WHEN: Today, Wednesday, September 28
WHERE: CNBC Delivering Alpha conference
Following is the unofficial transcript of a CNBC interview with Duquesne Family Office Chairman and CEO Stanley Druckenmiller and CNBC’s “Squawk Box” Co-Anchor Joe Kernen live during the CNBC Delivering Alpha conference today, Wednesday, September 28th.
Mandatory credit: CNBC Delivering Alpha conference.
JOE KERNEN: So Stan has been at a DA before, Delivering Alpha. And I said, What was it, a couple years, two years, three years? Eight years. Eight years ago. It’s a rare “yes” from Stan and a precious “yes” to get him in this format. So I looked to see what year it was. It was 2014. Tell me about it, right? Time flies. And I just barely turned it on, the video, and you said, This zero interest rate policy the Fed is pursuing right now is insane. So we’ve had eight years to inflate this baby, and I think we might be seeing some of the deleterious effects. Now in 2021, you were on, I think, Squawk Box. What was the term that you used for the monetary policy? Because we had SPACs, we had NFTs, we had the AMC APEs, we had Bitcoin and Dogecoin, and yet the Fed still didn’t see a problem.
STANLEY DRUCKENMILLER: Yeah, I think I said it was the most radical monetary policy relative to the circumstances in history. Look, I made a New Year’s resolution that year not to be on TV, but when I saw what was going on, I couldn’t control myself. I haven’t been on TV since. Apparently, this isn’t on TV. That’s a good thing. But I was just incredibly frustrated with what to me looked like a Fed that was just taking unbelievable risks. For what? The story of the time was inflation was 1.7, and we were buying 120 billion bonds a month. This was post-vaccine, successful vaccine, because inflation was 1.7 instead of 2. So we’re taking this massive gamble where you threaten 40 years of credibility with inflation, and you’re blowing up the wildest raging asset bubble I’ve ever seen, and I knew that the worst economies happen post asset bubbles; the ’30s here, post ’89 in Japan after the housing bubble blew up here. So that’s what I went on. If you remember, the Fed did 2 trillion in QE after vaccine confirmation. And after the time I went on, you had the strongest momentum in employment in history on a rate of change basis. At the same time their partner in crime, the administration, was doing more fiscal stimulus, again, post-vaccine, after it was clear emergency measures weren’t needed, than we did in the entire great financial crisis. I’m not talking about before the vaccine, I’m talking about after. Look, it turned out I was right. I’ve been wrong plenty of times in my life. The Fed was wrong. They made a big mistake. It’s not so much that they were wrong. I’ve been wrong a lot. It’s the risk-reward bet they made. There’s some news this morning in England. 30 years ago we shorted the pound in the Quantum Fund. I didn’t know whether the pound was going to devalue. What I did know was, if they didn’t devalue in the next six months, my fund was going to lose 50 basis points; if they did devalue, I was going to make 2,000 basis points. So it was a 40-1 one-way risk-reward bet. If you look at what the Fed did, the radical gamble they took to get inflation up 30 basis points from 1.7 to 2, it’s, to me, sort of a risk-reward bet. You bet 1 to lose 40? And they lost. And who really lost? Poor people in the United States ravaged by inflation, the middle class, and my guess is the U.S. economy for years to come because of the extent of the asset bubble in time and duration and breadth it went on.
JOE KERNEN: So they had that dual mandate. So you think that in the back of Jay Powell’s mind he was like, I’ve got 30 basis points to go to get to where I want to go? Or was he saying, I don’t see a problem yet, I want full employment, so I’m going to let it ride at that point? Because the problem I have is that there’s inflation and there’s asset inflation. Was it not clear at that point that even if you weren’t at 2 percent, there was asset inflation everywhere? Now, how does a guy that’s running the Fed, why is that not on his radar screen?
