The Game-Changer Speech for Metals, Ags and Buffett

Updated August 14, 2000 Breaking News: Buffett moves into Gold – per 13F Sec Filing: Berkshire Hathaway new position Barrick Gold $GOLD, Raises Kroger $KR, Maintains Apple $AAPL 

Why is Buffett buying Barrick $Gold with the stock up 176% from the 2018 lows? He is NOT, “being greedy when others are fearful” – Berkshire is chasing, but why? They clearly see a secular shift in monetary policy with far MORE political influence. A post WW2 like Fed. We are looking at a social justice focused central bank, trying to rid themselves of the inequality label, let us explore.


Buffett enters gold (first time?) cut JP Morgan $JPM by 62% and exited Goldman $GS, NOT exactly an endorsement of the US economy. A Very defensive portfolio shift. Buffett just told you he believes the Fed will enter YCC Yield Curve Control and NOT allow meaningful steepening in US Treasuries. Thus, his hard exit from the financials, and gold miner entry – he is positioned for financial repression and stagflation. On gold, in a letter to investors he once wrote; 

“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%!  Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To ‘protect’ yourself, you might have eschewed stocks and opted instead to buy [3.25] ounces of gold with your $114.75 (Buffett’s first investment 80 years ago). And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle. [$114.75 would have grown to $606,811 if invested in a no-fee index fund tracking the S&P 500.”

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WARNING: A Look at the FOMC’s New Policy Path – By the time we get to Jackson Hole the trade may be 75-80% played out…

Central Banks and Commodity Prices

August 14 Breaking: Buffett moves into Gold – per 13F Sec Filing: Berkshire Hathaway new position Barrick Gold $GOLD, Raises Kroger $KR, Maintains Apple $AAPL 

This summer, many professional sports are on a shortened schedule, but front-running the Fed is in full swing.

Month over Month

Silver +51.9%
Mosaic MOS +50% (Ags, Agriculture plays as of August 10)
Natural Gas +27%*
Cobalt: +16.4%
Platinum: +15.2%
Gold: +13.9%
Palladium: +11.4%
Lead: +9.4%
Aluminum: +8.8%
Copper: +5.8%
Nickel: +1.9%

*Commodity prices have surged since the Fed’s aggressive messaging campaign, let’s explore. As inflation expectations have risen, stocks valued off long term, future cash flows have struggled. The former piping hot – cloud SaaS sector equities are off -10-35% in recent weeks. At the same time, “value plays” like Berkshire Hathaway have surged +20% since late June. In our view, the Fed is triggering a colossal sector rotation. Just look at natural gasripping higher. Warren Buffett is smiling. In July, he plowed $10B into Dominion’s natural gas assets – this is an indication that Berkshire is NOT expecting a demand shift away from fossil fuels anytime soon. Berkshire loaded up on pipes and storage assets – Buffett clearly expects high demand in this commodity play. Keep in mind, Dominion’s position in the “midstream” does really well when prices are higher – it’s clear to us Berkshire is BULLISH on the natural gas commodity. Buffett backed up the truck on very cheap assets which are a cash flow machine. He gets the inflation hedge with the cash flow growth upside, brilliant. Buffett is CLEARLY listening to the Fed’s Brainard. 

Navigating Monetary Policy through the Fog of COVID (there are TOO MANY technical analysts throwing around charts and NOT enough people digging through the most important Fed speeches)

Governor Lael Brainard

At the Perspectives on the Pandemic Webinar Series, hosted by the National Association for Business Economics, Washington, D.C.

“As the Fed expanded its balance sheet to unprecedented levels from December 2008 to December 2011, precious metals and precious metal miners widely outperformed equity markets. Historically, in the most extreme precious metal bull markets, silver widely outperforms gold. Today, silver trades at multi-decade cheap levels relative to gold. We remain bullish on both, but as we alerted clients last week, silver remains our highest conviction buy over the next 12 – 18 months. We’re long a full 3/3 position in the portfolio.”

