Stanley Druckenmiller on Economy, Stocks, Bonds, Trump, Fed: Full Interview

people may be confused they know Stan Druckenmiller or at least they think of Stan Druckenmiller as a hawk you've been complaining for several years that the fed wasn't raising rates fast enough or soon enough and now just as the economy is about to have its best year since 2005 you want the Fed to stop why excellent question and I certainly think it's a valid one let's go back in time a little bit the reason I started I think you would use the word complaining four or five years ago was I became very concerned particularly when

they started QE 3 that we hadn't learned our lessons from the past and we were going to create another yet another bubble in financial assets which would lead to yet another bust which would lead to even more radical monetary policy and less tip less discipline in terms of government spending and so forth and so on it's almost a repeat of my schizophrenia that went on in the early 2000s you didn't know me Eric but at the time I was a vocal critic of the last fed cut in oh three I became particularly incensed in late

oh three when the economy had fairly clearly turned and was growing rapidly that they stuck a considerable period on there to ensure that we'd have escape velocity and good economic growth the only thing they ensured was a housing bubble which then led to what we know became known as a financial crisis now here's the contradictory part if you knew me at the time you would also know that I became very vocal in as early as oh five about the housing bubble and by early oh seven was very vocal about how the Fed should be cutting

rates and reversing monetary policy I still believe could be wrong we'll never know counterfactuals don't seem to work had Bernanke recognized what was going on when to be fair twenty to fifty money managers did in early to mid oh seven that this was not a little hundred billion dollar problem that was containable but that it was a disaster looming and had he cut six to nine months earlier we would have had a recession but I don't know whether we've had a financial crisis and we certainly would not have had the consequences we've had so let's

fast forward as you know a few years ago I started saying if you wanted to create a deflationary bust I would do exactly what the Fed was doing since 2010 corporate non-financial debt has grown from six trillion to nine point six trillion where I'm from that's about a 60% increase during that time corporate earnings increased 27% so how in the world did the S&P earnings increased 60% it's because all that borrowed money went to finance buybacks and M&A so this entire trillions and trillions of dollars though to my mind were pushed were as a result

of investors being pushed by the Fed to go out on the risk curve take more risk resulted in a big debt built up resulted in Donald Trump feeling comfortable doing more fiscal spending resulted in Barack Obama saying he didn't want to he did not want to balance the budget on the backs of old people so there were no entitlement cuts so essentially the bond market which would traditionally have been a vigilante from all this sort of behavior market signals were cancelled we developed yet another bubble and we're now sort of in the position potentially and

I want to say potentially where we were in early oh seven but I'm not calling for a cut and that's why I say potentially if you look at the coincident economic indicators which I wish the Fed did they actually look at lagging indicators but if you look at the coincident ones they all look quite good GDP has a three handle so forth and so on if you look at the indicators I have historically used in my business they're not quite read yet but they are definitely I'm sorry no continue they're not read yet but what

what they are definitely amber and they are setting off warning signs what do you see okay so the best economists I know is the inside of the stock market and I'm sure you've heard Herrick to joke and I heard at Bowden in my economics one class the stock markets predicted nine out of the last five or sessions I will say with all humility that's better than the Fed they've gone over nine so nine out of five it's not it's not that terrible but the best economists I know out there is the inside of the stock

market so the Fed when they look at the stock market and they look at financial indicators probably is just looking at the S&P but the decline in the S&P which is funny when I was preparing for this interview it was ten it's now 13 is a bit of Mirage because if you look inside the stock market these cyclical elements of the economy particularly the front end sickles have show a completely different picture than the defensive parts of the stuff that's more sensitive to the economy economy so auto stocks are down 30% they're not down 10

or 11 they're down 30 building stocks are down 35 banks which you would think might be a symbol of credit or something else are down 25% the Russell 2000 is down over 20 percent retail equities are down over 20 percent so how in the world could the S&P only be down 10 or 11 when I was looking at these numbers it's because utilities staples and pharmaceuticals which are economically defensive are actually up and this is the same situation I use cycle after cycle so that's one of the thing the inside of the stock market which