STANLEY DRUCKENMILLER: Because it’s not part of their mandate, in their opinion, and I don’t think they looked at it as a risk. And to be fair to him, we’d had 20 years of disinflation, people tend to live in the past, and he had plenty of company, including on your network. So, the other thing I will say is, I’ve been wrong a lot in my career, and when I do, I correct my mistake. What was particularly mind boggling to me, two to three months later, inflation takes off, it’s no longer a theory, it’s actually happening. We come up with this ridiculous theory of transitory. I mean, so we have 5 trillion in fiscal stimulus, we have 5 trillion in QE. Janet Yellen is running down the TGA account, so that’s another trillion in stimulus. And if you remember, the monetary framework in the fall of 2020, they were no longer going to forecast. They were going to be data-dependent and wait until they see the whites of inflation’s eyes. So guess what? They saw the whites of their eyes. And what did they do? They forecast that it was going to be transitory. When you make a mistake, you’ve got to admit you’re wrong and move on. That nine or ten months that they just sat there and bought 120 billion in bonds, I think the repercussions of that are going to be with us for a long, long time.
JOE KERNEN: So going to whether — were they partners in crime with fiscal spending as well? And is that what caused — I mean, inflation is everywhere. And we know about Putin price hike and we know about supply chain issues following the reopening. But is it really the growth in the money supply and the deficit that is the root cause of what we’re seeing right now?
STANLEY DRUCKENMILLER: That’s what lit the match, absolutely. I mean, come on, when I went on TV, I wouldn’t consider this one of my better calls. You’ve got massive fiscal stimulus, you have massive monetary stimulus, and the thing is already starting to percolate. And of course it’s what caused it. What I will say, there’s a lot of people out there saying, well, Putin caused it. Putin did extend it, all right, but can I remind everybody that when Putin invaded, the CPI was 7 percent year-to-year before he invaded? And all this crazy stuff we did was to get inflation from 1.7 to 2, and we were already at 7. But, yeah, once you light the match — and we found this out in the ’70s — inflation rotates. That summer everybody kept talking about used car prices are going to come down, this is going to come down. That’s not the way it works. By the way, there are a lot of disinflationary things happening now in the good sectors. So the U.K. unions, okay, do you think they’re going to come in in the spring and they’re going to negotiate and they’re going to say, oh, well, the 5-year, 5-year forward is 2.3, so, yeah, I’ll take a 2.3 raise? No. It’s like the railroad workers who just got 24 percent over 3 years. When you lose that much purchasing power, so then the wage negotiations, it seeps in there. Then of course there’s customers of companies that have to raise their wages, and the thing spirals. And that’s what we’re dealing with, and that’s the position the Feds got themselves in with basically a boom-bust policy. But yeah, they were not alone. The fiscal stimulus was a huge part of this. But to be fair, they enabled it. The government can’t spend 5 trillion dollars if they don’t print it.
JOE KERNEN: The move today from the Bank of England, last I looked — in this market you’ve got to look every 2 minutes — but it was being received positively, which I thought was pretty shocking. I guess it was the notion that if they blink, maybe we blink sooner than people thought. I would have thought — this is one of those — you mentioned 30 years ago. This is one of those things where they put a drop in the ocean trying to stop this thing from happening. You know it’s not going to work properly, and it almost indicates maybe there are some underlying dislocations because rates have gone up so fast. Do we need to worry about what happened in England today? And are you surprised?
STANLEY DRUCKENMILLER: I think it’s a microcosm of everything we’re talking about. We’ve had 30 trillion of QE globally over the last ten years. When you have free money and you have bond buying for that period of time, it creates bad behavior, okay? So the pension funds and the insurance companies, they’re buying bonds, repoing, taking the repo money and levering that up with equities and all kinds of stuff to try and enhance their returns. And by the way, doing so when gilts were yielding, what, 2.8 and inflation is 10 or 15, that doesn’t happen if you don’t have the environment created the last ten years. So you’re the Bank of England and you’ve got this situation on your hands now which is quite serious, because I think 30 percent of mortgages there or at least 30 percent are heading toward being variable rate. What do you do? Well, what you don’t do is go and take taxpayer money and buy bonds at 4 percent when your inflation rate is over 10. You don’t cure inflation with an inflationary act. And buying bonds, you know, 7, 8, 9 points under the inflation rate, of course the markets are curing it, because they’ve got a Band-Aid, everybody is blinking. But this is creating long-term problems down the road. That 30 trillion has created all sorts of stuff that’s probably under the hood. I used this term a week ago, I didn’t know about this thing happening, and you’re going to see more of it because that’s what happens during asset bubbles. Behavior changes.