Bear Traps Report, April 3, 2020

The COVID-19 contraction is unprecedented in modern times for its severity and speed. Following the deepest plunge since the Great Depression, employment and activity rebounded faster and more sharply than anticipated. But the recent resurgence in COVID cases is a sober reminder that the pandemic remains the key driver of the economy’s course. A thick fog of uncertainty still surrounds us, and downside risks predominate. The recovery is likely to face headwinds even if the downside risks do not materialize, and a second wave would magnify that challenge. Fiscal support will remain vital. Looking ahead, it likely will be appropriate to shift the focus of monetary policy from stabilization to accommodation by supporting a full recovery in employment and a sustained return of inflation to its 2 percent objective.1

Fed Speak Drives Metals, More than ALL other Factors Combined
Every year or so there’s a game-changer in Fedspeak messaging, where new clues to the future policy path are floated. ‬As we head toward some very key events in the coming weeks, namely, the Jackson Hole conference and the Fed meeting in September, the Fed HAS BEEN lurching towards making a very important transition. In a speech delivered on July 14, Gov Lael Brainard cemented the path forward for all to see. She called it, “stabilization to accommodation,” and it’s NO coincidence that Silver surged nearly 60% in the days after her signal calling. After the fireworks, what’s the key question for the Fed now? After answering so many questions in March in regard to their power to stabilize markets, how does policy maintain its impact and grow with the pace of the recovery? A key answer to that will be in the Fed’s new forward guidance on interest rates. As even the Fed would say, this guidance is insufficient relative to the current risks and especially considering the fact that they are already at the zero lower bound. The question now, what will forward guidance look like in the future as that’s the crucial element of this Brainard transition of stabilization to accommodation. Going back nearly 2 months now, we have been of the view for some time that the Fed will adopt outcome-based forward guidance at the September meeting. What this means is, the Fed will attach its reaction function to realized economic outcomes. An example of this would look like, the Fed will not hike rates until employment and inflation are at X level. What this would do is, it would show the market that the Fed has no plans in getting in the way of recovery. Bottom line, in English – we’re looking at a new “social justice” Fed, trying to rid themselves of the “inequality” label, this is what’s driving the metals.

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A variety of data suggest the economy bottomed out in April and rebounded in May and June. Payroll employment rebounded strongly in May and June. Retail sales jumped 18 percent in May, exceeding market expectations, and real personal consumption expenditures (PCE) are estimated to have increased 8 percent. Consumer sentiment improved in May and June.2 And both the manufacturing and nonmanufacturing Institute for Supply Management indexes jumped into expansionary territory last month. Financing conditions remain broadly accommodative on balance: They continued to ease over recent weeks for nonfinancial corporations and municipalities, although they remained stable or tightened slightly for small businesses and households.3

The earlier-than-anticipated resumption in activity has been accompanied by a sharp increase in the virus spread in many areas. Uncertainty will remain elevated as long as the pandemic hangs over the economy. Even if the virus spread flattens, the recovery is likely to face headwinds from diminished activity and costly adjustments in some sectors, along with impaired incomes among many consumers and businesses. On top of that, rolling flare-ups or a broad second wave of the virus may lead to widespread social distancing—whether mandatory or voluntary—which could weigh on the pace of the recovery and could even presage a second dip in activity. A broad second wave could re-ignite financial market volatility and market disruptions at a time of greater vulnerability. Nonbank financial institutions could again come under pressure, as they did in March, and some banks might pull back on lending if they face rising losses or weaker capital positions.

A closer look at the labor market data hints at the complexity. The improvement in the labor market started earlier, and has been stronger, than had been anticipated. Over May and June, payroll employment increased by 7.5 million, the unemployment rate fell 3.6 percentage points, and the labor force participation rate rose 1.3 percentage points.4 The large bounceback is a sharp contrast to the Global Financial Crisis, when the initial employment decline was shallower and it took much longer before a similar share of the initial job losses was recouped.

The job gains in the past two months were concentrated among workers who were on temporary layoff. They likely were driven by an earlier-than-expected rollback of COVID-related restrictions as businesses ramped up hiring and consumers exhibited more comfort engaging in commercial activities, as well as by a boost to employment from the Paycheck Protection Program. While nearly all industries experienced increases, the improvement was especially notable in the leisure and hospitality sector, which had been particularly hard hit by COVID-related closures in April.

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It is unclear whether the rapid pace of labor market recovery will be sustained going forward, and risks are to the downside. The pace of improvement may slow if a large portion of the easiest gains from the lifting of mandated closures and easing of capacity constraints has already occurred. Moreover, weekly COVID case counts have been rising, and some states are ramping up restrictions. These developments mostly occurred after the reference period for the June employment report. After declining at a fast clip through early June, initial claims for unemployment insurance have moved roughly sideways in recent weeks and remained at a still elevated level of 1.3 million in the week ending July 4.5 Some high-frequency indicators tracked by Federal Reserve Board staff (including mobility data and employment in small businesses) suggest that the strong pace of improvement in May and the first half of June may not be sustained.