is the best economists I know and which I've used every cycle when I've invested is saying there's something not right here and this is the same set of indicators that you've used to predict the past four recessions the very same yes you might say it's because I have a not-so-pleasant personality but at at duquesne we always made we did predict the last four recessions and our returns going into them and as they started we're always well above our average returns over time so inside the stock market is one indicator the segment would be the yield

curve again amber not red but we've inverted as you know from fives and to is just slightly two years of 269 five years at 268 the ten years to 85 so there's not only a big flattening going on it's a very confusing bull flattening because it's not like we're looking at high rates to start with here and the Fed is you know told us that there's going to be three to four hikes next year after this hike and the market is just saying no no no then the other thing we've looked at historically is credit

tends to lead the economy there seems to be a confidence that this cycle we don't have the danger we had in the last cycle because the bad stuff all our housing back then has not infected the banks it was more done in the high-yield loan market and to me it's true it's great that it's not in the banks because that would probably be a systemic problem at a financial crisis but the economy doesn't really care whether credit is in the banks or it's in the investment community with high a loans in fact I would argue

that if you're on the other side of it you much rather work your loan out with a bank then you would with some hedge fund manager out there so the fact that I'm sure you read the article in The Financial Times yesterday and the fact that credit is drying up to the extent that it is and there all sorts of warning signs there I think the GE CD s has gone from 50 basis points to 200 basis points since September first iBM has gone from 30 to 80 high yield indexes are moving leverage loans are

down 3% but more importantly because we've had eight years of free money and the kind of excesses and pushing people out in the yield curve so that's created it's just a time for caution that you want this bubble to unlined slowly now because if you don't and let's say these indicators turn red you may have to do a lot more crazy monetary stuff and actually it'll be more of a problem in terms of someone like me who eventually wants to normalize one study leverage that's the Train I've been on I understand but this isn't an

effort to let that bubble out slowly someone I believe used the term three or four years ago that this is a beautiful deleveraging taking place I have no idea what he was talking about how do you have a beautiful deleveraging with us debt going through the roof at the government level and corporate non financial debt growing at the rate it was so what I'm asking for now is not a cut just to take stock of everything I've said and wait and see what happens and what I'd really like to think my business as you know

is risk reward so let's just talk about the risk reward here let's suppose I'm completely wrong and three to four months from now none of this stuff matter and all the financial people were crazy and they were panicking because of some technical factor in the market and let's suppose the Fed did not hike tomorrow what is the cost okay I'm not sure what the cost is but there's got to be some cost to their credibility two to three months down the road when they start hiking again not a big cost in my opinion let's suppose

that these economic indicators the stuff we're looking at the forward-looking stuff is right and we have big potential problems brewing and that they could be even bigger than we think because there's stuff hiding out there we don't know about in terms of malinvestment think about the cost if they hike tomorrow and if they continue to shrink their balance sheet 50 billion a month right when the ECB is not offsetting it I mean that that cost to me is five to ten X you really believe that that three-month period makes isn't enough of a difference in

other words by hiking on Wednesday presuming that's what they're going to do or hiking now in December instead of hiking in March it's I think it's important that that I understand how you're thinking is it because these that in and of itself could turn those flashing amber signals to red well the hikes already it's making a dovish hike it's now baked into the market by the way the market doesn't seem to be very impressed with it as we sit here today confidence is a fragile and an important thing I think the market is confused about

a Fed that three or four months ago sort of let us know well we're going to continue to hike until something either starts to break or financial conditions tighten because they're not sure how far they can go yeah and I remember when I was in my complaining period as you call it every time I'd talk someone the audience would raise their hand and say well what would you do if you were at the Fed because I was complaining they weren't starting and then not going fast enough and I would always say the same thing I

said I would sneak one in every time I could under booming financial conditions and hopefully get to 3% and then you're there I don't call hiking rates on top of shrinking your balance sheet 50 billion a month when the SP just went down 13 percent and all the cyclical stocks we talked about are down somewhere between 25 and 40 percent I don't call that sneaking one in when financial conditions permit it the those though who study the Fed and like you and maybe even consider themselves economists would argue that 25 basis points isn't enough to

make a difference to anything and that if in fact the Fed is making a mistake that mistake was baked in and that whether it's December or March or perhaps even June doesn't make that much of a difference well it seems to be baking in at a very rapid rate doesn't it again it's not even the level it's the rate of change and I think if you look back historically I could be wrong on this we in the US have never hiked into a meltdown like this since Volcker and he had a purpose and he had