JOE KERNEN: Recently you talked about the potential for a ’69 — 1969 to 1982 potentially type situation for the next ten years here in terms of taxes being at the same level a decade from now.
STANLEY DRUCKENMILLER: Yeah. I will say this. The — it’s conventional wisdom, which I agree with, that stocks go up over the long term.
JOE KERNEN: Okay.
STANLEY DRUCKENMILLER: The problem is we’ve become a little complacent about what does “long term” mean. If you bought the Dow in 1929, you got back to even in 1954. As you just pointed out, the Dow was in 1966 where it was in 1982. When I look back at the secular bull market started in ’82 — let’s just take a trip down memory lane. We had a President who said government was the problem not the solution. We had a guy who fired all the air traffic controllers in the country when they wanted a big raise. We now have a President who is a union man who says he’s trying to beat inflation who cheers at 24 percent over three-year reward to the railroad unions. We have a President who thinks government is the solution, not the problem. Maybe more importantly, or I’d say in terms of what we’re talking about, if you look at valuations back then, the S&P was 50 percent — I’m sorry. The stock market was 50 percent of GDP. It’s now 150, down from 225. That’s because five-years yielded 15 percent when I started Duquesne, so real rates were high. That’s why we were at 8 times depressed earnings. We’re now, what, 18, 19 times inflated earnings, that I have a very strong feeling are going to be down next year. Then you have the secular forces. You were right on the initial ramp of globalization, a fantastic thing. Building supply chains around the world increases efficiency, causes disinflation. That’s been a trend for 20 or 30 years. Going the other way now, we’re disentangling all that. That’s going to be inflationary. And then, finally, and we’ve already kind of alluded to it, the last ten years of the bull market, you put it all in hyperdrive with 30 trillion of QE and zero rates. Now the consequences of that are borne, and all those factors that cause a bull market, they’re not only stopping, they’re reversing. Every one of them. We’re going from QE to QT, unless you live in England this week. They’re really unfolding. So when I put all of that together, the one thing I bristle about when I hear people on your network, is they say: Well, I’m bearish, but I’m bullish for the long term. Look, you can have a period of 15, 20 years, 10 years where the market doesn’t go anywhere. That doesn’t mean you can’t make money. You could have made plenty of money in the ’70s. At various times we had two 60 percent rallies. I’m not saying, you know, go get another job when you can’t do stocks. I’m just saying we’ve had a hurricane behind us for 30 or 40 years, and it’s reversing, and I wouldn’t be surprised — in fact, it’s my central forecast — the Dow won’t be much higher in ten years than it is today.
JOE KERNEN: There was a time you went to college campuses and you talked about an equity and debt — I think in this case it wasn’t necessarily Fed-induced, but it was entitlement induced.
STANLEY DRUCKENMILLER: Yeah.
JOE KERNEN: And it could come — this was ten years ago, and I think you said sometime between, you know, Nostradamus —
STANLEY DRUCKENMILLER: 2020 to —
JOE KERNEN: He said 2020 and 2035.
STANLEY DRUCKENMILLER: Yeah.
JOE KERNEN: So it’s — is it 2022? Is it happening?
STANLEY DRUCKENMILLER: We are in deep trouble. So everything I said at those colleges is worse in terms of the metrics, except for one thing. And what I miscalculated was I didn’t calculate zero rates; I used 4 percent rates. But the only thing Donald Trump and Hillary Clinton agreed on in 2016 was don’t cut Social Security, don’t cut entitlements. So nothing was done. Joe Biden has excoriated Rick Scott because he dared mention maybe we shouldn’t be increasing senior pays. But if you look at the reversal I just talked about and you use the CBO estimate, which is rates at 3.8 percent, which I think, frankly, is pretty optimistic given all the things we’ve talked about, by 2027, the interest expense alone on the debt eats all health care spending. By 2047, it eats all discretionary spending. So we’re now getting into fiscal dominance. By the way, by ’49, it eats all Social Security. We’re getting to the point now where the interest expense on the debt is so high that it’s going to eat up our ability to basically service the next generation, and I’m not even sure about the current one.
