Druckenmiller, 53 Records And Three-Quarters Of A Trillion

It’s been 16 months since Stan Druckenmiller declared equities, broadly construed, uninvestable.

To be fair, he didn’t use the word “uninvestable.” During a virtual chat with the Economic Club of New York on May 12, 2020, Druckenmiller said “the risk-reward for equity is maybe as bad as I’ve seen it in my career.”

He added some caveats about the Fed and other ostensible nuance, but suffice to say equities turned out to be a decent bet. The S&P is up nearly 60% since then, big-cap tech almost 70% and small-caps almost 80%.

Of course, Druckenmiller doubtlessly made plenty of money during what ended up being one of the most spectacular rallies in history (figure above). I lampoon his remarks not because I think he hasn’t gotten richer lately, but because I think it’s important for regular people to disabuse themselves of the (patently ridiculous) notion that sell-side strategists should be written off as hopeless shills compared to billionaire hedge fund managers who, the general investing public believes, are somehow more “relatable.”

Investors habitually deride sell-side equity strategists while pretending whichever “legend” CNBC decides to interview that day is some kind of benevolent “man of the people,” keen to help regular folks make good macro calls.

With apologies (because this always offends someone), you have exactly nothing in common with a Druckenmiller or a Jeff Gundlach or a Dan Loeb. And you never will. When it comes to their macro calls, I’d begrudgingly (and ironically in this instance) refer you to Warren Buffett and Charlie Munger, who would be eager to explain (Warren patiently, Charlie impatiently) that no hedge fund manager has the first clue where equities are going, certainly not in the near-term, likely not in the medium-term and maybe not even over the long-term.

In any case, I didn’t set out to make that point again, but I stumble into it about once a month. It’s caustic, but it’s funny, and so are the three or four emails I invariably get from three or four Joe Nobodies each with three or four million and delusions of grandeur. “If you come at the king, you best not miss,” they’ll say, in a pitiable attempt to defend the Druckenmillers of the world, not realizing that if there’s anything someone like Stan cares less about than the idle musings of someone like me, it’s the obsequious praise of sundry Joe Nobodies.

Meanwhile, global equity funds took in another $19.2 billion over the latest weekly reporting period. (Note that I just pulled off an impossible feat: I simultaneously buried the lede and conjured a non sequitur. In theory, the lede can’t be a non sequitur. But in my world it can.) The total haul over the course of this year’s uninterrupted deluge is now $712 billion (figure below).

After falling below $10 billion in the latter half of July, the four-week average is back near $20 billion.

That’s one of this market’s built-in “failsafes” which together explain why selloffs can’t get any momentum. There are other, more nuanced, dynamics at work. Consider, for example, the impact of the mechanical bid from the vol control universe in an environment of rock-bottom realized volatility and the hedging flows that help keep spot “insulated.” (See “Past, Present And Future” for more.)

The S&P came into September riding a seven-month win streak, but note also that the index has logged 53 closing highs this year (figure below).

BofA’s Michael Hartnett noted that the top 10 years for closing highs “have a certain notoriety, both good and bad.”

1995 was year one of the late-90s US bull market, for example. 2017 was defined by Janet Yellen’s short vol bubble, which burst in spectacular fashion on February 5, 2018, when the VIX ETN complex imploded just as Jerome Powell took the reins at the Fed on the way to stumbling into a mini-bear market just 10 months later. 1928 and 1929 were followed by the Great Depression. And 1987 was… well, it was 1987.

Who knows what delights (or horrors) await traders over the next 12 months. Given how far stocks have run from the March 2020 pandemic panic lows, and considering nosebleed multiples, you might be inclined to say the “risk-reward for equity is maybe as bad” as you’ve seen in your entire career. If you say that in public, make sure your family office is busy deciding what to be long.