Billionaire investor Stanley Druckenmiller believes the Federal Reserve’s attempt to quickly resolve the excesses it has built up over a decade with accommodative monetary policy will not end well for the US economy.
“Our pivotal case is a hard landing towards the end of ’23,” Druckenmiller said Wednesday at CNBC’s Delivering Alpha Investor Summit in New York City. “I wouldn’t be surprised if we don’t have a recession in ’23. I don’t know the timing, but certainly towards the end of ’23. I wouldn’t be surprised if it isn’t bigger than the so-called average garden variety.”
And the legendary investor, who has never had a bad year in the markets, fears it could be worse. “I’m not really ruling out anything bad,” he said.
Druckenmiller believes the extraordinary quantitative easing and zero interest rates over the past decade have created an asset bubble.
“All those factors that cause a bull market, they don’t just stop, they all reverse them,” Druckenmiller said. “We are in deep trouble.”
The Fed is now in the midst of its most aggressive pace of tightening since the 1980s. The central bank last week raised interest rates by three-quarters of a percentage point for the third time in a row, promising more hikes to beat inflation, triggering a major sell-off of risky assets. The S&P 500 bottomed out in June and hit a new bear market low on Tuesday after a six-day losing streak.
The investor said the Fed made a policy mistake when it came up with a “ridiculous theory of impermanence,” thinking inflation was driven by supply chain factors and demand largely related to the pandemic.
“If you make a mistake, you have to admit you’re wrong and move on with those nine or ten months, they just sat there and bought $120 billion in bonds,” Druckenmiller said. “I think the ramifications of that will be with us for a long, long time.”
The consumer price index rose 8.3% year over year in August, nearly a 40-year high and surpassed consensus expectations.
Druckenmiller once managed George Soros’ Quantum Fund and rose to fame after placing a $10 billion bet against the British pound in 1992. He later oversaw $12 billion as president of Duquesne Capital Management before closing his company in 2010.
“You don’t even have to talk about Black Swans here to worry. To me, the risk reward of owning assets doesn’t make a lot of sense,” Druckenmiller said.