a goal inflation was 12% and come hell or high water was gonna break it what exactly is what are we solving for here I don't I don't quite get it and I got it three or four months ago but now it looks like the markets are warning and again Eric I'm not suggesting the Fed cut I'm really not although who knows where my mindset will be in that six months I'm just talking about not hiking rates and by the way we're sort of hiking rates we're certainly tightening monetary conditions even if we don't hike tomorrow

because of the roll-off of the feds baton because the balance sheet now some will say well it's just rolling off they're not selling that's not correct if you have a budget deficit and you need to raise money every month you know that creates government bonds selling every month and it tightens liquidity it's not a surprise I know no one looks at money supply anymore I'm a dinosaur but m-2 growth has gone from about seven and a half percent to four percent over the last couple years it doesn't take a genius to figure out why liquidity

is tightening and it's tightening rapidly so just to be clear you want the Fed to pause wait three months perhaps even wait six months and then reevaluate is that right yeah it doesn't even have to be three months what I would really like to Fed to do is get out of the forward guidance business completely I don't know what it does other than tie their hands I really believe the Fed would have tightened quicker on the on the upside but if you'll remember at the time they guided after the temper tantrum to a specific schedule

of QE rolling off and then they guided that interest rates couldn't raise and of course the economy and and financial conditions were booming but they didn't want to lose credibility so they stuck to that schedule what I would like them to do now and of course they're not going to do it but if I was running the Fed I would say something like we're pausing in terms of interest rates for now we really do we would like to normalize over time but but when you normalize matters and I would say the same thing with the

balance sheet our long-term goal is to get the balance sheet down but over the near term and the intermediate term we will be data dependent in the way we actually do that you know I grew up in a world where the Fed didn't spoon feeds you every day you just come in and they turns out they've raised rates or they're just tweaking the repo rate or something and we seem to do fine without the spoon feeding you want them to go back to an era of best judgment best judgment and I want them to untie

their hands forward guidance tides their hand and to be frank given their record it's kind of embarrassing when you forward guide and then you're stuck with a guidance that is not necessarily appropriate you know you you asked me earlier what indicators am I seeing can I just say that that the Fed one of the things that's really puzzled me the feds mandate as you know is maximize full employment over the longer term and stable inflation stable price stability over the longer term okay think about that as a mandate to me the way you achieve those

objectives is you do not do it with boom bust cycles and we continue to do these booms bust cycles and one of the reasons is somehow the Fed has confused what we're solving for which is price stability and maximum employment with using employment as an indicator employment is in the lagging indicators so just because you want to maximize employment doesn't mean when the lot that when the unemployment is rate you can't back is you can't back off in fact as you know most recessions were preceded by a very low unemployment rate that's what that's where

you do you run out of capacity Stan you know what the cynics are going to say right they might even be saying it now that this has nothing to do with the economy that you as an investor want the Fed to pause because you want a Powell put or worse some of those might people might say that you're just giving covered of President Trump okay on the power put I just told you I have a demented personality and I've been able to make more money in bear markets and bull markets so I have struggled as

I've said in some other interviews which I know you're aware of since we went into the QE business and suppressed all this volatility so at least going forward this is the in kind of environment where historically if they continue to ignore to ignore the kind of signals I'm talking about what profile food for one and I do want to I do want to address Trump because I know there's a narrative out there that the fed will lose credibility if they cave into it if they cave in the Trump here oh look I could not agree

more that it would be horrific if the Fed were to pause because they were bullied by Donald Trump I also want to say that it would be horrific if the Fed didn't pause because they were afraid people would think they were being bullied by Donald Trump that would be just as political as the first outcome let me just say right I know I'm right let me just say that a stop clock is Right twice a day Donald Trump is a permanently a low interest rate guy we know that's because he's from the real estate industry

but just because Donald Trump thinks the dovish tilt relative where we've been as appropriate now doesn't mean it's actually not a good idea right now if the only reason you're not going to pause is because Donald Trump is bullying you you're being just as political if that's the reason you did so we need to just take him out of the equation but poor jpowel can't tell that story either way I've through houses he can't say whether it was or wasn't because the president asked for it and if he doesn't pause similarly he can't say I

