Billionaire and former hedge fund manager Stanley Druckenmiller shared his 2020 market outlook in an interview with Bloomberg last December. Investors have much to learn from Druckenmiller’s deep knowledge and experience. During its 30-year run from 1981-2010, his hedge fund delivered a stellar 30% average annual return without a single down year.
Let’s dive into Druckenmiller’s 2020 outlook. See my list of key takeaways below.
Druckenmiller’s Portfolio Holdings
Currently, he’s betting on a benign economic and market outlook in the intermediate term. He’s long stocks, British banks, copper, U.S. financials, and commodity currencies (AUS, CAD, and NZ vs USD). He’s short the yen and short long-term bonds. Compared to last year, he reduced his value-tilt, returning to a normal mix by buying assets that benefit during higher-growth periods. Keep in mind, he frequently changes his outlook to reflect changes in economic conditions and market behavior.
Unprecedented Stimulus + Strong Economy = Bullish
Given the U.S. economy’s current health, Druckenmiller believes interest rates are insanely low. Coincident economic indicators are strong, market breadth is at an all-time high, inflation is mildly positive, confidence is picking up, and unemployment is at record lows, yet the Fed has cut rates three times. He’s confident that this “easy money” will spawn bubbles, misallocate resources, and eventually cause another 08-like crisis, but says it could be years away. All countries have negative real interest rates and most of Europe has negative absolute rates. This stimulus usually increases economic activity and/or asset prices, explaining Druckenmiller’s positive outlook. In his view, global economic growth will exceed the IMF’s projections. He also expects less policy uncertainty in the U.S. given that the election is only eleven months away.
Favorite Currency: British Pound
Compared to the US, the UK is cheaper and less debt reliant, with a Deficit/GDP of 2 vs 4.5 and a dividend yield of 4% vs 1.7%. Unlike most, Druckenmiller thinks the UK is better off without the EU; historically, Britain’s growth has outpaced the rest of Europe, and Druckenmiller sees the EU as a misguided union of nations that constantly bicker due to policy and cultural differences. Overall, he expects investments to flow into the UK and push up the pound. He’s also bullish on British banks like Barclays and Lloyds.
Copper: Bet on Global Economy and E/V
Industrial metals often rise strongly during global growth. Druckenmiller especially likes copper because the electric vehicle market’s growth could increase copper demand by .5%.
Fed’s Policy Blunder: Profit Opportunity
Just last year, the U.S. Fed was a strong hawk, hiking rates despite deteriorating economic conditions and a declining stock market. Now, the Fed is insanely dovish and has cut rates three times despite record low unemployment, modest inflation, rising consumer confidence, and record stock gains. Druckenmiller stresses that the Fed has been very wrong on markets, economy and policy, and every time he has bet on them reversing a policy error he has made good money. He expects the Fed to eventually realize it must raise rates, so he’s betting on longer-term bonds eventually falling.
Deflation Risk: Irrational and Overblown
Druckenmiller says Chair Powell’s fears of deflation risk are irrational, as 12/14 recognized inflation measures are above the Fed’s desired level of 2%. When Trump urges the Fed to cut, Powell responds with harsh words but ultimately caves to his pressure. In Druckenmiller’s view, Trump is crazy for saying we need negative rates to compete with countries where that policy is clearly failing and causing slower growth; he should “shut up.”
Even if the U.S. did encounter deflation, that can be good if caused by increased productivity, efficiency, and/or falling costs. Suppose the U.S. cut its healthcare costs from 19% to 13% of GDP, causing overall inflation to fall below zero. Should the Fed panic and consider more stimulus? Definitely not. Druckenmiller also notes that deflation may be natural during technological revolutions like the present one. The last technological revolution occurred in the late 1800s and delivered 3% deflation and 8% real growth annually for an entire decade.
Bear Market: Potential Triggers
In his view, the three events most likely to cause a bear market include:
an anti-capitalist politician like Elizabeth Warren becoming president
a steep rise in inflation that forces the Fed to excessively tighten
a major credit event caused by the many “bad apples” hiding in the credit market
Investing Advice: Be Open-Minded, Use Volatility
When he discovers new information, Druckenmiller doesn’t hesitate to alter his bets. On the morning of the ’87 stock crash, Druckenmiller famously went from 100% long to 100% short after reading compelling research. About a year ago, he predicted we’d be in a global bear market. Later he realized he was wrong, adjusted his positions, and still ended the year with a 10% return. Though volatility is higher than it used to be, he says it can help investors by presenting them with more attractive entry points for longer-term trades.