"Friends of Soros": The Federal Reserve cut interest rates too early, Trump will reignite inflation, and today's AI is like the internet of 2000

Earlier this week, Stanley Druckenmiller, the former number two at Quantum Fund who once teamed up with George Soros to short the British pound, was interviewed by Nicolai Tangen, CEO of the Norwegian Sovereign Wealth Fund. The two engaged in an in-depth dialogue about Druckenmiller's investment experience over the past few decades and current market trends.

Regarding the U.S. stock market, Druckenmiller believes that the current leading sectors (mainly technology stocks) are too narrow. Although there has been some recent expansion (with improvements in financial stocks), it is not strong. He views the current high concentration of the U.S. stock market rally as a warning sign, considering it a necessary condition for a bear market.

According to Druckenmiller, he began shorting U.S. Treasuries the day the Federal Reserve started cutting interest rates. He believes that the Fed may have prematurely declared victory over inflation, overlooking its persistence. At the same time, the Fed's forward guidance has limited its policy flexibility, raising concerns that Powell is overly fixated on a soft landing while neglecting the long-term stability of the economy.

Druckenmiller also expressed regret over selling NVIDIA shares too early. He bought into NVIDIA when its market capitalization was around $37 billion, at a time when ChatGPT had not yet emerged. He had indicated that he might hold NVIDIA for several years, but sold when its market cap reached $80 billion to $90 billion, missing the opportunity for its market cap to further rise to $2 trillion.

Additionally, Druckenmiller stated that he is not optimistic about AI stocks in the short term, considering their high valuations. He finds it difficult to grasp the short-term trends of AI stocks now, comparing the current AI situation to the internet in 2000.

Despite this, he still believes that AI is a genuine major trend. He stated that the combination of humans and AI can create powerful investment capabilities, and this combination may surpass purely human or machine investors. He believes that an intuitive investor who can leverage AI to supplement their investment decisions could become one of the best investors in the world.

Here are the highlights from Druckenmiller's speech:

• We do not see any substantial signs of economic weakness, perhaps except for the real estate market, but that is starting from a very high price level. So from the bottom-up information, we do not see signs indicating economic problems in the next three to six months.
• I am a bit concerned that the Fed may declare victory too early. If Trump wins (the interview was conducted before the election), the animal spirits of the business community may return, and they will crave easing. Trump may impose tariffs, which is inflationary on the margin. Immigration has always been a huge boon for this country, perhaps not in the way it has been completed, but it has certainly allowed us to achieve growth without inflation over the past two to three years, with a significant increase in the labor force. (Trump advocates for large-scale deportation of illegal immigrants based on the previous construction of the border wall.)
• I do not believe Powell is cutting rates for so-called political reasons. I do believe he is obsessed with a soft landing, he is obsessed with his glorious achievements, and the mistakes he made in 2021 I believe he is being pushed by other economists and the media. To me, the Federal Reserve's job is to avoid major mistakes. I would remind everyone that the economy is landing because they allowed inflation to soar from 2% to 9%.
• The current yield on the 10-year Treasury bond is about 4.5%, which can help normalize GDP. So, assuming inflation rises to 4% and real GDP growth is 2.5% or 3%, the yield on the 10-year Treasury bond could rise to 6% or 7%. I'm not predicting this, but if it happens, if inflation rises again and the economy doesn't slow down, I think yields could reach that level.
• I look for big trends. I'm not the type to hold for twenty years like Buffett, but I look for trends that last two to four years, and both fit that category.
• I am shorting Treasuries, but not heavily. In fact, I timed it well, right on the day the Federal Reserve cut rates. It's been smooth sailing since then. I should have been bolder in shorting. Now that they have dropped so much, I'm a bit worried that my short position is too large.
• (The leading sectors are too narrow) This has never been a good thing, but the leading sectors are not as narrow as they were last April. So, the leading stocks are expanding, and financial stocks are performing better. This is not good. Historically, bear markets have never started without a narrowing of the leading sectors. Currently, the leading sectors have narrowed to a certain extent, bringing the market closer to meeting a necessary condition for a bear market. But this market situation is a yellow light, not a red light.
• Tech stocks are priced high, with companies like Apple selling at 25 or 30 times earnings. Of course, its growth rate is not 25% or 30%, but we don't have much exposure to the tech sector.
• We were very optimistic about AI before. But we are not optimistic about it now; we don't know where we should be or how to actively participate, just like in 2000 and 2001 with the internet. You could believe in the internet without exposure and then gain your exposure on a more timely basis. Or I could be completely wrong; that's not uncommon.
• We bought NVIDIA early, I think when its market cap was around $37 billion, thinking we would hold it for a few years. But I didn't think its market cap would rise to $900 billion in a year, let alone exceed $2 trillion. I think it started at $100 billion or $150 billion, which is some crazy stuff. So, if I had realized it earlier, I might not have sold it early.
• I don't think (AI can replace humans in investing). But I think they can serve as assistants; a combination of humans and AI can beat any purely human investor. I don't think pure machines will make money, even though they have a disciplined process and do math. But I think if you can find an intuitive investor who uses AI and other tools to complement their skills, that could be the best investor in the world, rather than a machine.