JOE KERNEN: Okay.
STANLEY DRUCKENMILLER: I brought some cyanide if you’d like one.
[LAUGHTER]
JOE KERNEN: Well, no, no, I’m thinking about that, and I’m thinking maybe we’ll be okay, but —
STANLEY DRUCKENMILLER: Yeah, because we’ll be dead.
JOE KERNEN: Yeah, that’s what I mean.
[LAUGHTER]
JOE KERNEN: But I worry about, okay, let’s bring it back to how hard — Okay. It’s going to be a landing. Is it going to be a nice, smooth like 3-point landing? Is it going to be a little bumpy, or is it going to be one that you hope to walk away from right now?
STANLEY DRUCKENMILLER: Well, I —
JOE KERNEN: Or don’t walk away from.
STANLEY DRUCKENMILLER: Let me just say this. I will be stunned if we don’t have a recession in ’23. Don’t know the timing, but certainly by the end of ’23. I will not be surprised if it’s not larger than the so-called average garden variety, and I don’t rule out — not my forecast, but I don’t rule out something really bad. Why? Because, if you look at the liquidity situation that has driven this, we’re going to go from all this QE to QT, we’re following an asset bubble. We’ve been doing all this running down the SPR, which is now — that’s the Strategic Petroleum Reserve. It’s now below ’84 levels, even though obviously oil consumption is much higher. We’ve had a bunch of myopic policies that have actually delayed the liquidity shrinkage. QT has been almost entirely offset by Janet Yellen running down the Treasury savings account. By the way, pretty amazing policy. She could have sold ten years for under 1 percent during this time. Instead, she runs down the Treasury savings account. So all of that has mass liquidity shrinkage, but it really comes into full gear, and she can continue this for a while. We can do the SPR for a while, stimulative stuff. But by the first quarter of ’23, it kind of goes the other way. So our central case is a hard landing by the end of ’23. But I don’t know, I’ve been wrong on a lot of things. I could be wrong on this, but since I do it for a living, that’s our forecast, which is a recession in ’23.
JOE KERNEN: You said everything has reversed from 1982 that ushered in, arguably, the greatest time in human history probably, for everything, for all scientific and medical advances and disinflation and the stock market and everything else. So we’re at —
STANLEY DRUCKENMILLER: By the way, I’m wildly bullish on medical advances, that’s the one thing I’ll push back on, cancer, and I expect neuroprogress —
JOE KERNEN: Great. So we’re all going to live forever, and none of us are going to have any money.
STANLEY DRUCKENMILLER: We better not all live forever, because our kids won’t have any money because they’ll be paying our Social Security.
JOE KERNEN: So, you know, Reagan said, unfortunately, every generation has to learn the same stuff all over again. I don’t see that happening. I don’t see any Reagans on the horizon. What do you think happens in the next five years politically? Do we have someone riding in on a horse that —
STANLEY DRUCKENMILLER: My first boss in Pittsburgh in 1976 said, “Stanley, the way you time a political cycle is you buy the market two years before the general election and then you sell it on the general election, because they always rig things to be good in the election year.” He said this in ’76. We had major bottoms in ’78, ’82, ’86, ’90, ’94, ’98, ’02, not so much in ’06 because Bush tried to push it through all the way, and we see what happens. The incredible thing about the myopic policies they’re running — and I assume it’s for the midterms, I can’t — is it’s kind of dumb politically because it sets up a bad, bad ’24. So maybe the silver lining is we get a crisis that doesn’t destroy us but it’s bad enough maybe to bring us together and someone comes out of nowhere. Because we definitely need a change. Half the country hates the other half. We’ve got myopic economic policies, boom-bust policies. You don’t really get change unless bad stuff happens to catalyze the change. That’s what brought in Paul Volcker, G. William Miller, and Arthur Burns preceded him. So as gloomy as I am, I’m open to something really great happening out of nowhere that we don’t see catalyzed by something bad before it happens.
JOE KERNEN: Yeah, great. Huge crisis and then something good — greater than we’ve already had?
