Hedge fund legend Stan Druckenmiller, who runs family-office Duquesne Capital, compared the Federal Reserve’s rate hikes to a game of Jenga while speaking at a conference this week.
Jenga is a game where players take turns removing one wooden block at a time using one hand from a tower comprised of 54 blocks. The game ends when a player causes the tower to collapse.
“So that’s kind of how these interest rate increases and balance sheet rolling off, it doesn’t matter until it matters,” Druckenmiller said at Grant’s 2018 Fall Conference. “But, I don’t know whether it matters at 2%, 2.5%, 3%, 3.5% on Fed funds. I don’t know whether it matters on the central bank balance sheet’s expansion goes to fifty billion a month, to zero, or minus fifty.”
Druckenmiller said that he feels “strongly” that the policymakers “don’t have a clue” either.
“[Fed chair] Jerome Powell gives a speech about how things are so unbelievably wonderful. I guess he’s been in California where the stuff is legal now. How can he possibly not think, see the road ahead?” he said.
The Federal Reserve last raised its rates by 25 basis points in late September, bringing the benchmark federal funds rate to a target range of 2% to 2.25%. This marked the third increase this year, with the Fed signaling it would likely raise rates again in December and through 2019.
“I think they’re just going to keep going and just like Jenga, the thing is going to go like that” he gestured to show the tower falling, “And all these zombies, many of them are just going to explode.”
By “zombies,” Druckenmiller is referring to companies that would’ve gone bankrupt had it not been for unusually low interest rates.
Druckenmiller speculated that it’s probably not going to be like global financial crisis of 2008, but more like the bursting of the tech bubble in 2001 and 2002.
“Historically, it looks like this is the most disruptive economic period since the 1880s and 1890s, I don’t doubt,” Druckenmiller said, before adding, “But where are the bankruptcies? I mean, seriously, Eddie Lampert’s Sears (SHLD)… Who needs that thing? What function is Sears serving our society?”
The day after Druckenmiller made his comments reports surfaced that Sears is expected to file for bankruptcy as soon as this week.
“I’ve had a theory that since July we’re getting into the period where this stuff is starting to matter,” he said, “And it hasn’t mattered until this week.”
At the time of his talk on Tuesday, he had been 25% short equities in the last 10 days.
“Don’t take a lot from that,” he emphasized. “It could be positive in a week. I was 25% short equities last 10 days.”
Right now, his portfolio is long the “new economy,” short the “old economy” in the U.S. As for the new economy, some of the companies he likes include the cloud names such as Microsoft (MSFT), WorkDay (WDAY), Salesforce (CRM), and Amazon (AMZN).
Over the last 30 years, Druckenmiller, 65, has amassed one of the most revered track records in the hedge fund history. He’s never had a losing year and out of 120 quarters, only five were down. He’s compounded annual returns of 30% during his career managing outside money, according to RealVision.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter. Send tips to email@example.com.
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