election?
DRUCKENMILLER: No. Jerome Powell normalizing interest rates—
KERNEN: Yeah.
DRUCKENMILLER: We now have a hurdle rate for investment in this country. So, I think the allocation of capital, ironically, if we don’t go to the, you know, the zombie route and if we don’t continue the drunkenship, ironically, I think it could be a force for good because instead of funding a bunch of nonsense and bubble stuff, the capital gets more properly allocated. So, look, I’m open-minded to a really bad outcome, and I’m open-minded to a decent outcome. I’m just, I’m here today not to talk about Janet Yellen. I’m here today, guns and butter this morning, I could have written it. By the way, I didn’t. We’ve got to stop, guys. We’re drunk. We’re digging this deep hole. What are we doing here?
QUICK: So, what’s more important? That we come up with aid for Israel, Ukraine, and the rest, or that if it’s not offset, do you think we shouldn’t spend it? If it’s not offset properly?
DRUCKENMILLER: No, no, we have to spend it, Becky, because if we don’t spend it, if Russia wins, okay, we’re going to be spending so much more down the road. I hate the DeSantis argument, where he’s going on and on about defense and Ukraine and most Republicans are going on about or at least the MAGA people about wasting money in Ukraine. Are you crazy? Do you know how much we’re going to have to spend if Putin wins in Ukraine? It’s madness.
SORKIN: So, in terms of the approaching entitlements, how would, if Stan Druckenmiller were king for the day, how would you do it?
DRUCKENMILLER: That’s about how long I would be king because it will take a one-term president to do what I’m talking about. This generation has got to take a cut. And everybody is, like, oh, my God, how can you do that? I said, well, right now currency is going to get 100 cents on the dollar. Future seniors might get 5 or 10 cents on the dollar. Is it not unreasonable for us to go to 85 or 90 cents on the dollar?
SORKIN: Right. But how would you, I guess I’m saying, how would you do that? Would you push out, this is, this isn’t just a Social Security story—
DRUCKENMILLER: I would—
SORKIN: I mean, by the way, you and I agree—
DRUCKENMILLER: I’m okay with it for the spending. No, I would cut, not just, the first thing you should do, the first no-brainer is freeze the COLAs. We had an elegant opportunity here with Social Security and the payment went up 9.8 percent in the big inflation year.
SORKIN: Right.
DRUCKENMILLER: No, I would do stuff that would get you thrown out of office. But I would do it.
KERNEN: We will the only this happens, like, once every year or two, when it has to happen. So, we’ll look back on all these things in a year or two. Can we do that? I’m booking you a year or two from now. If we’re both still around, can you come back and we’ll revisit?
DRUCKENMILLER: I can’t make any promises on that.
KERNEN: Yeah. Alright.
DRUCKENMILLER: I hope I’m not here because I only seem to get here when something ignites me. Last week, it was the $55 billion in emergency spending on top and then Secretary Yellen saying the preposterous statement that interest rates were not up because of the debt. They were up because the economy is good. I must have gotten awfully lucky because I made a lot of money this year betting on bonds going down because of the debt and had nothing do with the economy. If anything, I was wrong on the economy.
KERNEN: Right. It still happens. Well, if you’ll come on whenever you’re triggered, maybe I’ll book you for next week because I’m sure there will be something —
DRUCKENMILLER: You just take care of that lovely dog. Forget about me.
KERNEN: I’m going to. I’m going to have to visit the loan officer to do that, that operation. Stan, thank you.
DRUCKENMILLER: Thank you. Pleasure to see you guys again, particularly in person.
KERNEN: Always.
QUICK: Thanks, Stan.
DRUCKENMILLER: Enjoyed it.
KERNEN: We’ll be right back.