The following is the full transcript of the interview, translated by AI:

Tangen:

Hello everyone, I am Nicolai Tangen, CEO of the Norwegian Sovereign Wealth Fund. Today, I am here to talk with Stanley Druckenmiller, a legendary figure in the investment world Stanley, it's great to have you here.

Druckenmiller:

Nice to see you.

Tangen:

So, what are the most important data points you've been focusing on recently? What are they currently?

Druckenmiller:

Yes, interestingly, I'm considered a macro investor, but I do macro analysis from the bottom up. So we mainly listen to company opinions, we haven't seen any substantial signs of economic weakness, perhaps except for the real estate market, but that started from a very high price level. So we haven't seen any information from the bottom up indicating that there will be economic issues in the next three to six months.

I would also say, I'll reveal this now, I'm more of a market animal than an economist; we look at financial conditions, which have been very loose. I mean, they are looser or at least as loose as they were before the Federal Reserve actually started tightening. Ironically, in the past four or five weeks since the Fed cut rates, the dollar has gone up, and obviously, interest rates have risen, but they are still far above normal levels. So these are the data points we are looking at.

I want to mention another thing I've been obsessed with since the whole inflation episode began in 2021: about two years ago or a year and a half ago, I was very confident that inflation would decline, and I was right on that point. But I was completely wrong about the economy. Recently, you can take my words as a reference because I was right once and wrong once; I've shifted from worrying about the economy itself to being more concerned about future inflation. Why do I say this? If we go back to the 1970s, there was an inflation episode triggered by OPEC. You experienced a recession, and inflation rates dropped; I think from about 8% to 3%.

Tangen:

And then it went up again.

Druckenmiller:

Yes. What worries me, what troubles me, as you are completely right, is that inflation has gone up again. It coincides with the timing of the current bottom. Yes, so a year and a half ago, I was confident that inflation would have a declining period, and then we would see. And I'm a bit worried that the Federal Reserve is declaring victory too early. I don't have the same confidence as I did in 2021 when inflation was rising. That was when the money supply grew by 40%, and everything was happening. But I also don't have confidence that they have solved the problem and won the battle; they cut rates by 50 basis points, credit spreads tightened, gold hit new highs, and stocks surged. I don't see substantial signs of economic weakness. Of course, there are some areas that just make me nervous, and this issue may rise again.

Tangen:

What would cause it to rise again? What factors would it be?

Druckenmiller:

The Federal Reserve is loosening financial conditions. If Trump wins, the animal spirits of the business community may come back, and they are eager for loosening. Trump may impose tariffs, which is inflationary on the margin. Immigration has always been a huge boon for this country, perhaps not in the way it has been accomplished, but it has certainly enabled us to achieve growth without inflation over the past two or three years, and the labor force has also increased significantly. So the combination of revived animal spirits is doing better than ever, and I just keep an open mind about it.

Tangen:

Why the central bank urgently needs to cut interest rates.

Druckenmiller:

This? Honestly, I don’t think Powell is cutting rates for so-called political reasons. I do think he is obsessed with a soft landing, he is obsessed with his brilliant record, and the mistakes he made in 2021. I think he is being pushed by other economists and the media, and to me, the Fed's job is to avoid big mistakes. Just like in the 70s, like the Great Financial Crisis, like the massive inflation we just experienced. But all this fine-tuning and concern about a soft landing, in my view, is not the Fed's job; it is to maximize employment in the long term, not for the next three or four months. But I think the Fed's obsession with achieving this so-called soft landing, I would remind everyone, the reason the economy needs to land is because they let inflation soar from 2% to 9%. Yes, so there was no need to land for the past twenty years. But I think that is what they are obsessed with. I really, I don’t know.

Tangen:

How big of a problem is forward guidance?

Druckenmiller:

It’s a big problem. My friends take their forward guidance as signals rather than relying on data. This is a problem because once you provide forward guidance, you eliminate your optionality. I think, Nicolai, you and I are in this industry, and we know that when we are wrong, we have to change our minds. The Fed has shown time and again that if they change their minds, they will lose credibility. So this leaves them powerless.

I often make mistakes. I think my record is mainly because when I am wrong, I change my mind, not because I am always right, I certainly am not. Forward guidance seems to have bound them, weakening their flexibility.

Tangen:

How big of a problem is the budget deficit?

Druckenmiller:

As a practitioner, this is not something I can obsess over on a three to six-month basis. As an American, I am really obsessed because GDP cannot keep rising forever. For me, we will have a reckoning, but I don’t know when it will happen. I would say that because we are the reserve currency, we are allowed to engage in behaviors that the British cannot. There is a new term I have been using, trust. We don’t have trust yet because we are the reserve currency. Although if you look at everything we have done, it is more aggressive than what the British have done.

How does the old saying go? How do you go bankrupt slowly and then suddenly? Running a deficit in a fully employed environment, basically 7% of GDP, is a situation that cannot last forever. One reason we have not paid the price for this is that during the pandemic, the entire private sector, 80% of individuals refinanced their mortgages So the average mortgage rate is still below 4%, even though it has marginally reached 8%. Companies have deferred their debts, which will mature in 2025 and 2026. If we are going to have problems, it might be more like the end of 2025 or early 2026, but you just don't know.

