Markets

Stanley Druckenmiller's top 3 concerns in 2023 + The sector he is bullish on

Thu 15 Jun 23, 2:39pm (AEST)
Stanley Druckenmiller
Source: Livewire Markets

Key Points

  • Druckenmiller believes the worst is yet to come, and that corporate profits, commercial real estate, and credit tightening will all be major challenges in the coming months
  • Druckenmiller is short the US dollar and long artificial intelligence (AI) stocks
  • He believes AI stocks could continue to perform well even in a recession

Stanley Druckenmiller is famed for his high-conviction, big-money calls. As the founder and CEO of one of Wall Street's most famous family offices, he's made big bets on the trajectory of the economic and macro environment.

Some of them have paid off. In 1992, he and George Soros famously broke the Bank of England - earning themselves £1 billion. 

Others have been less successful, like in 1999 when Druckenmiller shorted 12 internet stocks to the tune of about US$200 million. Just three weeks later, Druckenmiller was covering his short position and accepting a loss of US$600 million. 

But even that experience can't keep him away from his newest and largest long bet in the equity markets. Druckenmiller was recently interviewed at the annual Bloomberg Invest conference by Bloomberg's lead Wall Street correspondent Sonali Basak. Here are some of the highlights from their conversation.

Walks like a bear, talks like a bear

Despite Druckenmiller's quip that he is "tired of being a bear and being labelled a bear", he sure doesn't speak like a bull. When he was asked about his views of the macro landscape, he said that the worst is not here yet.

"Our central case is that there are more shoes to drop, particularly in addition to the asset markets economically," Druckenmiller said. 

He calls out the economists who have changed their views from a hard landing to a soft landing and even from a soft landing to a no landing scenario

"The fact that it hasn't happened yet doesn't change the probability if it does happen of the depth of it," he said. 

"I would actually argue that since it's taken so long, the Fed has ended up with a higher terminal rate and in fact, inflation gets stickier the longer it stays in the system. It increases, not decreases, the probability of a hard landing."

In his own words, we are coming out of a time when "stupid" trades could have been made and liquidity was freely available. He references the time when Dogecoin had a peak valuation in May 2021 of US$80 billion, describing it as the kind of trade that "can only happen in the world of free money." 

Beyond the joke cryptocurrencies, he argues that the collapse of Silicon Valley Bank was just the tip of a much larger iceberg. 

"When you go from this kind of environment - the biggest and broadest asset bubble ever - and then you jack rates up by 500 basis points in a year, I think the probabilities would suggest Silicon Valley Bank and Bed Bath and Beyond are just the tip of the iceberg," he said. 

Three top concerns

Druckenmiller has three areas of focus for the next down leg of the cycle:

  • Corporate profits - which could fall between 20 and 30% in the upcoming recession (the one positive is that these falls could be smaller than previously expected because the recession call has been so anticipated)

  • Commercial real estate - given "office is such a problem"

  • Credit tightening - with the next six to nine months presenting a real challenge given the health of many banks' balance sheets

And yet, he has one very bullish trade

Two months ago, my esteemed colleague Ally Selby wrote a note about another conference Druckenmiller attended. At the time, he argued that his short US Dollar trade was the only high-conviction play he had. Interestingly, it's a view he re-emphasises when Basak asks him a question about whether he thinks US exceptionalism is in decline.

"I think it is. America is an amazing country with an amazing system ... but we've been eating so much seed corn presently that I worry about the future," he said.

It turns out that was not his only top trade of late. Druckenmiller admits he has been dabbling in the artificial intelligence (AI) rally, arguing companies like NVIDIA (NASDAQ: NVDA) may not suffer in the way that some of the bears may wish. 

"If staples can go up in price in a recession, why can't a company like NVIDIA? If their orders go up 70% in a hard landing which is what I think will happen, it's not clear to me that NVIDIA goes down despite the lofty valuation," he said.

"We have some longs and we have some shorts. AI has dominated the long portfolio for about five or six months." 

This article was first published for Livewire Markets on Thursday, 15 June 2023.


You can catch the entire conversation here: 

 

Written By

Hans Lee

Content Editor

Hans is a Content Editor at Livewire Markets and Market Index. He created Signal or Noise and helps write the LW-MI Morning Wrap on Tuesdays and Thursdays.

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