Stanley Druckenmiller, known for generating superior market returns, is ready to play contrarian.
Billionaire investor Stanley Druckenmiller might be the best thing ever to do it, at least from a pure returns perspective. His company, Duquesne Capital Management, which closed in 2010, generated an average annual return of 30% for three decades. He is better than Warren Buffett and Berkshire Hathaway.
Although Duquesne Capital is no more, Druckenmiller still invests through the Duquesne Family Office, and he’s not afraid to go against the grain. The protégé of George Soros is now making a bet that goes against the broader view of the market and the Federal Reserve, according to the remarks of people who heard him speak at a conference in early October. Does he know something Wall Street doesn’t?
Bet on a bundle of links
Most of the market and the Federal Reserve believe that inflation will continue to slow and the Fed will continue to lower interest rates until 2025. CME GroupThe FedWatch tool, which tracks the likelihood of interest rate changes by looking at one-month futures prices, indicates that most traders (as of Oct. 15) expect the Fed to cut rates of interest by an additional 50 basis points this year. and get its benchmark rate up to a target range of 3.25% to 3.50% at the end of 2025. Keep in mind that these future interest rate projections are constantly changing.
The Fed’s “dot plot” also traces a similar path. The dot plot shows how each member of the Federal Open Market Committee (FOMC) thinks interest rates will tend and then compiles a consensus. The points plot is updated every three months. The Fed believes that, with the trend of lower inflation, it should now be concerned about the labor market, which saw the unemployment trend higher until the last two months. The Fed is trying to engineer a “soft landing” for the economy where inflation falls and returns to the Fed’s preferred 2% target without previous interest rate hikes pushing the economy into recession .
Image source: Getty Images.
Druckenmiller takes the other side of this bet, he said he recently revealed in a conference that he is shorting US Treasury bonds. Bets against US government bonds now account for 15% to 20% of Druckenmiller’s portfolio, according to reports of what people said at the conference.
A bet against Treasury bonds or bonds is effectively a bet against the current view that interest rates will fall. Bonds have an inverse relationship to bond yields, so if bonds go down, yields go up. The federal funds rate affects bond yields, although most yields do not move solely on the federal funds rate. Druckenmiller also said that inflation could rise to levels seen in the 1970s. If inflation rises, the Fed may not be able to lower interest rates as much as the market thinks or even at all because the economy will be too hot to stimulate with more cuts.
We don’t know the exact bet
We don’t know the exact bet Druckenmiller is making. For example, we do not know the duration of the bonds that Druckenmiller is shorting. Being short of the two-year Treasury bill is different from being short of the 30-year. Druckenmiller also said that he is not sure how long the trade will take to develop. It could take six months or six years, he said. In addition, Druckenmiller is concerned about “bipartisan fiscal recklessness.”
For all we know, Druckenmiller’s bet might have more to do with government spending and the national debt than anything else. If the level of debt is too high and the market begins to worry about the ability of the government to pay its debt or interest payments, investors will demand higher interest rates for the added risk, which would have the bond prices.
However, given his comments on inflation, Druckenmiller seems to be playing against the Fed and the general market. While retail investors should listen to Druckenmiller and try to get into his mind, it is not a good idea to completely change your strategy when the exact trade is not known. The motive of institutional investors is not always clear. But thinking and being open to opposing views – and then doing your own due diligence – is what makes a good investor.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Berkshire Hathaway. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.