Tangen:

What gave them the confidence to suddenly change their minds about the price at which they are willing to lend money?

Druckenmiller:

It could be due to a failed auction. It might also be because if the Federal Reserve is wrong about inflation, and inflation rises again because they eased financial conditions when the financial markets were overheating. If they have to start raising rates again, that's why I think they should be very cautious about their selective choices now, because they have already provided a series of forward guidance on rate cuts, which could lead to this situation. My best guess would be a failed auction, but honestly, it could be in six months or it could be in six years. I just don't know. So.

Tangen:

If interest rates start to rise, how high can they go?

Druckenmiller:

Well, that's a good question. Right now, the yield on the 10-year Treasury is about 4.5%, and it could push GDP towards normalization. So assuming inflation rises to 4%, with real GDP growth at 2.5% or 3%, the yield on the 10-year Treasury could rise to 6% or 7%. I'm not predicting this, but if it really happens, if inflation rises again and the economy doesn't slow down, I think yields could reach that level. Interestingly, that's what happened in the 1970s; the bond market didn't really react until we went from 3% to 12%, and then it reacted significantly. Again, I'm not predicting this, but as a practitioner, I keep an open mind about it. It's already on my radar.

Tangen:

You said you made the most from the Fed's mistakes, so are you in the same situation now?

Druckenmiller:

I am shorting Treasuries, but not heavily shorting. In fact, I timed it quite well, right on the day the Fed cut rates. It's been smooth sailing since then. I should have been bolder in my shorting. Now that they have dropped so much, I'm a bit worried that my short position is too large. But that's my position.

I think the situation being discussed is happening, and I haven't seen any signs of it yet. I'm open to this situation, and if I'm convinced it's going to happen, I will increase my shorting. My current short position is about 25% of net asset value (NAV).

Tangen:

Stanly, let's turn to the stock market. The sectors leading the market are very narrow. The U.S. stock market is being supported by only a few stocks. How do you view this narrow market breadth?

Druckenmiller:

This has never been a good thing, but the leading sectors are not as narrow as they were last April. So the leading stocks are expanding, and financial stocks are performing better.

This is not good. Historically, bear markets have never started without a narrowing of the leading sectors. Currently, the leading sectors have narrowed to a certain extent, bringing the market closer to meeting a necessary condition for a bear market. But this market situation is a yellow light, not a red light. That's my view.

Tangen:

So how do you think technology stocks will develop, which sectors do you favor?

Druckenmiller:

The boom in AI is in full swing, and I think the private sector sees it as a life-or-death threat to their business if they don't spend money, because if they don't spend money, their competitors will, and if their competitors are right, they will face huge competitive issues. Of course, there are also the mega-cap companies that are all in, and their demand continues. So you see, technology stock prices are high, with companies like Apple selling at 25 or 30 times earnings. Of course, its growth rate is not 25% or 30%, but we don't have much exposure to the tech sector, and we're not sure, so I'm not really involved.

Tangen:

But you were involved early on. How did you spot these early trends? What did you see?

Druckenmiller:

Honestly, I got a great share from a really excellent analyst.

Tangen:

Many companies have a lot of young analysts.

Druckenmiller:

Who's at the top of things, they started, we noticed about three or four years ago that those kids going to Stanford and MIT, the engineers, were shifting from cryptocurrency to artificial intelligence. That was the first sign. Then my young partners started talking more and more about AI. I had them tell me how to get involved. They mentioned a company called NVIDIA, and I thought it was a gaming company I hadn't researched in a long time.

I bought a pretty large position, and then about a month later, ChatGPT was born. That was pure luck. I didn't know about ChatGPT, but the AI drumbeat was loud enough, and the stock had dropped, I think, from 400 to 150 or something. So that's how I started getting involved.

Once we invest in something like that, we start digging deeper. Then there was a series of things. We knew it would impact power. We knew it would impact uranium. We covered the entire chain like that; it was a pretty easy trend to spot, just like cloud technology, you know, these things come in waves.

But the problem with AI is that I'm struggling with it now; the reason we are exposed is not because we are bullish or bearish, but because we don't know how to get involved, because we started with picking and shovels, which is NVIDIA, and to some extent, Microsoft But now we see these modelers spending a lot of capital. If AI is real, and I think it is, they will give you the same answers. So we will have four or five companies that will spend a lot of capital, but I don't think this is a winner-takes-all model.

On the other hand, I think there are some applications that I haven't even thought of, that no one has thought of. They will suddenly emerge. I mean, who would have thought of Uber or Facebook in the early days of the internet? So we were very optimistic about AI before. But currently, we are not optimistic about it; we don't know where we should be and how to actively participate in it, just like the internet in 2000 and 2001, where you could believe in the internet without exposure and then gain your exposure on a more timely basis. Or I could be completely wrong, which is not uncommon.

Tangen:

But you also got involved early with anti-obesity drug manufacturers.

Druckenmiller:

Oh, that's what you think. I mean, I don't know what Norway is like, but in the U.S., if you go to Disney, everything is fine. If you understand the mindset of Americans, if you tell them there is a way to lose weight without doing any work. I know this drug was effective early on because we were exposed to it. But when I learned that if you stop taking the drug, you will regain weight, that’s when I knew it was a razor business because people would have to keep taking the drug.