The pandemic’s harm to lives and livelihoods is falling disproportionately on black and Hispanic families. After finally seeing welcome progress narrowing the gaps in labor market outcomes by race and ethnicity in the late stage of the previous recovery, the COVID shock is inflicting a disproportionate share of job losses on African American and Hispanic workers. According to the Current Population Survey, the number of employed persons fell by 14.2 percent from February to June among African Americans and by 13.4 percent among Hispanics—significantly worse than the 10.4 percent decline for the population overall.6

Separately, on the other side of our dual mandate, inflation has receded further below its 2 percent objective—reflecting weaker demand along with lower oil prices in recent months. Both core and total PCE price inflation measures have weakened, with the 12-month percent changes through May standing at 1.0 percent and 0.5 percent, respectively.7 Measures of inflation expectations are mixed; while market-based measures have moved below their typical ranges of recent years, survey measures have remained relatively stable within their recent historical ranges.8 Nonetheless, with inflation coming in below its 2 percent objective for many years, the risk that inflation expectations could drift lower complicates the task of monetary policy.

The strong early rebound in activity is due in no small part to rapid and sizable fiscal support. Several daily and weekly retail spending indicators tracked by Federal Reserve Board staff suggest that household spending increased quickly in response to stimulus payments and expanded unemployment insurance benefits. Household spending stepped up in mid-April, coinciding with the first disbursement of stimulus payments to households and a ramp-up in the payout of unemployment benefits, and showed the most pronounced increases in the states that received more benefits.9 With some of the fiscal support measures either provided as one-off payments or slated to come to an end in July, the strength of the recovery will depend importantly on the timing, magnitude, and distribution of additional fiscal support.

At the sectoral level, there is substantial heterogeneity in the effect of COVID. Recent data suggest that the recoveries in sectors such as manufacturing, residential construction, and consumer goods are likely to be relatively more resilient, while consumer services are more likely to remain hostage to social distancing. Manufacturing production jumped nearly 4 percent in May (following a historic drop in April), and forward-looking indicators point to another solid increase in June. Pending home sales and single-family permits rose more than anticipated in May. In the consumer sector, the rebound in spending has been concentrated in goods categories—especially those sold online—whereas most services categories have remained quite depressed. A similar concern may apply to the commercial real estate (CRE) sector and to equipment investment. Some parts of the CRE market—most notably, the lodging and retail segment—are experiencing significant distress and have seen sharp increases in delinquency rates along with tighter bank lending standards. For equipment investment, production and supply chain disruptions and high levels of uncertainty continue to weigh on expenditures.

In addition to the headwinds facing demand, there could be persistent effects on the supply side of the economy. The cross-border distancing associated with the virus raises the possibility of persistent changes to global supply chains. Within the U.S. economy, the virus may cause durable changes to business models in a variety of activities, resulting in greater reliance on remote work, reductions in nonessential travel, and changes to CRE usage and valuations.

In downside scenarios, there could be some persistent damage to the productive capacity of the economy from the loss of valuable employment relationships, depressed investment, and the destruction of intangible business capital. A wave of insolvencies is possible. As the Federal Reserve Board’s May Financial Stability Report highlighted, the nonfinancial business sector started the year with historically elevated levels of debt.10 Already this year, we have seen about $800 billion in downgrades of investment-grade debt and $55 billion in corporate defaults—a faster pace than in the initial months of the Global Financial Crisis. Several measures of default probabilities are somewhat elevated. It remains vitally important to make our emergency credit facilities as broadly accessible as we can in order to avoid the costly insolvencies of otherwise viable employers and the associated hardship from permanent layoffs.

Finally, in keeping with the global nature of the pandemic, foreign developments could impinge on the U.S. recovery. The International Monetary Fund estimates that real global gross domestic product dropped at an annual rate of about 18 percent in the second quarter after falling nearly 13 percent in the first quarter. While the potential for a fiscal response across the euro area is positive and important, there has been some renewal of tensions between the United States and China, and the outlook for many emerging markets remains fragile.

The Federal Reserve moved rapidly and aggressively to restore the normal functioning of markets and the flow of credit to households and businesses. The forceful response was appropriate in light of the extraordinary nature of the crisis and the importance of minimizing harm to the livelihoods of so many Americans. With the restoration of smooth market functioning and credit flows, our emergency facilities are appropriately moving into the background, providing confidence that they remain available as an insurance policy if storm clouds again move in.

While it is welcome news that 7.5 million jobs were added in the past two months, it is critical to stay the course in light of the remaining 14.7 million job losses that have not been restored since the COVID crisis started. The healing in the labor market is likely to take some time. Last month, a majority of Federal Open Market Committee (FOMC) participants indicated they expect economic activity to decline notably this year and recover only gradually over the following two years. A majority of FOMC participants indicated that they expect core inflation to remain below our 2 percent objective and employment to fall short of its maximum level at least through the end of 2022.

