Druckenmiller Says Fed Policy Underappreciates Risk
Chicago (July 17) Stan Druckenmiller, the hedge-fund manager with one of the best track records over the past three decades, said the Federal Reserve’s policy of keeping interest rates near zero for so long is baffling and risky.
“Fed policy seems not only unnecessary, but fraught with unappreciated risk,” said Druckenmiller, speaking at the CNBC Institutional Investor Delivering Alpha Conference in New York. He said the actions are as “baffling” as they were in late 2003, when the Fed said its target rate would stay at 1 percent for a “considerable period” even when there were indications of vigorous growth. The following year, the Fed started a cycle of tightening that pushed the rate to 5.25 percent by 2006.
Central bank chair Janet Yellen said yesterday in remarks to the Senate that the Fed needs to press on with record monetary stimulus to combat persistent job market weakness. Druckenmiller, 61, said with average net worth per household above 2007 levels, unemployment falling, industrial production at a new high, and no signs of deflation, easy monetary policy could do more harm than good.
“Five years into an economic and balance sheet recovery, extraordinary monetary measures are likely running into sharply diminishing returns,” he said. “The odds are high that the Fed’s monetary experiment will be more disruptive down the road than the Fed anticipates.”
Druckenmiller also questioned the Fed’s certainty over its forecasts given mistakes in the past, including declaring in 2007 that the subprime mortgage crisis was contained.
“Where does their confidence come from?” he asked.
Druckenmiller said in an interview after the presentation that he’s speaking out because he feels a sense of responsibility. “We are setting ourselves up for a huge loss in output,” he said.
After producing average annual returns of 30 percent from 1986 through 2010, Druckenmiller shut his hedge-fund firm Duquesne Capital Management LLC and now manages his own wealth through Duquesne Family Office LLC. He’s also campaigned against the mushrooming costs of social security, Medicare and Medicaid, and the damage it could do to the youth of America.
While Druckenmiller wouldn’t specify how he’s positioning his portfolio, he said that if an investor thought the Fed’s monetary policy was too loose, then the playbook would be to invest in the equity market and “various risk markets.”
Betting on credit isn’t the place to make money given there is little upside with rates at this level. There’s also been a deterioration in the quality of new corporate debt issuance with a dramatic increase in covenant-lite loans, he said.
Druckenmiller doesn’t expect that the Fed’s policy, while a bad bet from a risk-reward perspective, will end in a systemic crisis.
If the Fed started raising rates in the first quarter, we’d get a bear market and slower growth, he said.
“But it will be better in five or 10 years than it would have been” if the Fed didn’t act, he said. “If the policy continues for the next year or two the risks will go up while those people taking a victory lap will scream louder and louder.”