Tangen:

You say that easily. It’s a bit. I mean, hey, you’re not the only one walking around Disney and seeing these things, right? So, you actually act on your intuition or all the data in front of you.

Druckenmiller:

Yes, but you know, it’s not all about being smart. So I bought NVIDIA at a very appropriate time, but I sold it at 800 or 900, just when the frenzy really started.

I also sold Eli Lilly at over 700, of course, making a good profit. Yes, I look for big trends. I’m not the type to hold for twenty years like Buffett, but I look for trends that last two to four years, both of which fit that category.

And honestly, we are now looking for AI applications that may not have been recognized yet. I think I have held Memorial Sloan Kettering for almost thirty years. Their applications in cancer are remarkable.

Tangen:

By the way, Memorial Sloan Kettering is one of the leading cancer hospitals in the world. Yes. They receive a lot of funding, partly because you are on the board.

Druckenmiller:

They do receive a lot of funding; I wouldn’t say it’s partly because I’m on the board, but thank you.

Tangen:

When we last met, you mentioned the concept of buying first and analyzing later. Let's talk about that topic.

Druckenmiller:

Yes, Soros used to call it investing first and investigating later. I think I just gave a classic example. I don't know much about NVIDIA. I only know about AI, and some people told me how to get involved. So we bought NVIDIA, and then we were doing more work, and then ChatGPT was born.

But my point has always been that the market is smart, it's fast, and it's getting faster with all the communication and technology we have today. So if I hear a concept I like, and if I wait and spend two to three months analyzing it, I might miss most of the action and then regret it psychologically.

It's hard to buy a stock. You're looking at 100, and it turns into 160. Even if it's going to 400, somehow your head gets messed up, and you're waiting for a pullback. So we buy something, a meaningful position, but not seismic, and then really do the work. If I think we made a mistake, I'll sell it. If I think we didn't make a mistake, and if we have to, we'll add to it.

Tangen:

I happen to work in exactly the same way in my life. It really focuses your work and your thinking on your work. But do you always trust your own pattern recognition?

Druckenmiller:

Yes, when I started this business, I was promoted. So before I really understood the specifics of analysis, I was elevated to a leadership position, and I had to rely heavily on charts and intuition. But I found it wasn't difficult if you're dealing with a cyclical company that's losing money or not profitable, and everyone in their industry is shutting down capacity. You don't need a rocket scientist to envision that 18 to 24 months later, if no one adds capacity, they might not be losing money anymore. They could make a lot of money. I find it very important to never invest in the now, always trying to envision what you see 18 to 24 months out, and then see if you feel things will be different from now, and will the security prices reflect that? I think this might be the biggest mistake investors make because they invest in the now instead of looking forward, seeing where the ball is going rather than where the ball is.

Tangen:

Now, some people believe in the intuition of others. Does Soros believe in your intuition, or do you have to show him the analysis? Soros.

Druckenmiller:

I had a tough start. I went there. I had some significant success running public funds at Dreyfus, and he told me I was his successor. But I don't think he was entirely sure when I got there. The first six months were very tough because it was unclear who was in charge. To be honest, we were all in bad trades. I flew to Pittsburgh because I still had Duquesne. I was running both at the same time. When I got off the plane, I thought we had payphones, and at that time we didn't have cell phones. The head trader there told me he sold my bond position So I might have a higher opinion of myself, and I should. I was very young at the time, and I was always responsible. So I was very angry and basically expressed extreme displeasure. He said, let's talk when we get back to New York. Implying that I wanted to resign. He said maybe there were too many chefs in the kitchen, and he would go to Eastern Europe for four or five years, not getting involved. Then he would figure out whether he had been hindering me all along or if I really didn't have the capability. That's the way he spoke, the way we thought, he just actually said it. Fortunately, when he left, the Berlin Wall fell. I invested in the German mark, but I think it was lucky for both of us. I was in the best run, like before or after, for about four years. So he kept talking about results. So I think he trusted my intuition, just because of the way the record started.

Tangen:

Do you trust your colleagues' analysis?

Druckenmiller:

I trust their analysis. Their analysis is much deeper and better than mine. But I can see the development of intuition, and I might be as optimistic about my company's stock talent as I have been for 45 years. So I think it's a person or service. Yes, but part brain, part analysis, and then part intuition. They are not intuitive like I am because they don't need to be. I have been somewhat forced to be intuitive because I never acquired their analytical skills.

Tangen:

You mentioned some examples where you sold too early. Do you usually sell early?

Druckenmiller:

No. I mean, awkwardly, we bought NVIDIA early, I think when its market cap was around $37 billion, thinking we would hold it for a few years. But I didn't think its market cap would rise to $900 billion in a year, let alone exceed $2 trillion. I think it started at $100 billion or $150 billion, which is some crazy stuff. So, if I had realized it earlier, I wouldn't necessarily have sold it early. I'm a technical trader, so I usually wait for the top, and NVIDIA really didn't have a top.

Tangen:

Okay, I just wanted to know. What does reaching the top mean?