Looking ahead, it will be important for monetary policy to pivot from stabilization to accommodation by supporting a full recovery in employment and returning inflation to its 2 percent objective on a sustained basis. As we move to the next phase of monetary policy, we will be guided not only by the exigencies of the COVID crisis, but also by our evolving understanding of the key longer-run features of the economy, so as to avoid the premature withdrawal of necessary support. Because the long-run neutral rate of interest is quite low by historical standards, there is less room to cut the policy rate in order to cushion the economy from COVID and other shocks. The likelihood that the policy rate is at the lower bound more frequently risks eroding expected and actual inflation, which could further compress the room to cut nominal interest rates in a downward spiral. With underlying inflation running below 2 percent for many years and COVID contributing to a further decline, it is important that monetary policy support inflation expectations that are consistent with inflation centered on 2 percent over time. And with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence. Instead, policy should seek to achieve employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery.11

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With the policy rate constrained by the effective lower bound, forward guidance constitutes a vital way to provide the necessary accommodation. For instance, research suggests that refraining from liftoff until inflation reaches 2 percent could lead to some modest temporary overshooting, which would help offset the previous underperformance.12 Balance sheet policies can help extend accommodation by more directly influencing the interest rates that are relevant for household and business borrowing and investment.

Forward guidance and asset purchases were road-tested in the previous crisis, so there is a high degree of familiarity with their use. Given the downside risks to the outlook, there may come a time when it is helpful to reinforce the credibility of forward guidance and lessen the burden on the balance sheet with the addition of targets on the short-to-medium end of the yield curve.13 Given the lack of familiarity with front-end yield curve targets in the United States, such an approach would likely come into focus only after additional analysis and discussion.

The Federal Reserve remains actively committed to supporting the flow of credit to households and businesses and providing a backstop if downside risks materialize. With a dense fog of COVID-related uncertainty shrouding the outlook, the recovery likely will face headwinds for some time, calling for a sustained commitment to accommodation, along with additional fiscal support.

1. I am grateful to Ivan Vidangos of the Federal Reserve Board for assistance in preparing this text. These remarks represent my own views, which do not necessarily represent those of the Federal Reserve Board or the Federal Open Market Committee. Return to text

2. This is reflected in the University of Michigan Surveys of Consumers and the Conference Board. Return to text

3. Nearly all of the financial conditions indexes that we track indicate only slightly less accommodative financial conditions currently than just before the onset of the COVID outbreak. Return to text

4. The Bureau of Labor Statistics (BLS) has indicated that the official unemployment rate has understated the extent of joblessness in recent months because many workers who lost their jobs were incorrectly reported as being employed but absent from work, rather than unemployed on temporary layoff. The BLS estimated that this misclassification held down the unemployment rate by about 5 percentage points in April and by about 1 percentage point in June, such that the reduction in the unemployment rate would be about 7-1/2 percentage points if these job losses were classified correctly. Return to text

5. The flattening out seen in recent weeks is even clearer when looking at nonseasonally adjusted claims numbers, which might be a slightly better measure than seasonally adjusted numbers in the current environment. The usual seasonal adjustment procedure, which relies on multiplicative seasonal factors, is not ideally suited to the current extraordinary circumstances. See Jason Bram and Fatih Karahan (2020), “Translating Weekly Jobless Claims into Monthly Net Job Losses,” Federal Reserve Bank of New York, Liberty Street Economics (blog), May 7.

In addition, the Department of Labor stated that 49 states reported about 1 million initial claims for Pandemic Unemployment Assistance (PUA) in the week ending July 4. However, since most PUA applicants must first apply for, and be denied, regular state unemployment insurance (UI) benefits before they apply for PUA, initial PUA claims and initial claims for regular UI benefits will be strongly correlated (likely with some lag) and do not constitute independent measures of the number of unemployed persons seeking unemployment benefits. Return to text

6. The Current Population Survey (or household survey) measures the number of employed persons and includes detailed demographic information, whereas the Current Employment Statistics survey (or establishment survey) measures the number of jobs in the payrolls of nonfarm establishments. Return to text

7. That said, the trimmed mean PCE inflation rate calculated by the Federal Reserve Bank of Dallas over the 12 months ending in May remained stable at 2.0 percent; the data as of May 2020 are available on the Bank’s website at And this morning’s Consumer Price Index (CPI) data for June showed some signs of stabilization, with both core and total CPI inflation increasing noticeably last month, driven by a partial rebound in price categories that seemed most affected by social distancing in prior months (such as apparel, accommodation, and transportation services). Return to text

