At the 2023 Sohn Investment Conference on May 9, 2023, 13D Research & Strategy Founder Kiril Sokoloff spoke with Duquesne Family Office CEO Stanley Druckenmiller about the future of investing.

This session is presented by Sohn 2023 Corporate Sponsor: Tegus

For those that missed it earlier, this year's SOAN corporate sponsor, TGIS, has come up with a fun idea for SOAN attendees.

They've offered to source a custom expert call for anyone in the SOAN audience, which you can do at tgis.com slash SOAN.

Hopefully some of those calls will be used to investigate the ideas that have been presented so far today.

We move now to an incredibly interesting interview.

Stan Druckenmiller is the founder, CEO, and chairman of the Duquesne Family Office.

He's 1 of the most successful and legendary investors of all time, with an incredible investing track record across decades and through a variety of market environments.

He's also a student of history, and I'm sure that his ideas today will be sobering informative and balanced.

Sam Altman said earlier that he tries not to make macro predictions, but Stan is in that business.

So I expect some macro thoughts that will leave us all thinking.

Stan is being interviewed by Kirill Sokolov, the founder of 13D Research and Strategy.

Kirill too is a student of markets in history and brings decades of perspective, making him the perfect person to steer the conversation and get into the most important topics with Stan.

It's always such a great pleasure to be with you.

I can't think of anyone in the world I've talked to you.

Last year, you told me you thought the US recession would arrive in the last half of

or early 24, but you recently told me that you brought your recession forecast forward.

You're hearing lots of anecdotal information from the CEOs you talk to, problems in trucking, problems in retail, obviously credit contraction issues.

And you believe that the consensus of a soft landing is very unlikely.

And you rate the probabilities of a hard landing as quite high.

After all, how could we not have a hard landing after 11 years of the greatest monetary stimulus in US history?

A 500 basis point increase in short rates over the past year, the developing real estate crisis in commercial real estate, regional banks have 33% of their loans in that sector, and the bursting of the everything.

You conveniently left out part of the punchline, which was when we talked, I told you that I've been doing this for 45 years.

I have to make economic forecasts for a living, and this is easily the most challenging period to have a confident forecast I've had in my career.

You've just articulated some of the reasons the extreme monetary policy and then the abrupt change.

But COVID figures kind of mess everything up.

Trying to figure out what the momentum coming out of COVID is just that and is real or is not real or sustainable or is not sustainable.

Then you've got the whole China reopening.

So I want to qualify anything I say with saying in terms of confidence.

It's not as much as I would usually have not that economic forecasting is is an exact science anyway, but but we do know a few things.

I read Edward Chancellor's The Price of Time.

As you know, I've been saying for years that my observation was the worst economic outcomes tended to follow asset bubbles.

I was only looking at the past 100 years or so.

And, Edward Chancellor's book and real tour de force describes how this has been going on for over

years And basically every time you've had interest rates below

going back 500 years, it's generally been followed with difficult economic times.

So if you look at the current menu, I think it was actually just a little over 2 years ago, I went on national television and said we had monetary policy that was the most reckless and extreme relative to the economic circumstances I had ever seen.

You had a booming economy, you were coming out post COVID and it was clear post vaccine that we were on our way to maybe the most rapid recovery I had seen in my lifetime.

I was not surprised about a year later that inflation reached

I was not surprised that SPACs went crazy.

What I was surprised by was that for the next year while all that happened, Jerome Powell's Fed continued to have their foot on the gas.

billion a bond a month while rates were 0.

This obviously led to everything I just described.

Then, realizing they had probably made the biggest mistake in the history of the Fed, they slammed on the brakes.

They've raised rates 500 basis points in the last year.

We know historically, 2 things which you've already articulated.

So I'm sitting here staring in the face at the biggest asset and probably the broadest asset bubble.

Forget that I've ever seen that I've ever studied.

And then as the grand finale, the government spent 5 trillion on COVID, the Fed financed 60% of it.

And as I just described now we now we have a big hike in interest rates.

At that constellation of factors Know that we've only had a few soft landing since 1950.