Druckenmiller:

The top refers to a state where the rate of increase in stock price changes and flattens out for a period of time. In technical analysis, this could ultimately become a bullish flag, where the stock price just consolidates temporarily and then continues to rise, or it could also be a real top, where the stock price peaks.

Tangen:

How do you know which is which?

Druckenmiller:

You don't know. You have an opinion, you express it. Sometimes you're right, sometimes you're wrong. In the video, there was no top. But I, I have analyzed the semiconductor industry, not very well, but since the 1970s, it has been a cyclical industry. I know NVIDIA has durability; they have 4,000 software engineers. So it's not just hardware. You know, they have a software called CUDA that they use to power their GPUs. But I just thought, once its market cap exceeded $2 trillion, that was too much In the worst-case scenario, there will be a big correction. I will have another chance. Of course, I won't have another chance. Oh, you might.

Tangen:

Yes, I think you will.

Druckenmiller:

I don't know this price; let's assume I will buy it back. I don't mind buying something back at a higher price than I sold it for. I don't like it, but I am completely willing to buy something back at a higher price than I sold it for.

Tangen:

Some people can't allow themselves to do that.

Druckenmiller:

Oh, I can. One thing I'm very good at is that I'm not emotional.

Tangen:

But you've never had a drawdown here?

Druckenmiller:

No.

Tangen:

A silly question. Why does it matter?

Druckenmiller:

No, I think it matters because others talk about it, and my investors like it when I have investors, because, you know, they have this thing in our industry called risk-adjusted return. I don't really like that, but I would say I have significant drawdowns within the year. So part of the drawdown is just a matter of luck.

Tangen:

So what does drawdown mean to you?

Druckenmiller:

I become anxious.

Tangen:

Do you still feel anxious, even with your own money?

Druckenmiller:

Yes. I'm a competitive person, even with my own money. I wish I weren't, but I am. One of the reasons my results are as good as theirs is that I wish I weren't. It's a bit pathological, but it works for me.

Tangen:

Who are you competing against?

Druckenmiller:

My competitiveness refers to seizing opportunities. If there's a good opportunity that I missed, I will be disappointed in myself. It's like if I scored 20 points, I think I should have scored 50 points; I feel disappointed in myself. If the opportunity basically rises 10 or 15 and goes up 20, I'm happy. I mean.

Tangen:

The benefit of being an ambassador is that there's always a good reason to beat yourself up, right?

Druckenmiller:

Knowing where the good things about our business are, but it could also be the bad things about our business. For some reason, I like to beat myself up. I only measure from the top.

Tangen:

But what is the key reason for you to sell a stock?

Druckenmiller:

If the reason for buying the stock no longer holds, I don't care what I paid for it. If I bought it at 60 and it drops to 50 because the market discovered the problem before I did, I have no feelings about it. Soros is the same way I really didn't learn it from him, but it was definitely reinforced.

After a while, you also have enough confidence that you're not afraid to clear the table and start over. Because you have confidence that you will succeed again, you won't sit there with uncertain positions. Just clear the positions. If you've been doing this for decades and it works, you have the confidence to take losses, and once I'm out, I don't worry about it too much.

Tangen:

You said you have no emotions. What do you mean?

Druckenmiller:

Did I say I have no emotions? I have a lot of emotions. Are you talking about taking losses?

Tangen:

Yes.

Druckenmiller:

What I mean is that one of the reasons I think charts are effective, we have support, we have resistance, is because a group of people bought in at 60, it drops, they've been waiting for three or four years, it comes back to 60, and they could have been up in other things all along. I just don't care what I paid for the stock. In my investment process, that is absolutely irrelevant.

Now this combination, on one hand, is stubborn, but in Donnahan, you can change your mind. That's beautiful.

Rare, I was told. Yes, I was told by my friends and other investors that I am completely ruthless, yes, I was told that this is rare.

Tangen:

Do you think this is one of the keys to Geo's success?

Druckenmiller:

I think it is, I think it's a big part of it. I think, again, keeping an open mind and having humility, the only reason you can change your mind is if you're not arrogant about a position, that's important. I think I had some great mentors, one in Pittsburgh, and then Soros on scale. I think I self-taught some lessons very early. Don't be afraid to concentrate, that's it. That's a big reason for my success.

Another big reason is, I think, self-teaching is being willing to enter other asset classes. If you're going to concentrate, it's better to have five buckets than one.

So I grew up in the stock market, but sometimes the risk-reward in the stock market isn't that clear, when it's actually clear in the bond market or currency market. You ask about the reason for never hanging up. Part of the reason is that the most active moves in the bond and currency markets often happen in bear markets in the stock market, so you can put stocks in a drawer for a while and just focus on those markets.

I think that's a huge reason for my success, it gives you the discipline not to play in areas where you don't have a lot of confidence, because if you have credit to play with, if you have commodities to play with, currencies or bonds, you can usually find something that you think has a great risk-reward. They also tend to be more liquid than the stock market. So for our previous conversation, when you're wrong, you can change your mind.

Tangen:

What did you learn from Soros about scale?

Druckenmiller:

I don't know if you know, do you know, baseball or does your audience know baseball?

Tangen:

I don't play it, but...