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8. The median 5-to-10-year measure from the University of Michigan Surveys of Consumers and the median three-year-ahead expected inflation from the Federal Reserve Bank of New York’s Survey of Consumer Expectations both came in at 2.5 percent in June—well within their ranges in recent years. Median long-run expectations from the Survey of Professional Forecasters ticked down 0.1 percentage point to 1.9 percent in the second quarter, which is historically low for this measure. Market-based measures of inflation compensation over the next few years have retraced much of their sharp declines in mid-March but remain below their typical ranges in recent years. The 5-to-10-year measure of longer-term inflation compensation derived from Treasury Inflation-Protected Securities, at around 1.4 percent, remains notably below pre-pandemic levels. Return to text

9. This evidence is also consistent with recent research by Baker and others, who examine a panel of households using a financial planning app and show that these households responded quickly to CARES Act (Coronavirus Aid, Relief, and Economic Security Act) stimulus payments despite stay-at-home orders and social distancing; see Scott R. Baker, R.A. Farrokhnia, Steffen Meyer, Michaela Pagel, and Constantine Yannelis (2020), “Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments,” NBER Working Paper Series 27097 (Cambridge, Mass.: National Bureau of Economic Research, May). Other recent studies, including Kargar and Rajan as well as Chetty and others, find similar responses to the CARES Act using different data. See Ezra Karger and Aastha Rajan (2020), “Heterogeneity in the Marginal Propensity to Consume: Evidence from Covid-19 Stimulus Payments,” Working Paper Series 2020-15 (Chicago: Federal Reserve Bank of Chicago, May); and Raj Chetty, John N. Friedman, Nathaniel Hendren, Michael Stepner, and the Opportunity Insights Team (2020), “How Did COVID-19 and Stabilization Policies Affect Spending and Employment? A New Real-Time Economic Tracker Based on Private Sector Data (PDF),” Opportunity Insights Working Paper (Cambridge, Mass.: Opportunity Insights, May). Analysis by Bhutta and others uses data from the Survey of Consumer Finances to assess how the cash assistance (expanded unemployment insurance benefits and stimulus payments) under the CARES Act would help families cope with job loss and find that the CARES Act dramatically improves households’ financial security; see Neil Bhutta, Jacqueline Blair, Lisa J. Dettling, and Kevin B. Moore (2020), “COVID-19, the CARES Act, and Families’ Financial Security,” working paper, July. The act’s cash assistance, in addition to families’ liquid savings, would allow an estimated 94 percent of working families to cover their recurring nondiscretionary expenses if they were to lose all of their income for six months from April through September 2020. In contrast, in the absence of the CARES Act, only about half of working families would be able to cover six months of expenses by relying exclusively on their liquid savings and standard unemployment insurance benefits. Return to text

10. See Board of Governors of the Federal Reserve System (2020), Financial Stability Report (PDF) (Washington: Board of Governors, May). Return to text

11. See Lael Brainard (2019), “Federal Reserve Review of Monetary Policy Strategy, Tools, and Communications: Some Preliminary Views,” Remarks at the Presentation of the 2019 William F. Butler Award New York Association for Business Economics, New York, New York. Return to text

12. See Ben S. Bernanke, Michael T. Kiley, and John M. Roberts (2019), “Monetary Policy Strategies for a Low-Rate Environment (PDF),” Finance and Economics Discussion Series 2019-009 (Washington: Board of Governors of the Federal Reserve System, February). Return to text

13. During the recovery from the previous financial crisis, there were several junctures when the expectations implied by market pricing and Committee communications got out of alignment, which proved costly. Return to text

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Silver, laying a beating on Gold

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

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Silver Doesn’t Care About the News Headlines
Since the Fed’s aggressive balance sheet explosion in March, silver is 133% higher vs. gold’s 40% move. Likewise, the Silver’s lower dollar price of $26 an ounce brings in bargain hunters with gold up at $2000 – an all-time high. Silver’s all-time high is north of $50. Of course, the silver bond is a lot smaller – far more risk. Gold may be setting record prices right now, but it’s silver that’s been gaining ground much faster. The shift has pulled the ratio between the two precious metals back down to more normal levels after their relationship got twisted during March’s market upheaval. Back then, it took 124 ounces of silver to buy just 1 ounce of gold; now it takes 78, close to the five-year average. “Even as gold should keep marching toward new records this cycle, silver appears poised to outperform,” Citigroup Inc. analysts including Aakash Doshi, Bloomberg reported.