Proceeded by what I would call proactive rather than reactive fed policy.

And believe we're going to have a soft landing.

1 never knows, but if you're just looking at the odds, they're very tough.

In terms of the timing, I have much less certainty on that than I do on whether we're going to have a hard landing or a soft landing.

The timing is difficult, but I will say, you've already noted, in our shop, we tend to use anecdotal information a lot.

Housing, which has tended to lead historically, is actually fairly robust.

Travel, restaurants, stuff like that is fairly robust.

But other stuff, trucking, which has been a guiding light for my firms in terms of economic forecasting with a 6 to 8 month lead time, actually since I got in the business is extremely weak.

We're hearing bad, bad anecdotes from retail.

And then of course, you have the, you've already mentioned it, the the banking problem, we always knew, given what I've already described, there are going to be bodies out there.

When you have free money, people do stupid things.

When you have free money for 11 years, people do really stupid things.

Obviously, the regional banks, recently we had Bed Bath & Beyond.

But I would assume there's a lot more bodies coming.

The regional banks, the median regional bank has 43% of their loans in commercial real estate, about 40% of that is office.

As you know, we've had this huge change in lifestyle.

Due to COVID, number 1, the great resignation, but number 2, people are going to the office.

So we have actually a higher vacancy rate than we had in 2008.

So I put all that together and I look also at the inverted yield curve.

The timing has always said sort of third to probably fourth quarter of this year to first quarter of 24.

But the recent anecdotes, the banking problems, I wouldn't be surprised if there'd be encounters a year from now as they tend to do backward looking that the thing started sometime in the second quarter.

I don't know that, but I do this for a living.

And given all the uncertainties and the difficulty of having a conviction.

And how do you best mitigate those risks?

Will the outcome be inflationary or deflationary, a combination of the 2?

I argued that 18 trillion in sovereign credit with a negative yield and interest rates at 5000 years low, 5000 years low was a real deflationary extreme.

On the other hand, for years you've argued that the surest way to create deflation is to build an asset bubble and then burst it.

And we're in the fourth great super bubble of the last 100 years.

And what are the implications of another round of massive monetary stimulus?

Well, the easy answer to your question and the most truthful 1 is I don't know.

First of all, when I talk about a hard landing, I'm talking about something, albeit starting from near record margins, that probably encompasses say a

plus with an emphasis on the plus decline in corporate profits.

Unemployment probably going up from probably going up from the 3.4 right now to something above 5.

Probably a number of increases in bankruptcies, which as you know, Carol, are astonishingly low, given that we've been in 1 of the most disruptive economic periods since the 1880s.

And until recently, there've been basically no bankruptcies and they're nowhere near where they were in

In terms of inflation or deflation, wow, that is really hard.

2 years ago, I was pretty confident inflation was going to go up and go up materially.

Now, it's funny, we had a staff meeting last week, and I said I could make a case in 3 years for inflation being at 8, or I can make a case for deflation.

That's kind of a wide range in terms of giving an answer, but I would say.

The hardest thing looking at all this is sort of looking at the money supply.

So Ed Hyman, who I have unbelievable respect for, has pointed out that we have the most rapid shrinkage in the money supply we've ever had.

But it's not that simple because the money supply grew in the high 30s, around

So if you look at the stock of money, it's still extremely high.

So if you make this big mountain and you just come down a little like this, Yes, the year to year over change in the money supply is like minus

but there's still a lot of liquidity out there.

I think Jamie Dimon said a year and a half ago, there was like 2 and a half trillion in excess deposits and savings.

We've worked probably a trillion, a trillion and a half of that off, but there's still a stock out there.

So trying to time this is difficult but putting it all together, given anecdotes given the fact that we are on our way with long and variable lags were already a year into it.

I would guess inflation will probably come the next 6 to 9 months, and that's when it gets really hard.

Because then you're asking me to predict what the Fed will do.

And I just told you I was astonished at what the Fed response was in

And in case no 1 knows, next year's an election year.