Druckenmiller:

When I went to see Soros, I thought I would learn something that would make the German mark ultimately rise. Humbly, I found that I was doing better at this than he was. In baseball terms, I had a very high batting average. He had a higher batting average. So what you learn from Soros is that when you have conviction, you should make big bets. I know your audience may have heard this before, but the best example might be the pound.

Tangen:

So what happened, let’s go back. So you’re in the office. What happened in the UK?

Druckenmiller:

So I’m in the office in New York, and Scott Bessent, one of my partners in Europe who mainly trades in Europe, he’s in London, he tells me that the housing market in London is a big problem, and the UK economy is in trouble because, like most Anglo-Saxon economies, it is very affected by housing and such factors. Just.

Tangen:

Paint a picture. So you’re in the office, do you overlook Central Park?

Druckenmiller:

I don’t overlook Central Park, but I’m close to it. I’m in the Soros office on the 32nd floor. But that’s okay. It’s not a corner office. It’s not fancy.

Tangen:

So the UK economy is declining.

Druckenmiller:

We thought the UK economy was declining. But I need to take you back to about three years ago when the Berlin Wall fell. It probably saved my job because I might have been fired six months after Soros went to Eastern Europe if the Berlin Wall hadn’t fallen, but the German mark dramatically dropped in two days because the theory in the market was that the Ostmark, the East German currency, would contaminate the German mark. I knew German history, knew they were obsessed with inflation because of the Weimar Republic. And then led to Hitler and so on. So I knew my Germans, we were absolutely obsessed with inflation. I knew that bringing all these East Germans into the labor supply would lead to economic prosperity. So we were very optimistic about the overall German economy, and we were very confident. Then there was no way the German bank would allow inflation. So we were very confident it would come with tight monetary policy. So we had shorted the Italian lira successfully during this period. So when Scott called me, we were already on the German mark journey. We had been for years. The UK economy was declining, and the currencies were interconnected.

Tangen:

So there was an inversion, right?

Druckenmiller:

There was an inversion. So I called to ask how much it would cost me to short the pound against the German mark for six months. The cost was 0.5%. At that time, the Quantum Fund had about $7.5 billion I decided to invest first and then conduct research.

So I decided to short the British pound with 1.5 billion from the fund, which is about 20-25% of the fund, while going long on the German mark. I expected to possibly lose 0.5% within six months due to the pegged exchange rate system, and I believed that this pegged exchange rate system would not break within six months.

However, about five or six weeks later, I was afraid to believe it was on September 15th when I read an editorial by the president of the German central bank in the Financial Times.

Now that I am older, I am quite sure he wrote an editorial in the Financial Times, using more appropriate language, but he basically said that the German mark and the British pound should no longer be pegged. So I decided to lead Duquesne and Quantum Fund to go 100% long on the German mark and short the British pound, as the cost was still 0.5%, which was incredible.

Now you will hear from the old Soros. So he happened to be in New York, which he doesn't always do. I walked into his office and explained to him why I wanted to go 100% long on the German mark. He had quite a large personal account. That's how we kept our interference minimal. He traded that, you know, 90%, 90%, 95% overlap. I told him why I was doing this. He had a rather unpleasant, confused expression when I told him my thesis that one economy was booming and needed higher interest rates, while the other economy was collapsing and needed lower interest rates. These two currencies should not be pegged. I was thinking, does he not understand this? Because this gentleman almost understands everything. Then he said, look, this is a one-way bet. They rarely occur. Going 100% long is absurd. We should put 200% of the fund into this trade. So there you have it.

Tangen:

So that means you borrowed money from the bank and doubled down.

Druckenmiller:

On a $7.5 billion fund. He thought we should short the British pound and go long on the German mark with $15 billion. As it turned out, we never got there. But it showed the way this person thinks. I saw it time and again.

Tangen:

So what happened when you broke it?

Druckenmiller:

Yes, unfortunately, we had quite a strong reputation. When I started selling, I noticed many other hedge funds began to sell as well. By 1:00 to 1:30 AM, the forward market had exploded. They started at half a percentage point and eventually turned into 6 or 7 percentage points, basically trading stopped after 1:00 AM. Then the Bank of England intervened from 6:00 AM to 9:00 AM, trying to stem the bleeding. Then interest rates rose to 12%. I knew everything was over, but the forward market had become irrelevant. By noon the next day, it was all over.

Tangen:

He was sitting next to your desk, watching the screen.

Druckenmiller: Yes, whatever the screen was. We only did $7.5 billion. Ironically, without Soros, we might not have reached $7.5 billion because I originally planned to do $1.5 billion, and I was more anxious

Tangen:

So how did you feel when you broke it?

Druckenmiller:

There was a lot of adrenaline. It was exciting. I didn't feel sad because I thought the UK economy needed it. Years later, when they changed "Black Wednesday" to "White Wednesday," I felt vindicated. Then after the UK exited, I took action because UK bond prices dropped two points, which I thought was ridiculous. The UK needed to lower interest rates.

Tangen:

There was a hole because what happened was the currency devalued, which was good for exports. Right? So the stocks went up.

