Billionaire investor Stanley Druckenmiller believes that the Federal Reserve’s attempt to quickly unwind the excesses it has built up over a decade with easy monetary policy will not end well for the US economy.
“Our central case is a late 23 hard landing,” Druckenmiller said Wednesday at CNBC’s Delivering Alpha Investor Summit in New York City. “I’ll be stunned if we don’t have a recession in ’23. I don’t know when, but will for sure by late ’23. I won’t be surprised if it’s not larger than the so-called average garden variety.”
And the legendary investor, who has never had a bad year in the markets, fears things could get worse. “I’m not ruling out something really bad,” he said.
Druckenmiller believes the extraordinary quantitative easing and zero interest rates over the past decade have created an asset bubble.
“All of these factors that cause a bull market don’t just stop, they reverse every one of them,” Druckenmiller said. “We’re in big trouble.”
The Fed is now in the midst of its most aggressive pace of tightening since the 1980s. The central bank last week raised interest rates by three-quarters of a percentage point for the third consecutive month and promised more hikes to beat inflation, sparking a major sell-off in risky assets. The S&P 500 broke its June low and hit a new bear market low on Tuesday after a six-day losing streak.
The investor said the Fed made a policy mistake when it came up with a “ridiculous transitional theory” in which it thought inflation was being driven by supply chain and demand factors largely linked to the pandemic.
“If you make a mistake, you have to admit you were wrong and carry on for those nine or 10 months of just sitting there buying $120 billion worth of bonds,” Druckenmiller said. “I think the effects of that will be with us for a long, long time.”
The consumer price index rose 8.3% yoy in August, near a 40-year high, beating consensus expectations.
Druckenmiller once managed George Soros’ Quantum Fund and rose to fame after helping to settle a $10 billion bet against the British pound in 1992. He later oversaw $12 billion as President of Duquesne Capital Management before closing his firm in 2010.
“You don’t even have to be talking about black swans to be concerned here. To me, the risk premium of owning assets doesn’t make much sense,” Druckenmiller said.