If they act like Arthur Burns when it goes down to 3 or

and you haven't had enough time where inflation is down, and they haven't slayed the dragon, that's where I could see a few years out sort of an inflationary, probably with an emphasis on the stag part, a stagflationary environment.

Or I am haunted by the previous things I've said and the fact that we've had this massive asset bubble.

If you burst it, there's a possibility that they can't put Humpty Dumpty back together again.

If there's 1 thing about the consensus that I'd say I'm on the other side of, and I want to be careful with my words here, It's this constant repeating that this looks like nothing like 2008 or

First of all, those saying it, I don't remember them predicting in

And I don't remember people saying the banking system was that weak going in.

I am not predicting something worse than 2008.

So I don't wanna see headlines tomorrow that I said something worse than 2008 is coming.

But I think it's naive to not be open minded to some sort of possibility of that effect.

The banks have got themselves in a balance sheet problem Before the loan losses have started because of, obviously, the mismatch of liabilities and assets with treasuries on their balance sheet, they're basically have stuff yielding to

So before we even get into an economic contraction, many of the banks already have impaired balance sheets.

If you pile on losses in commercial real estate, credit card losses, the stuff that normally happens in a recession.

And you take the fact that we have had this big asset bubble going into it, and you take the fact that we just had the most rapid increase in interest rates from the bottom in history.

I think it's just naive not be open-minded to something really, really bad happening.

Again, it is not my forecast, but as a risk manager, it has to be part of my matrix and my equation and thinking about it.

Well, let's go down that train of thought.

In a hard landing, what asset classes would perform best?

And of course, during the time of nifty 50s and 70s, as that bubble burst in

the so-called basic industry stocks were flat, didn't get any involved.

And once the Fed started cutting in early

Likewise, during the early 2000s, as the internet bubble burst, commodities and commodity equities, especially oil held up well, and of course, were the leaders in ensuing decades.

So the natural inclination is to reduce exposure to commodities if a hard landing were coming.

But history shows that that doesn't always work.

So as you're doing your thinking forward, how do you evaluate how much exposure to have in these sectors and what events or market action would make you want to take very large position.

Well, you notice the period you went right to was the period I just also mentioned, which was the Arthur Burns reign.

And with the OPEC increase in 1973, and I think oil went up 400%, and then Burns taking his foot off the brakes too early.

Obviously, chemicals, oil, stuff like that, added sort of a wonderful period.

I don't think this is all that different.

Again, it's going to depend a lot on government and policymakers' response if we get a hard landing, but 1 would think.

They're going to be some great commodities.

At this point as we approach the hard landing.

Only because I'm not an idiot, and I know what happened to the cyclical factors as a hard landing starts.

But coming out of it, given the move toward EVs, given the usefulness of it and infrastructure spending, which I think a lot of government policies will try to encourage on their way out.

The question is, when I was when am I supposed to buy it?

And a lot of how big I would get a position like that again will be policymakers response if we even get a hard landing.

As I said earlier, this is not an easy forecast, place to forecast.

The other interesting place is the US housing industry, because housing has obviously gone down dramatically, given the 500 basis point increase in interest rates.

But we, unlike 07-08, we actually have a structural shortage in single family homes going into this.

So if things got bad enough, I could actually see housing, which is about the last thing you would you would think of intuitively could be a big beneficiary on the way out.

And then I would say there's always growth.

And this is really hard to figure out which names, but biotech has been a big under performer in the last 3 to 5 years.

And there are tremendous things going on in cancer and other areas.

There was an article, I guess it was in the Economist last weekend about new viral drugs, using viruses to conquer bacteria.

I would hope that I haven't been 1 to buy into fads historically.

I played some Bitcoin at the bottom, but never really got too, too worked up about blockchain.

in an emotional moment in the tech bubble after having sold it.

But I actually think the AI thing is very, very real and could be every bit as impactful as the internet, literally going forward.

And it could be a beautiful opportunity in a hard landing, just like 0102 were a beautiful opportunity when the tech bubble burst going forward for companies who would benefit from the internet, AI could be there.

It's funny, my firm has only been able to participate in AI by owning NVIDIA and Microsoft.