Druckenmiller:

Yes, the stocks went up. Bond prices also went up because they needed to lower interest rates; they were artificially kept high. So I did a lot of other things around that theme, and that's how I trade. You have a theme, and then you look at the dominoes that fall because of that theme. But the key is, when you really believe in something, Soros's position may never be big enough. Especially in a liquid market. I learn from you; I like to play during a big turn.

Druckenmiller (continued):

He is completely willing to play from the third inning to the sixth inning. If we go back to baseball terms, if it's a nine-inning game, he is completely willing to play from the third inning to the sixth inning when there is more certainty, and he can use more leverage; he has more courage than I do, especially in positioning. I don't think that completely influenced me, but it certainly helped me. It was a huge learning experience. I think the most important thing I learned from him is not whether you are right or wrong, but how much you made when you are right and how much you lost when you are wrong. He may be one of the best ever.

Tangen:

Stanley, many people have heard about you shorting the pound, but not many know that you also shorted the Swedish krona.

Druckenmiller:

I don't remember very clearly, but it was another victim of the German mark. I assumed there was some sort of disparity between the two economies, and I thought there was a peg that was inappropriate. The result was yes.

Tangen:

So you took that bag, and you also took another bag; I think you also got involved with the Thai baht.

Druckenmiller:

Yes, the baht was easy. They,

Tangen:

But no one knows about this, right?

Druckenmiller:

No, I think Sebastian Mallaby wrote a book called "More Money Than God." There is a whole chapter about the Swedish krona.

Tangen:

That’s not about the Swedish krona.

Druckenmiller:

No. Swedish Krona, no. I would rather no one knows about these things.

Tangen:

But. Well, we need to get it right for the history books.

Druckenmiller:

I'm glad to talk about it twenty-five years later.

Tangen:

Do you regret any missed trades?

Druckenmiller:

I often regret trades I didn't make. I want to mention one of the biggest mistakes I made. I predicted inflation early on and had a strong feeling about it. My partner Christian Broda and I wrote an article in The Wall Street Journal in the spring of 2021. At that time, I had a significant short position in two-year Treasury bonds, which had a yield of 15 basis points. I thought it was a one-way bet. At 15 basis points, I was captivated by their position at the time. I initially expected Treasury yields to drop from 15 basis points to lower levels, so I closed most of my position when yields fell to 150 basis points, which seemed like a big win at the time. However, later Treasury yields rose to 500 basis points. I deeply regret not holding that position. There might have been another 30, but I prefer to forget my mistakes.

Tangen:

Do you think machines can replace humans in investing?

Druckenmiller:

No, I don't think so. But I believe they can serve as assistants; a combination of humans and artificial intelligence can beat any purely human effort. I've been fortunate to know Garry Kasparov for a long time. I am a co-founder of the Garry Kasparov Chess Foundation, and there's no particular reason for that; I hardly play chess. My 9-year-old daughter can beat me. That's how I got started with Garry.

But he might be one of the earliest users of machines. Yes, training himself and collaborating with them. I can see the same thing happening in fund management . I don't think purely machines will make money, although they have a disciplined process and are mathematical. But I believe if you can find an intuitive investor who uses AI and other tools to supplement, I think that could be the best investor in the world, rather than a machine.

Tangen:

Now, you took a break in 2000. What was the reason?

Druckenmiller:

It's a painful but very interesting story. It actually started in 1998. Well, no, it started in the spring of 1999. I shorted what I thought were 11 or 12 internet stocks, not the leaders like AOL or Yahoo, and I believe the position was $200 million, but within weeks I lost $600 million. So that was my first big loss. I was down 16 or 17% in the spring of '99.

Then I turned around and realized that Greenspan was adopting an accommodative monetary policy due to the Asian financial crisis while the U.S. economy was strong, and internet technology was on the rise, etc. I hired some young investment managers to buy those stocks I wasn't familiar with These young managers have their own small-scale investment accounts, and I make large investments in the stocks they choose.

After going through a difficult period, our portfolio achieved a net gain of 42% a year later, recovering from previous losses, mainly because we capitalized on the upward trend of the Nasdaq market, especially in 1999.

Then in January 2000, I thought the market was too crazy and decided to sell all my tech stock holdings. These holdings had grown to about $6 billion, which was a huge number for that time. I also told Soros the reason for my decision to sell all tech stocks.

I sold most of my tech stocks, leaving only a few small positions. I really didn't care about these small positions because the Quantum Fund was too large, and this small investment wouldn't significantly affect performance. However, these small investments continued to perform well in the market, earning 4% to 5% daily.

What I mean is, the market was still thriving until March. I watched this and was very angry with myself for not being in this trade. Then in early March, I couldn't take it anymore. I tell you, I am not emotional. This was a real emotion, a very foolish move.

I bought back all of these. I think I missed the top by about an hour, so I bought back all these tech stocks. Within a week, I knew I was dead; the Quantum Fund's returns dropped from 14% to 1%.

I had gone through the trauma of spring, and I recovered from it, but it had a huge impact on me. I have kids, you know, it was a repeat of last year. So I went to see Soros, and I told him two things. Hey, I am getting out of all this.

I am going to resign. We can't tell anyone because I have to liquidate this portfolio. But the Nasdaq, it was at the beginning of a 90% decline, and you couldn't exit. So when I exited, it took me a few weeks, and the Quantum Fund dropped 17%, and Dukin dropped 17%. I was exhausted.

