Legendary investor Druckenmiller: Current situation is unprecedented in my career, only comfortable shorting the US dollar

Famous hedge fund manager Stanley Druckenmiller recently stated that he is shorting the US dollar. At the same time, he is not optimistic about the recent fixed income market and stock market. He is also investing in gold. For cryptocurrency supporters, "shorting the US dollar" is also a major argument, aligning the two perspectives.

Who is Stanley Druckenmiller?

Stanley Druckenmiller is best known for being the lead investment manager at George Soros's investment fund, Quantum Fund. From 1988 to 2000, he served as the chief investment strategist at the fund, helping manage the investment portfolio and achieving remarkable returns, including earning $1 billion in 1992. His strategies and keen judgment in the financial markets have earned him acclaim, with an annual return of over 30% for 30 years, making him one of the legendary investors. He currently manages his own $2 billion wealth.

Druckenmiller Bearish on Fixed Income Market

In a speech at the Norges Bank in April this year, Stanley Druckenmiller stated that the fixed income market lacks "profit space," the stock market is "very complex," and he is shorting the U.S. dollar. Currently, his stock allocation is net short 3% more than long positions.

"Things are getting more complicated; it's a particularly difficult time," he mentioned in his speech.

He stated, "I've been doing this job for 45 years. I've learned a lot of economic history, but I've never encountered a situation like this: 11 years of free money, meaning governments printing a lot of money, very extensive asset bubbles, and then interest rates going up 500 basis points in 12 months."

He does not see good opportunities in the fixed income field but has still invested in Japanese government bonds. He mentioned uncertainty in making profits, and the risk-return ratio is unreasonable. He also indicated that the U.S. might enter a recession in the second half of this year.

Stanley Druckenmiller expressed reluctance to take significant risks due to the complex situation. However, he still believes in a hard landing scenario, where raising interest rates to combat inflation leads to an economic recession. He believes that owning fixed income would be valuable if his hard landing prediction, with a 2-year bond yield of less than 4% and a federal funds rate of 5.25%, turns out to be correct. At the same time, he does not find long-term fixed income tools attractive.

Stanley Druckenmiller believes that if facing a severe recession, holding bonds would be appropriate, but currently, bond prices are not particularly cheap because the Federal Reserve has shown some resilience over the past year. He expressed some unease over the Fed's response to Silicon Valley Bank SVB, stating, "They printed enough money in four days to basically offset all their deflationary efforts over the past five or six months."

Druckenmiller Bearish on Stock Market, but Holds Nvidia

Druckenmiller stated that regarding stocks, he is shorting the overall economy through indices such as the Russell 2000 Index, which tracks U.S. small-cap stocks. Although his fund has investments in companies like Microsoft, Google, and Nvidia (stock symbol NVDA), his overall investment portfolio remains net short 3%.

He acknowledged the complexity of the stock market. For instance, during the 1973 recession and the 1974 oil crisis, the stock prices of oil and chemical companies rose, and during economic downturns, consumer goods stock prices also increased.

However, what does it mean for companies like Nvidia if we are heading towards a recession? Druckenmiller is not sure. He mentioned that despite the economic downturn, Nvidia continues to grow rapidly due to the arms race in the industry. He finds the downside potential unclear.

Druckenmiller Bullish on Shorting the U.S. Dollar

Druckenmiller stated that shorting the U.S. dollar is his most comfortable current investment. It is the only "Risk On" trade in his current portfolio. "Risk On" refers to investors being unafraid of risks, heavily investing in risky assets without hedging. Currency trends often last for two to three years or more, and in the past decade, over $10 trillion to approximately $13 trillion flowed into the U.S. dollar.

Druckenmiller admitted that he missed the nine-month rally of the U.S. dollar, which may be the biggest mistake in his forex trading career. Now, as the U.S. has weaponized the dollar and its deflation policy is not as effective as foreign policies, he decided to start shorting the U.S. dollar.

However, Druckenmiller emphasized not to mimic his actions as he might change his mind within a week.

Based on his bearish view on the U.S. dollar, Druckenmiller also invested in gold.

"When you really see the ball, swing hard," but don't overanalyze

Druckenmiller shared his experience of achieving high returns in managing funds: "I've always believed that the way to build a long-term track record is when you really see the ball, swing hard. And when you don't see the ball, don't swing."

However, he also stressed that in today's fast-paced world, "invest first, investigate later" is even more critical than before.

He mentioned, "In this fast-paced world, with all the new communication methods, if I have a good idea and I think it's attractive and for some reason I think the security will go up in a year or two, I usually buy it right away and then tell the analyst to do the research." If after analysis, he finds his choice was wrong, he exits because he does not like waiting. If he feels strongly about an investment, they shorten the analysis time, invest first, conduct a comprehensive analysis, and make adjustments.

Druckenmiller pays special attention to fundamentals and has a young team of analysts who debate investment ideas.

To Make Money in the Stock Market, Patience is Needed for the Next Two Years

Druckenmiller believes that patience is required in the stock market for the next two years as challenging times will indeed arise, and central banks will respond in crazy ways, similar to the period from 1976 to 1978. He believes that the currency market in the next two years will be "very interesting."

Druckenmiller still believes that the market will rise in the next 10 years, but volatility will be very high during the process.