Druckenmiller’s Lost Tree Speech, More important Now than Ever

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

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If you’ve never read this classic, the Stan Druckenmiller speech delivered in 2015 at the Lost Tree Club, in Florida – you’re in for a treat. It’s so inspiring – Druck’s passion for markets is like no other. Putting the pieces to the puzzle together means everything to him and everything to us. Above all, today – the words on this page carry a lot more weight. Blow by blow Stan lived and traded through a market much like the 2020 bull run in U.S. equities. Tech stocks in 1998-1999 and 2019-2020 are more like brothers than cousins in our view – we must sit back and embrace the lessons of the past. Make sure you read about the “gun-slingers” (below). 

Stan Druckenmiller and Ken Langone

I thought I would spend a moment just reflecting on
why I believe my record was what it was, and maybe
you can draw something from that. But the first
thing I’d say very clearly, I’m no genius. I was not
in the top 10 percent of my high school class. My
SATs were so mediocre I went to Bowdoin because it
was the only good school that didn‘t require SATs,
and it turned out to be a very fortunate event for

But I’d list a number of reasons why I think I had
the record I did because maybe you can draw on it in
some of your own investing or also maybe in picking a
money manager. Number one, I had an incredible
passion, and still do, for the business. The thought
that every event in the world affects some security
price somewhere I just found incredibly
intellectually fascinating to try and figure out what
the next puzzle was and what was going to move what.
And the fact that I could bet on that interaction,
those who know me, I do like to bet. One of the
great things of this business, I get to gamble for a
living and channel it through the markets instead of
illegal activity. That was just sort of nirvana for
me that I could constantly be making these bets,
watch the market moving, and get my grades in the
newspaper every day.

The second thing I would say is I had two great mentors. One I stumbled upon and one I sought out.

And I see some young people in the audience and
probably some grandparents who have some influence on some young people in the audience, and I would just
say this. If you’re early on in your career and they
give you a choice between a great mentor or higher
pay, take the mentor every time. It’s not even
close. And don‘t even think about leaving that
mentor until your learning curve peaks. There’s just
nothing to me so invaluable in my business, but in
many businesses, as great mentors. And a lot of kids
are just too short-sighted in terms of going for the
short-term money instead of preparing themselves for
the longer term.


“If you’re early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time.”

Stan Druckenmiller


The third thing I’d say is I developed partly through
dumb luck ~ I’ll get into that — a very unique risk
management system. The first thing I heard when I
got in the business, not from my mentor, was bulls
make money, bears make money, and pigs get
slaughtered. I’m here to tell you I was a pig. And
I strongly believe the only way to make long-term
returns in our business that are superior is by being
a pig. I think diversification and all the stuff
they’re teaching at business school today is probably
the most misguided concept everywhere.

And if you look at all the great investors that are
as different as Warren Buffett, Carl Icahn, Ken
Langone, they tend to be very, very concentrated
bets. They see something, they bet it, and they bet
the ranch on it. And that’s kind of the way my
philosophy evolved, which was if you see – only maybe
one or two times a year do you see something that
really, really excites you. And if you look at what
excites you and then you look down the road, your
record on those particular transactions is far
superior to everything else, but the mistake I’d say
98 percent of money managers and individuals make is
they feel like they got to be playing in a bunch of
stuff. And if you really see it, put all your eggs
in one basket and then watch the basket very

Now, I told you it was kind of dumb luck how I fell
into this. Ken Langone knows my first mentor very
well. He’s not a well-known guy, but he was
absolutely brilliant, and I would say a bit of a
maverick. He was at Pittsburgh National bank. I
started there when I was 23 years old. I was in a
research department. There were eight of us. I was
the only one without an MBA, and I was the only one
under 32 years of age. I was 23 years old.

After about a year and a half – I was a banking and a
chemical analyst – this guy calls me into his office
and announces he’s going to make me the director of
research, and these other eight guys and my
52-year-old boss are going to report to me. So, I
started to think I’m pretty good stuff here. But he
instantly said, “Now, do you know why I’m doing
this?” I said no. He says, “Because for the same
reason they send 18-year-olds to war. You’re too
dumb, too young, and too inexperienced not to know to
charge. We around here have been in a bear market
since 1968.” This was 1978. “I think a big secular
bull market’s coming. We’ve all got scars. We’re
not going to be able to pull the trigger. So, I need
a young, inexperienced guy. But I think you‘ve got
the magic to go in there and lead the charge.” So, I
told you he was a maverick, and as you can already
see, he’s a little bit eccentric. After he put me in
there, he was gone in three months. I’ll get to that
in a minute.