STANLEY DRUCKENMILLER: ’82 was a terrible recession. Everybody says, oh, my God, are we going to have a recession? ’82 was a terrible recession. First of all, politically, Reagan won 49 states in ’84. Secondly, it brought in 20 years of prosperity. So if the Fed engineers something here that we have some short-term pain for, to me they’re doing the right thing and it will be worth it. The risk is because it was preceded by 30 trillion dollars of QE, that it turns into something worse. And I’m not predicting that, but I’m open-minded to it.
JOE KERNEN: Nord Stream, you know, leaks. I mean, they are in a heap of trouble over there in Europe with the winter approaching and with Putin — I don’t know, he could get desperate, God knows, but we have messed up this energy transition. And are we going to be able to reverse that? What’s going to happen in Europe? Is there going to be a recession? They have to have power to heat homes, much less manufacture —
STANLEY DRUCKENMILLER: I would think there’s going to be a recession. I wouldn’t be surprised if they haven’t prepared for the winter better than we think. But of course there’s going to be a recession.
JOE KERNEN: In Europe.
STANLEY DRUCKENMILLER: You’ve got monetary policy tightening in Europe like everywhere else, and you have the price of natural gas at about $300 equivalent to oil there. Putin, I don’t know what he’s going to do. I don’t know what President Xi is going to do. We haven’t even gotten into all the red and black swans flying around up above.
JOE KERNEN: I know.
STANLEY DRUCKENMILLER: Which I’m assuming aren’t going to happen, but they are flying around.
JOE KERNEN: Do you want to name a couple of them?
STANLEY DRUCKENMILLER: Well, one is red. China. I mean, something strange could happen there.
JOE KERNEN: Any day.
STANLEY DRUCKENMILLER: Obviously Putin.
JOE KERNEN: Nuclear?
STANLEY DRUCKENMILLER: Yeah.
JOE KERNEN: I don’t want to even say that word.
STANLEY DRUCKENMILLER: I’m not expecting that. I’m just saying you don’t even need to talk about black swans to be worried here. To me the risk-reward owning assets doesn’t make a lot of sense. I’m not advocating going short. The greatest short seller ever, Jesse Livermore, made $100 million in ’29, and then he went bankrupt in ’36 and killed himself.
JOE KERNEN: Did he jump or shoot?
STANLEY DRUCKENMILLER: It wasn’t good.
[LAUGHTER]
But I don’t think you need to short. Just sidestep it. But to me the risk-reward is difficult right now.
JOE KERNEN: We’ve got not much time. Seriously, do we have to go to the next session? I would stay all day. I think Delivering Alpha should be a week.
STANLEY DRUCKENMILLER: This is enough venom.
JOE KERNEN: You sure? I love listening to you. So you became — in closing, is Bitcoin for real? You still own it?
STANLEY DRUCKENMILLER: I don’t own Bitcoin.
JOE KERNEN: Crypto?
STANLEY DRUCKENMILLER: I — it’s tough for me to own anything like that with central banks tightening. But yeah, I still think — if the Bank of England, what they did is followed by stuff like that by other central banks in the next two or three years, if things get really bad —
JOE KERNEN: Yeah.
STANLEY DRUCKENMILLER: — I could see crypto currency having a big role in a Renaissance because people just aren’t going to trust the central banks. But right now, I like everything I’m hearing out of the Fed, and I hope they finish the job. They made a big mistake. They seem to have owned it, but it’s easy to own it when employment is strong. Let’s see what happens if we get a hard landing. I just hope they stick to their guns because this stuff was terrible in the ’70s. You have to slay the dragon. And the chair is right. You’re probably going to have some pain.
JOE KERNEN: So 30 years averaging 30 percent and never a down year. So that’s how it happens. I mean, you can see why that probably works. I have to beg you to come —
STANLEY DRUCKENMILLER: That was a former version of my current self.
JOE KERNEN: I know.
STANLEY DRUCKENMILLER: I haven’t had any down years, but I ain’t making 30 percent a year.
JOE KERNEN: I know. Thank you. I begged you to come and you did again, and it’s just worth it for all of us. So, Stan Druckenmiller.
STANLEY DRUCKENMILLER: Thank you.
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