And it's not even clear to me, and this is kind of out there, Carol, but it's not even clear to me if we had a really bad recession that Nvidia would even go down.

It's kind of a stupid statement, given the multiple on it.

But if they bought staples historically in recessions, why wouldn't they grow a company that's obvious, buy a company that's obviously going to grow very rapidly.

So those are just some interesting thoughts.

I mean, we own gold and silver right now.

They historically have not done well in hard landings.

But given the, it looks to me like the monetary and the fiscal authorities are kind of at the end of their rope.

And given the fact that other countries have decided, particularly autocracies, not to hold their reserves in dollars.

I'm betting for the time being against the history of the performance of gold and hard landings.

Could be wrong and then don't go out and buy gold.

I could change my mind in a week or 2 folks, but those are just some thoughts to a very hard question.

I would say the most important answer I give that is keep an open mind and see how the authorities react to this over the 6 to 9 months because they can give you very different outcomes, but be open minded to your question.

Given the boom bust that the Fed has created for decades, the free money of the last decade, The Free money decade.

If 1 were to occur, do you think the independence of the Fed is in jeopardy?

And would it be a fatal blow to the utility case, for some?

I think the feds independence will survive.

It will be the most risk of that independence that I will have seen in 50 years.

I think there's a 5 to 10% chance if the hard lending got really bad and people look back at the record of the Fed the last 5 or 10 years, you already hear people screaming about 500 basis points, and the Fed has gone too far.

an election year, if things get really bad, and they look at the actual record, the guy blew 40 years of credibility in terms of disinflationary mindset.

And then like a reformed smoker, maybe if we have a hard landing, people will say he over adjusted and was wrong again.

I hope and believe their independence will survive, but it's not an unreasonable question.

Moving on to what the government will do in the recession in terms of stimulus.

Is it possible that we've seen literally the end of the credit cycle and that there are no more balance sheets left to fight.

It's possible, but these guys never cease to amaze me.

And I don't think they'll go down without a fight.

We have, we come into this with fiscal challenges completely unlike any time we've ever been in this situation before.

I remember in 79 and 80, when Reagan rode in on his white horse, you know, the market was 8 times earnings, prices were depressed and balance sheets, particularly the governments were nowhere near in the situation they're in now.

So there's not the room to move on the monetary or the fiscal front in a reasonable manner that there's been going into other cycles.

Wasted all our bullets amazingly in the last few years in an economic expansion.

But you know, the government can always print money and try.

I mean, they tried everything, and it didn't work.

Going back to Edward Chancellor, and you were kind enough to interview him in my brain trust in January.

is our current society so addicted to government and central bank financing that it's impossible to work our way out of this.

And you asked Edward whether he thought it was, whether we passed the point of no return, And he said he thought we

Just categorically say we passed the point of no return.

You know, I was worried about our fiscal situation so worried about it that 12 years ago, I went out and tried to convince

what lay ahead of us and was worried about the 2025 to 2035 period because of the demographics of the situation and what might happen with interest expense.

Frankly, the period since then has been worse than I ever imagined.

So I don't want to go quite so far as Edward went, but Let me just say I'm concerned.

It is amazing how America has this culture that always seems to respond and come back and maybe with a hard landing and a flush out and just a terrible recession that brings back the values and the culture we've only had.

We come out of this on the other side, but I mean, it's a scary cocktail that we're being presented with.

So looking at how you navigate these tricky markets, you've been saying for a year that being short is very dangerous because of brutal bear market rallies.

But if you're a standard long short hedge fund, how do you position yourself?

I like fat pitches and then the swing big.

And I also like when you don't see a fat pitch, stand there and let the pitches go by.

2 years ago, 2 years of 15 basis points with the money growing at 40%, money supply growing at 40%, that was a fat pitch.

Your risk reward was maybe if you're dead wrong, the 2 year yield goes from 15 basis points to 10 basis points.

I thought at the time, if I was right, they would go to

I have to admit, I didn't think they were going to go to 500 in a year.

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Sohn 2023 | Kiril Sokoloff in conversation with Stanley Druckenmiller