I feel terrible for j-pal I really do and it goes beyond that his predecessors have done him no favors Jani Ellen said she was going to hike 4 times in 2016 and she did not hike until after Trump's election this QE 3 and I said it at the time is now a noose around his neck as they try and unwind this balance sheet he has a very very tough road here in you're right Trump it's making a lot more difficult than he should just shut up do you have any more confidence in this fed board

with the appointees that it has many of which were made by the president any more confidence than you did in the Fed governors who were appointed by a President Obama the answer is I don't know it's too early as they just said they've been built a very tough hand I love sort of the humility and the common sense chairman Powell has shown in his press conferences I like his style but you know to me what's that lying cane shoes what do you do when there when effects change I changed my mind sir look I know

why they guided in September to hike in December the SP was exploding up or an oil was $85 a barrel the reasons they got it in December have all changed okay we can't now go in December just because we say it's going to keep our credibility to me you build your credibility by being data dependent and even the economic data okay I understand the coincidence stuff is strong but some of this leading stuff like autos and housing being this week with 2% rates has got to give them pause that maybe there's something to malinvestment and

debt build up and all that weighing down on the economy given what you know about some of these decision makers about jpowel about randy quarrels about rich clara de do you have any confidence that they will be more respectful of financial markets perhaps than you think previous fed boards have been um again I don't know I'm waiting with bated breath and I'm going to watch Stan you said that you've said it today you've said in the past that most of the really big money that you made at Duquesne was because of central bank mistakes and

the consequent impact on market liquidity correct so why issue this warning why not let the Fed make a mistake if that's in fact what it's going to do position yourself accordingly sit back and make money by the boatload money isn't everything I'm a very competitive person I competed for 30 years I retired seven or eight years ago I kind of feel obligated at this point when I see others particularly academic types leading them down what I think is the wrong path let's not forget I'm an American I've been lucky enough to be born in this

country to make a lot of money making a lot of money because we're going into another financial crisis and I'm not saying you are but that's the scenario you're laying out I don't see how that would really upgrade my life to see the rest of the country being miserable when I make another you know another killing but that has happened in the past yes and I don't I don't feel guilty about it that was my job it's what I did you had clients I had clients and and to be frank I warned at iris own

about the housing bubble in O five with a year and a half lead time and I also met with the Treasury secretary and o-5 and laid out the whole thing and not so long ago in 2015 you predicted that the combination of zero rates and quantitative easing which at the time you termed reckless monetary policy that was pushing everybody out on the risk curve would end badly yes and now I'm fearful and I'm not predicting a recession but there's enough stuff out there that I'm worried about a recession and I think it's time for caution

well now that we're three years later it's late 2018 with that much for further along into the cycle and there's that much more debt does the end look worse so not what I expected and we haven't ended yet a lot of it is going to be on a whether this stuff continues and B how policymakers and I don't just mean the Fed respond to it as it unfolds there was a gentleman on I know he was on a rival Network today mr. Navarro saying the Fed is the whole problem with the markets here okay that

is really rich really rich we all know about smoot-hawley we know a way you all know about trade wars and we all know what all this nonsense is doing to business confidence so you know that was something that really wasn't on my radar screen three years ago which was causing or or like initiating trade wars so there's all Sciences stuff going on so I don't know whether it's going to be worse it's going to be possible but I have to see how things evolve is there any way for central banks to withdraw all the liquidity

they've pumped into financial markets without triggering a bust I think the air can be let out of this balloon without causing another financial crisis I think it's possible but it's hard to believe at least markets will not have struggling returns the next three to five years possible but how difficult oh very difficult which is why I didn't like the so called insurance policy of QE 3 to get escape philosophy in the first place so possible difficult and with poor returns how poor oh I I could see the SP returning between 0 and 5 percent annually

the next five years but Eric did one of the strengths of my investment returns over time was being open minded and you know I'm just throwing out answers to something that as my wife and others will tell you you know he believes something on Monday and two weeks later he changes his mind but well are we in a bear market now well of course we are we've been on a global bear market for about a year now and for those by the way who say there's no correlation between the economy and the stock market I'll

