Druckenmiller: Fed Policy Is Extremely Short-Sighted (Video)

There are very few investment professionals voicing concern about the Federal Reserve’s easy monetary policies nowadays. Most economists still believe the Fed will likely raise the Fed Funds interest rate in June, or at least by September. The financial media takes it as a given that the United States economic recovery remains relatively robust, while China’s economy seems to be on the verge of disaster.

Enter Stanley Druckenmiller, one of the most successful hedge fund managers of the past thirty years. He has made big waves in the past month after a transcript of a speech he gave at a private club became public. In the speech, he explained that he is concerned that the economic climate is starting to look eerily similar to 2004 and the lead-up to the financial crisis.

Bloomberg TV just released a lengthy interview (see below) with Druckenmiller that delves more deeply into his concerns about the US economy. While he insists that he is not predicting a crash, he is also very clear that he does not like the risk-reward outlook of the Fed’s ongoing easy monetary policy. He doesn’t want to alarm investors, but at the same time it’s pretty obvious that he’s worried about the unprecedented amount of both domestic and global debt. He also thinks it’s ridiculous that interest rates are still at zero percent, but doesn’t see that changing anytime soon.

Bloomberg emphasizes three forecasts from Druckenmiller that exactly match or are very similar to what Peter Schiff has been saying for some time. These include:

Druckenmiller is just the latest of well-respected contrarian investors warning the markets that we cannot rely on academic economists to safely manage global economies through central banking. You can watch his full, 40-minute interview below, or scroll down to read highlights from it.

Highlights from Druckenmiller’s interview:

“Not just like 2004, but it certainly rhymes. Back in late 2003, I remember we had 9% nominal growth, 7% real growth, the economy was very, very strong. But we had 1% interest rates, and we also had a tag on them that they were going to remain there for a considerable period. I just felt that Fed policy was unnecessarily easy… I was more fearful because historically I’ve done a lot of work analyzing central banks and subsequent activity, and we’ve had problems in the past when monetary policy was too easy… I was worried some trouble might be brewing, but I couldn’t put my finger on what it was… That’s kind of how I feel now. I think we’re taking a terrible risk-reward in terms of zero rates…

“I’m more worried about things down the road than looking in the near-term. I think a lot of the dialogue about this is far too myopic, rather than looking at things in the longer-term perspective…

“Today, if you look at the situation, stock prices, household worth per capita are at record highs. They went to record highs in 2013 and they’ve been going up for two straight years. So I’m not sure what the Fed is trying to achieve in terms of the reward here… We’ve had a tremendous amount of debt growth, particularly in the corporate sector…

“[If] you’re getting a re-leveraging of an economy that never deleveraged the last time, you’re setting up the possibility of another asset bubble investment bust. I want to be very clear. I’m not forecasting an asset bubble investment bust 2 or 3 years down the road. What I’m saying is, if you’re a policy maker, the risk-reward is so skewed right now, because the zero rates aren’t getting you anything substantial, in my opinion, in terms of economic growth… But the debt growth is accelerating… Do they actually think 25 basis points is going to bring on the next depression? …

“Why does the economy need holding up now? Retail sales are at an all-time high. Everything is booming, except for capital investment… I don’t know why it needs extraordinary help here. Should we maybe have negative real rates? Yeah, but by the way, 1% would still mean negative real rates…

“The Fed, the academics, Ben Bernanke… they said, if they could, they’d like rates at negative 4%. Because they couldn’t do that, they did QE. Do you know where that version of the Taylor Rule they were using says Fed Funds should be today? 3.5%. If you use the traditional Taylor Rule, which said at the time rates should be minus 1%, that says we should be at 1.75%. There is no traditional theory that says rates should be at zero at this stage of the cycle… I think they’re very myopic…

“When you ask about June-September [rate raise], every month that goes by we have more and more financial engineering. And easy monetary policy, I think every academic would agree, borrows from the future. It’s a temporary demand stimulus to borrow from the future. It makes sense to borrow from the future generations when unemployment is 10%. Why does it makes sense to borrow from future generations when unemployment is 5.5%? I don’t get that…

“We’re not going to see anything for a year and half, because they set up metrics 8 or 9 months ago. They were met 3 or 4 months ago, so they changed the metrics. I have no confidence whatsoever that you’re going to see rate hikes in September or December or whenever. When they lay out metrics and then they change and then they change again and then they change again, who knows when they’re going to go. By then, how far will the financial engineering go and how far will the debt go? This is all pay me now or pay me later…

“I think the risk of a credit bubble is extremely high. If it’s not addressed pretty soon, things could look difficult 3 or 4 years down the road… A good start would be raising rates all the way to 25 basis points… That would be a big step…

“The Chinese stock market is up [about] 140% in six months after being in a downtrend for 5 to 7 years and is doing so on record volume with record breadth. If it was any other stock market or certainly any developed market, I’d tell you, being a market observer, there’s a 98% chance China will be in a cyclical boom 6 to 12 months from now… I would downgrade that assessment to 95% [since China is different from developed markets]… Whenever I’ve seen a stock market explode like that… Like day follows night, 6 to 12 months down the road, you’re out of a recession and you’re into a full-blown recovery… It’s certainly greater than 50% that China will be [there] in 6 to 12 months…

“Of course [student loans] aren’t going to get paid back. It’s very, very reminiscent of the housing thing… I don’t mean in terms of systemic risk, [but] with good intention, you had a subsidized market with increased demand. When you screw around with markets, that’s what happens… [I don’t think they’re the next subprime crisis], but I think they could be one piece to a potentially dangerous puzzle…”

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