Stan Druckenmiller Talks ‘Sense On Cents’

I truly enjoy listening to and learning from people who are not ‘talking their position,’ trying to sell me something, and truly ‘know their stuff.’

I had just such an enjoyable and insightful experience this morning in watching a Bloomberg interview with noted investor Stanley Druckenmiller.

All the talk today is about the sequester. Sequester? – Shmeckester!!

Not that the sequester is not important, but it pales in comparison to the truly major issues of the day. Let’s navigate and learn from the newest inductee into the Sense on Cents Hall of Fame, Stanley Druckenmiller, as he provides a healthy serving of ‘sense on cents’ on a host of critically important topics. He sounds the siren on THE single most important financial issue facing our nation. I assure you that you will not be disappointed.

Druckenmiller on why he’s speaking out now:
“I see a storm coming, maybe bigger than the storm we had in 2008, 2010. And really, the reason could happen without people looking as for a lot of similar reasons that we could get into. But the basic the basic story is, the demographic bubble I was looking at way back in ’94 that started in 2011, we are right at the first ramp-up of this thing that is about to hit.”

On U.S. demographics:
“Something remarkable has occurred since 1994 until now, which is entitlement spending, or let me say transfer payments to be a little more correct. Transfer payments which were 28% in 1960, and were 50% when we were in the budget mess in ’94. Lo and behold, they’ve gone up to 67% of government outlays.

But they haven’t gone up because of demographics. They’ve gone up because the seniors have a very, very powerful lobby. They keep getting more and more transfer payments from the youth.But the demographic storm is just starting now. It reminds me of ’05 when people just extrapolated housing prices going up for 50 years…Everyone sorta lives with their rulers in the past and doesn’t look at coming changes.

So what’s going to happen is we now have a working population, this is the way entitlements work, where the current workforce is paying for the benefits of the seniors. And since 2000, we’ve had about 4.5 to 4.8 workers for every retiree. By 2050, that number will drop to 2.4 workers per retiree. Another catchy way to say it is by 2030, the average population of the United States is gonna be older than the average Floridian right now.”

On who is going to stop seniors from stealing from the next generation:
“You asked me why I’m here. And I think people like me and others need to speak out. It’s about the future, not about the present where the problem is. And let me just say one thing. I am not against seniors, okay. I love seniors. Unfortunately I’m going to be one in the not-too-distant futures. What I am against is current seniors to me stealing from future seniors.”

On who should be blamed for hurting the economy:
“It’s hard to tell who’s going to be blamed– if we don’t act and this occurs…There’s plenty of blame to go around. If I had to analyze how do we get into the financial crisis, I would say it started way back in the ’90s when then-Chairman Greenspan refused to address the dot-com bubble, came up with some new theory of productivity and therefore we’re not going to have a problem, so all these NASDAQ companies who were never going to earn money went to hundreds-of-times earnings and then of course, we had a major bust.

And instead of taking a recession and having the cleanup…they needed an offset. So they created the housing bubble. So now by hindsight, everybody says, ‘Well, you had these horrible Wall Street actors,’ and I’m sure there were quite a few horrible Wall Street actors. And I don’t doubt that they were part of the problem. In fact, I know they were part of the problem.

But I also know it was negative real interest rates for 12 outta 20 years that enabled these actors to do the things they were doing and incented, yes, incented them to go out and gamble the way they were gambling.”

On gridlock in Washington:
“I’m pretty frustrated. This sequester thing– if you just look at how it came about, first of all, every five minutes all the suffering and all this horrible stuff is going to happen in various sectors if this goes through. But there’s three things that are not on the table in the sequester. I know you’re gonna be shocked by this. Medicare, social security and Medicaid, okay.”

On why Medicare, Medicaid and Social Security are not on the table:
“I’m sure it’s because of short-term politics. The problem with politicians is, they really only do have a four-year life cycle. The rest of us should have the responsibility to look a little further than that ahead. But yeah, I don’t know whether ‘mad’ is the word. I’m extremely frustrated by their refusal to deal with this problem. And the sequester thing, I think the president made a deal. It was a deal so they would extend the debt ceiling, which they did, all right. I am very much for tax reform. But I don’t think it should be part of this particular thing and we should be parading out the crowd we’d been parading about to say how horrible this is going to affect the economy.

Let me tell ya, I don’t know what the economy’s going to do. But it’s just a little ridiculous to say a $600 billion tax increase over ten years and $150 billion increase in the payroll tax is going to have no affect on the economy. But an $85 billion cut in discretionary spending is going to tank the economy? If the economy were to soften, I can tell you it won’t be because it will not be because of this $85 billion.”

On equities vs. bonds:
“One of the things that is kinda one of my pet peeves is hearing all these people on TV say, ‘Well, you gotta go into equities ’cause they’re so cheap relative to bonds and there’s no other game in town.’ They are cheap relative to bonds. But everything is cheap relative to bonds…

So just because equities are cheap relative to bonds doesn’t mean their price isn’t subsidized. I’m not making a forecast here because the subsidization could go on for a long time. But real estate, gold, equities, they’re all priced off of ZIRP, zero interest rates, and they’re all subsidized.”

On whether the hedge fund industry could be in hot water 12-24 months from now and become even further consolidated:

“Oh, I don’t know. I think the hedge fund’s short-term thinking is just a manifestation of our entire society. Whether it’s the Fed or whether it’s– the administration or whether it’s Congress, no one bothers to think about the long term anymore. And the hedge funds are just one more manifestation of that.”

On where investors should put their money right now:
“That’s hard for me to answer. Because I have the luxury of a lot of experience in sitting in front of a screen. And I can go into currency markets where it’s at a relative price. So it’s the one area where prices aren’t subsidized. And I’m arrogant enough to think I can time these things.

But I don’t really know how to answer that question for public invest– but let me just say that this idea that you’ve got go plowing into risk because rates are zero, that they will rue the day one day. The music will stop. And I would probably be invested right now thinking I’m smart enough to know that we’re quite away from the music stopping.

I don’t think Bernanke is about to end these policies for a while. But let’s just know what we’re dealing with here.”

On whether there needs to be more consolidation in the banking industry:
“I’d like to see them be more like utilities. I could care less whether they make money, unless I happen to own equities in it. But if we’re talking about as a United States citizen–I have no problem with banks being utilities and going back to what banks used to do…”

On whether banks should just be making loans:

“Yeah.”

On what his future looks like:

“I’m probably going to disappear again at some point. But in the meantime, I’m gonna do what I can to try and bring the awareness of this issue out because with respected economists, again, focusing on a little problem over here when you’ve got this big problem over here, I think the message needs to be out there.”