just point out that the Dax and the China market peaked in January and I don't know that anybody's seen their economic data lately but I'm not even talking about the insider starting organs I think I think we're in a bear market in the sense that most stocks globally have been going down for nine to ten months I think it's going to be hard to get out of this thing in other words let me start over I don't think it's clear-cut to me which a lot of people say that this is a correction in a secular

bull market because we had free money for eight or nine years because we had a debt build-up because we I'm sure we had malinvestment this could take three to five years either sideways or a big down with something else but yeah I think I think the highest probability is we struggle going forward and the bottom may be a ways away still maybe or it could be right here and we're just talking about sideways for quite a while I mean I I will say this in terms of the current market we've done a lot of de-risking

I went short the market in in July because I saw a cutie coming and I lost my but in July in August because I was three months early you can't be you can't think ahead in this market well since that time I'm torn because cutie I think is still set to accelerate the minute the ECB stops I'm talking global T QT which we pointed out in the article peaked October 1st on the other hand we've had a major adjustment in prices hopefully policymakers and I don't just mean central banks are gonna get the message and

with this adjustment in prices and with this D risking that's been done by a lot of investors we could certainly have a favorable period ahead of the next 16 months but it's highly dependent on policy not only from the central banks but from the Chinese and the US government's what to you or the logical macro trades of the stage in the cycle logical doesn't mean profitable but um I profitable that I it's funny because when we talked about how I've done well in bear markets I'd love to sit here and tell you it's I made

it shorting stocks it's always very difficult in a boom in a bear market they don't trade with rhythm you get these vicious rallies you get squeezed out of shorts people play all sorts of games I always made it in Treasuries because Treasury yields will go down dramatically not so easy this time because one of my biggest hit was in two years and in the fall of 2000 they were 604 Fed Funds for six-and-a-half they went down to like one and a half or two now I'm starting with them at 268 but I'm long Treasuries I'm

long two years I'm long five years and a long ten years and I have been for a bit I don't like the level but because of everything we've been talking about I like the risk reward and if the Fed makes a policy mistake it's not inconceivable to me at all that the two years back to fifty to sixty basis points in a couple years because they're doing all this crazy nonsense again QE you know the the whole gambit rates at zero blah blah blah so even at these yields I like Treasuries within the stock market

and I've held this view for several years and it was okay until recently I love the secular growth stocks because in a period of slow muted growth if you can find a 20 to 30 percent grower it's really like a long-term cashflow in some ways it's almost better than a bond that trend got severely interrupted about six months ago the tax cut and the economy going to the extent they were created a lot of cyclical companies whose earnings grew at thirty percent and when they were nine times earnings my companies were twenty five or thirty

times earnings now they're having the same earnings growth obviously those companies became in favor it's hard for me to see if we don't go in a recession which I don't think we're going to and gross those down to one and a half and the Fed changes how companies let's let's just take these cloud companies which to me look like sort of mobile ten years ago they've got maybe they're in the second inning of a nine inning game as corporate corporate America and corporate everything has to convert to the cloud you're talking about Microsoft and I

talk about Microsoft I'm talking about ServiceNow I'm talking about workday these are companies I'm still like I do like them Salesforce that kind of stuff okay they're very high-priced but to me if we're going to go to a one one and a half two percent growth rate and interest rates are going to be B'nai and they're worth more in that environment they are in a three and a half percent environment because they're going to grow the same rate either way and you could argue that if we get in a mild recession demand for their product

goes up because it's a way to cut costs is obviously trade moving into the cloud for for employment by the way that view worked out beautifully and then was really bad in October I was between twenty and thirty percent short the stock market the entire month of October and managed to lose a percent you think it was mathematically impossible but these names have such data and when you go from nine times sales to seven times sales I even though your earnings aren't missing a beat it's a problem but I look at them now and they're

selling for quite a bit less than they were in say September and again I just described to you why I think they'll be okay over the longer term what about a stock that's had the crap kicked out of it like GE yeah that's a difficult one that one I just don't know I'll just say this we were not big fans of Mo we made very good money shorting that stock cope looks very impressive on paper mm-hmm I have to believe he was on that board for four or five months I don't think he went in

