“With that kind of unprecedented stimulus relative to the circumstances, it’s hard to have anything other than a constructive view on markets, risk and the economy in the intermediate term”, Stanley Druckenmiller told Bloomberg TV, during a wide-ranging interview on December 18.
Suffice to say things have changed a bit in the five months since Druckenmiller sat down with Erik Schatzker for a chat that included an amusing lamentation about the impossibility of investing when you have to “wonder where the hell the next bomb is coming from”.
The “bomb” reference was to Donald Trump, who Druckenmiller called “crazy” for championing negative rates in the US, among other things.
Fast forward to May and Trump is still calling for negative rates. And he’s not far from getting them. The outright economic collapse that accompanied efforts to combat the pandemic has forced the Fed to zero and markets are pushing for more. Equities, meanwhile, are up some 30% after collapsing in March during what will go down in history as the swiftest bear market plunge and subsequent recovery on record.
Druckenmiller weighed in on all of this Tuesday, during a virtual chat with the Economic Club of New York. As you might imagine, his take on the outlook for risk assets has changed materially.
“The risk-reward for equity is maybe as bad as I’ve seen it in my career”, Druckenmiller said, before noting that “the wild card is the Fed can always step up their [asset] purchases”.
They sure can. And they sure have.
But Druckenmiller doubts it’s going to be enough. “The consensus out there seems to be: ‘Don’t worry, the Fed has your back'”, he remarked, on the way to suggesting that no amount of stimulus will be sufficient to completely ameliorate the damage to the economy.
He, like so many Fed officials this week, warned that a wave of bankruptcies is in the offing.
“I pray I’m wrong on this, but I just think that the V-out is a fantasy”, he chided, referencing the V-shaped recovery predicted by the administration, many market participants and economists, who are duty-bound to see a light at the end of the tunnel, even if there isn’t one there.
Druckenmiller described efforts to keep the economy from imploding as “a combination of transfer payments to individuals, basically paying them more not to work than to work”.
Combining state unemployment benefits and additional funds from the federal government, Goldman assessed last week that “some groups receive more than their usual wages in unemployment benefits and some receive less [but] for two groups facing high layoff rates in this recession—sales workers in the retail trade sector and services workers in the leisure and hospitality sector—benefits substantially exceed normal wages”. Here is the breakdown:
The bank said that “on average, laid-off workers are entitled to unemployment benefits worth about 106% of their former wages”. Not only that, around three-quarters of those laid-off workers “receive benefits that exceed their former wage”, on Goldman’s estimates (more here).
As far as aid to companies goes, Druckenmiller characterized bailouts and other assistance as “a bunch of payments to zombie companies to keep them alive”.
He expressed incredulity at the notion that the broad market would gain on positive news flow around Gilead’s breakthrough, or any other therapeutics for that matter. “I don’t see why anybody would change their behavior because there’s a viral drug out there”, he said.
On negative rates, he feigned bemusement: “I don’t understand even what the argument is”.
Druckenmiller is similarly incredulous at the notion of propping up companies which might otherwise go out of business. “I’m not a scientist. I’m a common sense guy”, he mused. “I just don’t think you can take massive amounts of money [and] allocate capital to zombie companies. It just doesn’t make any sense to me”.
He did have some nice things to say about Amazon, though. “[The company] has made all of our lives better”, he gushed. “I think it’s an amazing company. I get a little emotional when politicians attack it”.
Ultimately, Druckenmiller indicated that in his judgement, everyone may have lost their minds.
“This is one of the most bizarre decision making processes I’ve ever seen”, he shrugged.
When it comes to the Trump administration’s response to the virus, Druckenmiller said it may one day be remembered as the “poster child for the worst public policy decisions ever made from a cost-benefit analysis”.