But before he left, he taught me two things. A,
never, ever invest in the present. It doesn’t matter
what a company’s earning, what they have earned. He
taught me that you have to visualize the situation 18
months from now, and whatever that is, that’s where
the price will be, not where it is today. And too
many people tend to look at the present, oh this is a
great company, they’ve done this or this central bank
is doing all the right things. But you have to look
to the future. If you invest in the present, you’re
going to get run over!


“Profits are achieved by discounting the obvious, and placing capital in the direction of the unexpected.”

George Soros


The other thing he taught me is earnings don’t move
the overall market; it’s the Federal Reserve Board.
And whatever I do, focus on the central banks and
focus on the movement of liquidity, that most people
in the market are looking for earnings and
conventional measures. It’s liquidity that moves

Now, I told you he left three months later, and
here’s where the dumb luck came in in terms of my
investment philosophy. So, right after he leaves,
the Shah of Iran goes under. So, oil looks like it’s
going to go up 300 percent. I’m 26 — 25, excuse me.
I don’t have any experience. I don’t know anything
about portfolio managers. So, I go well, this is
easy. Let’s put 70 percent of our money in oil
stocks and let’s put 30 percent in defense stocks and
let’s sell all our bonds. So, and I would have
agreed with him if I had some experience and I was a
little more experienced, but the portfolio managers
that were competing with me for the top job, they, of
course, thought it was crazy. I would have thought
it was crazy too if I’d have had any experience, but
the list I proposed went up 100 percent. The S&P was
flat. And then at 26 years old they made me chief
investment officer of the whole place. So, the
reason I say there was a lot of luck involved is
because as Drelles predicted, it was my youth and it
was my inexperience, and I was ready to charge.

So, the next thing that happened when I started at
Duquesne, Ronald Reagan had become President, and we had a radical man named Paul Volcker running the
Federal Reserve. And inflation was 12 percent. The
whole world thought it was going to go through the
roof, and Paul Volcker had other ideas. And he had
raised interest rates to 18 percent on the short end,
and I could see that there is no way this man was
going to let inflation go. So, I had just started at
Duquesne. I had a small amount of new capital. I
took 50 percent of the capital and put it into
30—year treasury bonds yielding 14 percent, and I
owned nothing else. Sort of like the oil and defense
story, but now we’re on a different gig. And sure
enough, the bonds went up despite a bear market in
equities. Right out of the chute I was able to be up
40 percent. And more importantly, it sort of shaped
my philosophy again of you don’t need like 15 stocks
or this currency or that. If you see it, you got to
go for it because that’s a better bet than 90 percent
of the other stuff you would add onto it.

So, after that happened, my second mentor was George
Soros, and unlike Speros Drelles, I imagine most of
you have heard of George Soros. And had I known
George Soros when I made the bond bet, I probably
would have made a lot more money because I wouldn’t
have put 50 percent in the bonds, I probably would
have put about 150 percent in the bonds. So, how did
I meet George Soros? By the early to mid-‘BOs
commodities were having dramatic moves. currencies
were having big moves, bonds were having big moves,
and I was developing a philosophy that if I can look
at all these different buckets and I‘m going to make
concentrated bets, I’d rather have a menu of assets
to choose from to make my big bets and particularly
since a lot of these assets go up when equities go
down, and that’s how it was moving.

And then I read The Alchemy of Finance because I’d
heard about this guy, Soros. And when I read The
Alchemy of Finance, I understood very quickly that he
was already employing an advanced version of the
philosophy I was developing in my fund. So, when I
went over to work for George, my idea was I was going
to get my PhD in macro portfolio manager and then
leave in a couple of years or get fired like the nine
predecessors had. But it’s funny because I went over
there, I thought what I would learn would be like –
what makes the yen goes up, what makes the deutsche
mark move, what makes this, and to my really big
surprise, I was as proficient as he was, maybe more
so, in predicting trends.

That’s not what I learned from George Soros, but I
learned something incredibly valuable, and that is
when you see it, to bet big. So what I had told you
was already evolving, he totally cemented. I know we
got a bunch of golfers in the room tonight. For those who
follow baseball, I had a higher batting average;
Sores had a much bigger slugging percentage. When I
took over Quantum, I was running Quantum and
Duquesne. He was running his personal account, which
was about the size of an institution back then, by
the way, and he was focusing 90 percent of his time
on philanthropy and not really working day to day.
In fact a lot of the time he wasn’t even around.