there looking for a job everything tells me he didn't I assume he knows where the bodies are buried but I just don't know but I sure as hell wouldn't be shorting it at seven and a half would I take a pun on it here I don't know not in the kind of environment we're talking about have you bought anything since the beginning of the decline in the last well yeah fortunately or unfortunately yes like there's a whole bunch of cloud companies that I had limits in most of them didn't get hit till October I looked

like a genius to myself at least until a couple weeks ago and now they've come back down but it's very interesting what's happened in the last three or four weeks if you look at the November low Salesforce was like a hundred and twelve I think it's probably I didn't look today and it was a big days you know I think it's probably 130 now or something workday bottom that 117 I think it's like I don't know 150 could it could be higher I didn't look at the market we're just after the close but all those

names are 15 to 20 percent off their November lows whereas if you look at the banks and the cyclical z' they're all way low below they're November lows now it's a little dangerous saying this because these cloud names may have gone down a lot more than I think today but but the relative performance they really suffered because of their beta in October in November even though they have these high betas since November at least on a relative basis they've started to show I think rational behavior what about shorts you've never been afraid of macro shorts

or single stock shorts yeah I don't really like to talk about individual stock shorts it just creates a lot of controversy I learned my lesson years ago on your network after a Robin Hood conference I talked about IBM and I could have done with all that without all that publicity but there's plenty of shorts and they have tended to be in at least in my in my book centered around the cyclical and the value area for all the reasons I've told you and frankly in tech we've been long the disruptors and short the disrupted which

has worked beautifully over in two years again has some real hiccups when the markets plunging and the value guys come in and start buying the disrupted companies which are 10 times earnings and selling the 30 times earnings ones but we have not changed that theme we've been short all the financials because to me it was it was very simple why in the world would you buy a group that needs rates to go up to own it because the last time I checked banks our equities and equities don't do well with with rates going up you

still short financials I am on the other hand let's say rates go down I assume my cloud names will do much better and I don't want to own something because it's going to go down less than a down market so yeah we're short financials I would also say I didn't mention earlier indicators the fact that AIG is down from 65 to 35 and it's the number one what I would call closed on credit fund on the planet and that since January and the banks are down what they are how can you look at that unless

you have just no respect whatsoever for the market and not see that's at least a warning light that there's there's a problem out there Blackstone which is a great beautifully run company with a great management that things down 25% in like a month I mean how how can you look at that and not say again credit dependent that it's not sending a warning signal out is it tend to short credit oh I've been short credit for a while but it's easy to short credit for long Treasuries because again if rates are going up I don't

want to be short credit because their interest rate instrument and if I make money in Treasuries is because the economy fell apart and there'll be a lot of good there'll be a lot of good credit short so five or six percent absolute nominal yields for stuff that normally would be eight or nine an environment like this the risk award is just terrible in credit oil well I don't know other than to say if I were to fed I'd be watching it you'll notice our article this morning how many times inflation was mentioned zero but if

you're looking at inflation which they seem to care about not just oil but all the commodity indexes are down dramatically in the last four or five months and it's inconceivable that that doesn't float through how much more do politics play into your investment process in the Trump era a lot and I stink at it I mean I was I learned this business to solve economic puzzles and try and think 18 to 24 months ahead when the president can't seem he's so myopic that he thinks like one or two days ahead at the most it's it's

very hard and obviously it doesn't take a rocket scientist all yet it was watch for a few days they have a powerful impact on markets and it's tough because economic signals and an economic puzzle solving is something I've done for a long time and I have some confidence in it how all this politics is going to play out I'm not so sure I happen to think the China thing will work itself out because both sides I think desperately want a deal both Trump and XI but I don't know I don't have the kind of confidence

in that forecast as the economic stuff that I've been doing for 40 years so it plays a big part but the major part is quite unnerving does it matter if the government shuts down I don't think so that's that's a lot of nonsense it already open again I mean it's it's discouraging to see the theater and it's just more the sense one more of the same as a great term for it Stan no one forgets how you and George Soros broke the Bank of England so to speak in 1992 when you bet against the pound

is there a brexit trade for you now there is one but I don't know what it is I could see the pound going to 135 if the markets are convinced there's no hard breaks it mm-hmm and we're going to muddle through here and particularly if the Fed starts easing that would be obviously months down the road if ever happen but if the politics back to your earlier question plays out the wrong way and Gerry core Corbin gets in the mix you know then you could see a big downside so it's so it could go either