I had been running this high-profile fund for twelve years. So I sold everything, everything was in Abu Dhabi, and sent a letter to my investors saying I was going on vacation. I didn't know if I would come back. You can take all your money out. But if you take your money out, if I decide to come back, I can't guarantee that I will allow you back in. I think I had about 200 clients. One of them took their money out. I remember who it was, but that will be kept temporarily. So I shut everything down. My wife, kids, and I went to Africa. The best thing I did was, in the summer, I refused to expose myself in any way to anything that would tell me where the market was. So I was not allowed to watch TV. I was not allowed to see the prices in The Wall Street Journal, nothing. So I came back on Labor Day. I thought my wife couldn't handle me at home after the kids went back to school. A bit of humor, maybe not.

So I came back, and it was remarkable because the S&P had rebounded to its highs. The Nasdaq had recovered about 85% of its decline, but the dollar was up, interest rates were rising, and oil was also up. If you look at history, these are the three death kisses of the market So I started calling all my clients, who are basically small business owners; they are not flashy institutions, and their businesses are doing poorly. Then I called Ed Hyman and said.

Tangen:

He is a stock strategist.

Druckenmiller:

Yes, Hyman might be the top institutional investor economist. I said it was strange; I hadn't been paying attention to the market for a while, with the dollar rising and so on.

Two days later, Hyman published a regression analysis result in his daily update. The analysis indicated that certain factors affecting the economy were: monetary factors accounting for 50%, oil factors for 25%, and interest rate factors for 25%. Hyman predicted earnings a year in advance, forecasting a 36% decline in earnings over the next year, while Wall Street's consensus expectation was an 18% increase in earnings.

So I combined this information, listened to my clients, and in fact, Greenspan had a direct weapon for tightening, which I thought was inappropriate. I started buying all these government bonds; the market wasn't moving in my direction, but all the information kept coming in, so I kept buying more. Now I have a 350% exposure to government bonds in this fund. Then I was lucky enough to encounter the Gore-Bush controversy, the economy collapsed, and I ended up making 40% in the fourth quarter. So I took a year off.

When he returned to manage funds, he found he had lost 18%. I thought, at least I don't have to worry about this anymore. I finally accepted the reality of the loss; it was like the best year I had ever experienced. If I had continued managing funds, I think I would have been very nervous and unable to make that trade. That was because I took a four-month break, cleared my mind, and then just re-examined the new evidence. So it was a very bad start and a very lucky ending.

Tangen:

Now, you don't take vacations often. You work very hard. When you wake up in the morning at 4:30 AM, what do you do? You have an office at home.

Druckenmiller:

Yes. I immediately go to Bloomberg.

Tangen:

At 4:00, do you make a cup of coffee first and then go to Bloomberg, or do you go straight there? Yes.

Druckenmiller:

No, yes, I make a cup of coffee first. I go up. I haven't showered yet. I check all the markets, read The Wall Street Journal, browse the Financial Times, skim the New York Times, and check all the overnight emails. When I say check, I mean skim through them. For the important ones. Then maybe around 5:15 or 5:30, I shower, go to work, and start over.

Tangen:

So when do you sleep?

Druckenmiller:

Usually around 9:30, to see what happened in the Japanese market?

Tangen:

Basically, you live according to the financial markets

Druckenmiller:

Yes. My mother-in-law said something a long time ago that she thought was a joke, but she was right. This is the only thing I'm really good at. I really enjoy it. It keeps me young. I'm here dealing with these analysts, who are all talented young people, but I'm forced to read the newspapers, forced to understand these trends, and that keeps me excited. I love it.

Tangen:

Now, you're 71, right? Yes. Do you think you'll continue until you, until you die?

Druckenmiller:

Yes. Hopefully not tonight.

Tangen:

No, I don't think so.

Druckenmiller:

Yes.

Tangen: Finally, we have thousands of young people here. They want to be like you, making a lot of money in the financial markets and achieving success. What should they do? How should they get in? What should they consider?

Druckenmiller:

First of all, if they're getting into it for the money, they should go somewhere else. Yes, there are too many people like me who just love the game for the reasons I just outlined. They won't be able to surpass those who are passionate about the game. And if you lose, it's not a fun game. I'm just telling you.

How I deal with losses. So, but if they have a passion for it, if I were a young person, I wouldn't go read an MBA. I would find a mentor. If they didn't want me, I would keep pestering them until they eventually accepted me to work for them and learn everything I could from them. If they still like the industry, just keep working to grow your knowledge base.

I want to say that in our business, the skill set of analysts is completely different from that of portfolio managers. Occasionally, you will encounter overlap. But if they really like the analyst part, that's where we all started, thinking they have to become a portfolio manager. I've seen it ruin the lives of those who aren't suited to pull the trigger. So they should keep an open mind about it. I got into this industry because I wanted intellectual stimulation. And you'll get a lot in both areas, but that's my advice to them. And to keep an open mind.

Tangen:

Stanly, this has been a historic conversation.

Druckenmiller:

Thank you, Nicolai, I think I've said more than I should have. Too much trouble. Thank you