Last week was the most recent Robin Hood Foundation conference. The Robin Hood Foundation, founded by Paul Tudor Jones and several others, is a charitable organization which attempts to alleviate problems caused by poverty in New York City. The conference began with the much anticipated fireside chat between PTJ and Stan Druckenmiller. I listened to the conversation between the two legendary investors, and took down some notes highlighting the most important points.
PTJ: A quick word of fiscal recklessness
-
Debt to GDP is about 122%, has doubled over the last 30 years
-
We are in a hole and we continue to keep digging
STAN:
-
Stan’s ‘generational equity tour’ – in 2012, Stan realized that there would be a demographic problem in the US starting in around 2020, lasting for about 15 years until 2035- there would be far less people entering the workforce than those retiring from it, putting a massive burden on future (entitlement) spending needs
-
On top of that, entitlement spending had increased from 30% of budget outlays to 60% of budget outlays over the previous 30 years as well.
-
Things have only become much worse since then, mostly starting with the full employment deficit spending under the 2016 Trump Administration, followed by the Biden administration doubling and tripling down on this same type of deficit spending. Up until now, there has not been any market force to push back against this type of federal deficit spending.
-
The good news is that during this period, most households and the private sector were able to refinance debt at historically low levels and extend the term/duration
-
Unfortunately, there was one entity that did not do this and that is the US Treasury. During this period, Yellen was issuing 2Yr terms at 15 basis points instead of 10yr terms at 70 basis points or 30yr terms at 180 basis points, both of which looks like a mighty attractive rate at this point in time. Stan absolutely skewers the US Treasury and Yellen here, calling it the biggest blunder in the history of the Treasury going back to Alexander Hamilton, and ultimately stating that Yellen is unfit for the job. Ouch.
-
To be fair, I do remember the US treasury shopping around at the time, but I believe it was stated that there was too little demand for longer dated US Treasury debt (shocker). I will follow up on this point, though
-
The consequence? By time we get to 2033 interest expense on US debt will be 4.5%, by 2043 (20 yrs) it will be 7%. This equates to 144% OF ALL DISCRETIONARY SPENDING. This doesn’t include anything else (social security, medicare, military, etc).
-
The numbers are broken. The math doesn’t worth. Sacrifices will have to be made.
-
For the entirety of Stan’s trading career, one of his golden rules has been to NEVER let his obsession about the US Debt/Deficit impact this trading decisions as he felt it would never truly have an important market impact. He has thrown that rule/playbook in the trash now.
-
Stop believing the Fed and politicians. Remember when in 2011 Ben Bernanke said the increase in the Feds balance sheet was temporary? Well it turns out that it wasn’t so temporary. $800bn to $9 TRILLION
PTJ:
-
On inflation – it is apparent that both Trump and Biden have been responsible for getting us to this tipping point of fiscal recklessness.
-
It seems like those are the only 2 choices again, so paint us a world in which Donald Trump gets elected, and one in which Joe Biden is elected?
STAN:
-
Under a Trump Administration – terrified of more of the same/Arthur Burns model from the 1970s x2. Under this model, Stan is open minded to 8-10% inflation, with intermediate lulls (I think this is probably accurate)
-
Under a 3rd Scenario with a Non-Trump Republican – Could see something of the opposite to a Trump scenario, somewhere in the 3-4% (I am not sure)
-
Under a Biden Administration – Stan thinks that reality will settle in for this administration sooner or later and will ultimately end up like a Non Trump Republican scenario ( I think this is cope)
PTJ:
-
For PTJ the question has become ”because the fiscal recklessness has become such of a big issue, what is the point of recognition for the markets?”
-
PTJ sort of believes that this happens sooner rather than later. PTJ thinks the point of recognition will be as we get deeper into primary season, perhaps by the 3rd of 4th primary, if it becomes clear that it will indeed be Trump on the R ticket vs Biden on the D ticket
STAN:
-
If you look at the 10yr, historically if inflation is about 2%, the 10yr should be around 4.5-5% (if we exclude the recent 10-15 years of insatiable QE). If inflation is above 2%, we would typically see the 10yr at 6-7%+
-
There is certainly room for higher yields, and both Stan and PTJ believe its already started.
PTJ:
-
On US Exceptionalism with the US being the 4th most indebted country in the world behind Japan, Italy, Greece.
-
“Would you agree or disagree that American exceptionalism has been financed by fiscal recklessness (borrowing from the future is why we are so strong now)?”
-
“And when we have to deal with that issue, does that mean US exceptionalism goes away (and with it the USD strength, stock market strength, etc)?”
-
“How do you see that unfolding for the different asset classes?”
STAN:
-
While all of that is largely true, the US has still been leading some areas like technology, AI, military strength, etc.
-
The US has used and abused the reserve currency status of the US Dollar, and looking out into 2024 and 2025, you have to be open minded to something breaking
On Stocks
-
there will certainly be opportunities within the stock market, largely driven by policy/liquidity opportunities or new technologies like AI, but Stan believes that the stock market will go through a decade of extreme uncertainty and he expects the stock market to be at roughly the same level in 10 years
-
Stan believes we have to go through a normalization period after the last 10 years of QE
-
With continued supply chain problems, fiscal recklessness, and the worst geopolitical situation in his life time, it is hard for Stan to get excited about stock market to the long side
On Bonds (2yr & 30yr)
-
Stan is long the front end, but short the long end.
On the Dollar
-
Long term, Stan wants to hate the dollar, but when you look at the alternatives, it’s the best of the crappy rest.
On Gold & Bitcoin
-
Stan owns Gold, and is surprised that BTC has got going but concedes that the younger generations view it at as digital gold of sorts. BTC has less than 2 decades of history vs 5000 yrs for Gold, but Stan likes them both. He does not own any BTC currently, but concedes that he should.