way that is just not so binary it's not something I want to play the beauty of the pound trade that you mentioned was a one-way bet it was either going to be flat or we're gonna make fifteen or twenty percent this is not so appealing you can either make 10 percent or lose 10 percent since I can't figure out which it is elsewhere yes if in fact it goes so to speak the wrong way if there's a hard brexit and to your point Jeremy Corbyn becomes a stronger contender to succeed Theresa May as Prime Minister

do you think we see the pound testing and perhaps dropping through that post Briggs it vote low of 118 possible I don't know but it's possible I've heard you complain stand on at least two occasions that the market doesn't generate the same kinds of signals that it used to what do you mean by that you know I'm not really complaining I'm more whining there's a difference someone said the other day you've been very critical of these eligos and I said well not critical of the algos they just made my life very inconvenient I don't it's

not that they're doing anything wrong so what I meant by that Eric is a big part of my process and you've already kind of heard it throughout the interview is taking signals from markets I've always believed markets are smarter than I am they sent out a message and that if I listened to them properly no matter how powerful my thesis if they're screaming something else it's telling me you've got to reevaluate you got to reevaluate and you go back to and Isis all right fine but you got to be open-minded about I don't know maybe

six or seven years ago combination of central bank's canceling the signals but maybe more importantly the algos coming in with very very sophisticated models based on historical events and maybe stuff they're picking up on the internet about who's shopping or this kind of stuff and also on standard deviation away from price have come up with their own methodology of how to predict price movements and how to behave well I grew up with someone fundamentally like security and they buy it from somebody who fundamentally doesn't like security and somehow the invisible hand spit out a very

good answer and it was predictive over time and I also learned that things would change and when the trends started to go up that's when I'm supposed to plow in well the algos machines trading they tend to have different motivations like they're not nearly as momentum oriented and just when the trend may look like it's going up it may be just some algo who's got some standard deviation or something going on and it is severely inhibited my ability to read the signals so my first mentor sparrows trellis back in Pittsburgh used to say 100 million

Frenchmen can't be wrong and that was his saying that that the the voice of the market was always correct and I you I need to listen to it and it was true if a company was reporting great earnings and everybody loved it and the stock just didn't act well for three or four months almost inevitably something happened that you didn't foresee six months down the road and I'll never forget about two or three years ago Facebook had reported great earnings stock was like 122 opens at 131 after-hours and like three days later its trading at

116 so the analysts come in and they're giving this said nothing's wrong it's great it's great I said no kid you're wrong something's gonna come out you just don't know it yet something terrible in the next three or four months anyway year later the stock was like 220 so that didn't mean anything conversely I can remember so many examples when a company would report bad earnings it goes down 5% on huge volume then closes up on the day almost invariably three to six months later that stock was higher doesn't mean anything anymore other than some

hedge fund maybe being a wiseguy or somebody's doing something all the time I've seen that and a month later the stocks actually lower so the price signals that I learned how to read and how to listen to are broken they certainly don't work the way they used to I still liked price action versus news but it used to be a very very important part of my process now it's a much diminished part of my process and frankly as me I don't want anybody crying but it's made my job much much more difficult and I'm thrilled

I got rid of my clients eight years ago are the markets more or less efficient as a result I think the message over eight or nine months is still great and like Here I am telling you what the auto stocks are doing this I just think over a week or two you're getting noise that used to mean something and now it doesn't mean anything so maybe they're maybe they're not efficient and they're noisy over a week or two but they're still pretty darn good predicting predicting ahead I mean the the the classic recent example was

the night Trump was elected bonds got murdered you know they they opened up five points in the middle of night ended up down on the day stock market was down like some crazy amount overnight ended up that day you know predict and all the cyclical stocks were going back to this they predicted this whole thing by the way and it's only the last year they turned the other way so the market was just laughing at all the pundits the market doesn't laugh but you know what I mean the market was predicting a big economic recovery

