By Kevin Muir of “The Macro Tourist” fame; reposted here with permission
When I first cracked open Market Wizards by Jack Schwager as a pimply-faced teenager, I was mesmerized. Here were all these traders revealing the intricacies of their craft. I read it. And reread it. And then read it again. It set the course of the next three decades of my life.
I still have the dog-eared original version of the book.
I must confess that back then, much of the more sophisticated nuanced wisdom went over my head. My years of making all the different mistakes that traders make were still ahead of me, and I couldn’t understand cryptic thoughts like the following:
I was like, huh? Everyone gets want they want out of the market? Well, I want to win at this marvelous game, so according to Ed, I should be good.
Today, I understand all the subtle psychological demons that affect your trading, and I know that Ed’s comment has some deep wisdom to it, but back then, it seemed like gobbledygook.
Why do I bring this up?
RealVision TV recently had an hour long interview with an individual that I consider the best trader/investor that has ever lived (subscription required).
Although I understand the appeal of Warren Buffett, and I am a big fan of Soros’ ability to bet big when the odds are stacked in his favour, pound for pound, I would take Stanley Druckemmiller any day of the week over those guys. Stan’s ability to stay nimble and open minded to the multitude of investment outcomes, while at the same time recognizing when the risk/reward is skewed in a particular direction is unparalleled.
So when RealVision posted the hour long chat with Druck, needless to say, I watched with enthusiasm.
Yet I laughed when I saw the headlines from all the other traders who did the same. Almost to a tee, traders took Stanley’s warning about the sustainability of the debt creation pace and extrapolated a bearish view from the legendary trader.
It made me want to adjust Ed’s saying to:
Although I heard Stanley’s warning (from the RealVision interview transcript):
You know, intuitively, you can make a case that we’re going to have a financial crisis bigger than the last one, because all they did was triple down on what, in my opinion, caused it.
Did everyone miss the part where he went over the timing of expressing this trade?
Well, unfortunately, I have gone short several times this year. And at least I’m alive, but I regret having to do so. I looked at the seasonals in July-August. And I looked at the background of the— I had no precedent for a balance sheet rate of change going down a trillion dollars from where it had been, but that gave me the conviction to go short, on top of the fact that, seasonally, I had a [trusted] period that also sort of rhymed with right when the slope of the curve of the QE was shrinking.
It didn’t work. I got a bloody nose. I’m now recontemplating my future.
Stanley is not balls-to-wall short and proclaiming the end is nigh.
He is selectively taking shots on the dark side, but not fighting it by any means. In fact, he is looking for a big rally that he can sell into:
If we get a blow off in the fourth quarter, which seasonally tends to happen, particularly in NASDAQ-type markets, particularly if these bombs keep going off in emerging markets, I could see myself taking a big shot somewhere around year end. But that’s a long way off, and I’ll cross that bridge when I come to it. Right now, I’m just licking my wounds from the last shot I took.
It seems to me that too many people are sure about the market’s next move, yet here is one of the greatest investors who has ever lived, telling you he is staying nimble and waiting for the proper setup.
I have so many things I want to write about regarding Stanley’s interview – like how Druckenmiller is long stocks like AMZN and GOOG (what he calls the disruptors) while short retailers and staples (the diruptees) which would make all these bears quoting Stan recoil in horror, but I am going to save that for another day. Rest assured, this isn’t the last article about the interview.
But for now, I wanted to highlight that reading the Stanley-Druckenmiller-is-forecasting-“a financial crisis bigger than the last one” headlines is so far from the nuanced truth, it feels like my 19-year-old self wrote them. Almost thirty years later, Ed Seykota might be proud that I finally understand a little of what he is talking about…