and an acceleration under Trump whereas all the Talking Heads were saying this was Armageddon in the end of the world and the market was right now the markets kind of going yeah do you find yourself similarly inconvenienced by passives as you do algo zinc wants I don't know the answer to that I'm just you've bought et us yeah I've bought them I'm price action versus news in general I don't want to blame it on passives or an algos or whatever but price action versus news which was a big part of my process doesn't work as

well as it used to and I'm gonna learn how to do more fundamentals than I have a store clink I presume you're not doing as well as you used to as a result yeah I as you know made 30 percent a year for 30 years we ain't even in the same zip code much less the same state as those kind of returns so stand the reversal of quantitative easing and the return of volatility to financial markets was supposed to be just the elixir that hedge funds needed hasn't worked out that way what do you think

well first of all it's early days and if the trends has changed sometimes it takes them a while to adjust secondly I remember everybody always at some point my career saying boy this volatility must be great for you and I said well Italy is only good if it's part of a trend and it's giving you entry points within a trend we're getting volatility particularly with Trump with no trend so when you're going up and down but there's no real trend that's a nightmare to our earlier point about price action versus and news you might think

something that a volatility move is the beginning of a trend and get yourself whips on so have you ever seen anything like that before like this not to this extreme no no I would also say and I think I predicted this on your network five years ago 9,000 hedge funds charging 20% or what it was this was going to happen anyway I mean when I started Duquesne there were about 8 of us and we were expected to make 20% a year year in and year out no matter what the environment well when you and by

the way I was like the only guy at Bowdoin that went into this so the competition wasn't so hot you mean the only person in your graduating class yeah because we've been in a bear market for ten years okay by 2000 the average IQ come in this century at least 30 or 40 points higher than mine so you know the markets become more efficient it's become more difficult every time you buy something somebody's selling it to you in and if the competitors have gotten that much smarter it's tougher so I'm not surprised at all by

the hedge funds not doing well because well to be frank I kind of predicted at five or six years ago but certainly this environment is aggravating it just no trend and and a lot of volatility yeah well maybe some there was a trend and I think they didn't do that well on the upside because of all the competition and because frankly there wasn't enough volatility for entry and now the competition tends to be diminishing but we're in this new crazy highly volatile world does the fundamental discretionary hedge fund managers still have a future as a

species yes I think so but you know I think it'll there's probably going to be 10 to 20 of them that are great and the rest of them sure as hell aren't worth 20% a year and they're probably not worth 15% a year there's still 3 trillion dollars of hedge fund money yeah chasing a defined amount of alpha is that too much money yeah I think so yes should be what I don't know less by definition you've been called grumpy yes is that how you think of yourself I like I enjoy being grumpy but no

I don't think of myself as grumpy at all I have a fabulous family I was born in a great country I have a job that doesn't particularly provide much as a society that has this crazy renew Mauritian associated with it I mean so I'm not sure what the term grumpy means but I'm one of the happier people I know I just I enjoy having a persona that's a little grumpy do you think grumpy is a better disposition to have as an investor uh I think you have to be a little skeptical and a bit of

a contrarian but no you don't you definitely don't have to be grumpy and I think Bulls make more money than bears so if anything be an optimist about life and about things in general is a great attribute to have as as an investor you just can't be starry-eyed and not naive well I think better of characteristic would be being able to control your emotions but I don't relate that to grumpiness if you think about everything that you've experienced yourself you've seen the things that you think are happening now and the things that you believe are

likely to happen in the future what are the qualities or characteristics that a money manager should come to the business with today you're asking really great questions Eric I think the number one neat thing you need is you need to be well there's about three but you need to be intellectually curious and really really open-minded so and you need you need to have courage and when I say courage you need the courage a bit big and a bit concentrated but also the courage to fight your own emotions I've never made a buy at a low

that I didn't just feel terrible and scared to death making it it's easy to sell at the bottom you know you can go home that night and relieve you of your nerves and then you know the higher they go there's another saying drill issues to have the higher they go the cheaper they look so when things are going up it's easy to buy them when they're going down it's hard to buy them do you need to be able to code do you need to be able to program an algorithm no no but apparently some very

good coders and very good algorithms really know how to make money you see so you can do that but it's not a necessary condition to make money as investor I do think in today's world you better know what they're doing because they and particularly if you're in the treating business like I am they influence markets and you have to know if a particular price move is happening because of them or if it's happening for more natural causes