And I’d say 90 percent of the ideas he were [ph.]
using came from me, and it was very insightful and
I’m a competitive person, frankly embarrassing, that
in his personal account working about 10 percent of
the time he continued to beat Duquesne and Quantum
while I was managing the money. And again it’s
because he was taking my ideas and he just had more
guts. He was betting more money with my ideas than I

Probably nothing explains our relationship and what
I’ve learned from him more than the British pound.
So, in 1992 in August of that year my housing analyst
in Britain called me up and basically said that
Britain looked like they were going into a recession
because the interest rate increases they were
experiencing were causing a downturn in housing. At
the same time, if you remember, Germany. the wall had
fallen in ’89 and they had reunited with East
Germany, and because they’d had this disastrous
experience with inflation back in the ’30s, they were
obsessed when the Deutsche mark and the [unint.]
combined, that they would not have another
inflationary experience. So, the Bundesbank, which
was getting growth from the [unint.] and had a
history of worrying about inflation was raising
rates like crazy. That all sounds normal except the
deutsche mark and the British pound were linked. And
you cannot have two currencies where one economic
outlook is going like this way and the other outlook
is going that way. So, in August of ’92 there was 7
billion in Quantum.

I put a billion and a half, short the British pound…
…based on the thesis I just gave you. So,
fast-forward September, next month. I wake up one
morning and the head of the Bundesbank, Helmut
Schlesinger, has given an editorial in the Financial
Times, and I’ll skip all the flowers. It basically
said the British pound is crap and we don’t want to
be united with this currency. So, I thought well,
this is my opportunity. So, I decided I’m going to
bet like Soros bets on the British pound against the
deutsche mark.

It just so happens he’s in the office. He’s usually
in Eastern Europe at this time doing his thing. So,
I go in at 4:00 and I said, “George, I’m going to
sell $5.5 billion worth of British pounds tonight and
buy deutsche marks. Here’s why I’m doing it, that
means we‘ll have 100 percent of the fund in this one
trade.” And as I’m talking, he starts wincing like
what is wrong with this kid, and I think he’s about
to blow away my thesis and he says, “That is the most
ridiculous use of money management I ever heard.
What you described is an incredible one-way bet. We
should have 200 percent of our net worth in this
trade, not 100 percent. Do you know how often
something like this comes around? Like one or 20
years. What is wrong with you?” So, we started
shorting the British pound that night. We didn‘t get
the whole 15 billion on, but we got enough that I’m
sure some people in the room have read about it in
the financial press.


Every bet when it’s put on has a risk – reward formula. There are some bets where if you risk x you and make y, and others (one-way) if you risk x, you can make x,y and z. The most attractive wager of all is the “one-way” bet, the supreme-optimal risk vs. reward.


So, that’s probably enough old war stories tonight.
I love telling old war stories because I like to
reminisce when I was a money manager and doing better
returns than I have since I retired, but I do think
it’s important maybe let’s try and move me to the
present here a little bit. So, I told you that one
of the things I learned from Drelles was to focus on
central banks. And Sam was kind enough to point out
some very good returns we had over the years.

One of the things I would say is about 80 percent of
the big, big money we made was in bear markets and
equities because crazy (Dislocations in markets) things were going on in response to what I would call central bank mistakes during that 30-year period. And probably in my mind the poster child for a central bank mistake was actually the U.S. Federal Reserve in 2003 and 2004.

I recall very vividly at the end of the fourth
quarter of 2003 calling my staff in because interest
rates, fed funds were one percent. The nominal
growth in the U.S. that quarter had been nine
percent. All our economic charts were going through
the roof, and not only did they have rates at one
percent, they had this considerable period — sound
familiar? — language that they were going to be there
for a considerable time period (forward guidance).

So, I said I want you guys to try and block out where
fed funds are and just consider this economic data
and let’s play a game. We’ve all come down from
Mars. Where do you think fed funds would be if you
just saw this data and didn’t know where they were?
And I‘d say of the seven people the lowest guess was
3 percent and the highest was 6 percent. So, we had
great conviction that the Federal Reserve was making
a mistake with way too loose monetary policy. We
didn‘t know how it was going to manifest itself, but
we were on alert that this is going to and very

Sure enough, about a year and a half later an analyst
from Bear Stearns came in and showed me some subprime situation, the whole housing thing, and we were ableto figure out by mid-’05 that this thing was going to end in a spectacular housing bust, which had been engineered – or not engineered but engendered by the
Federal Reserve’s too-loose monetary policy and end
in a deflationary event. And we were lucky enough
that it turned out to be correct. My returns weren‘t
very good in ’06 because I was a little early, but
’07 and ’08 were – they were a lot of fun.

So. that’s why if you look at today — can we get the
charts up please? I’m experiencing a very strong
sense of deja vu. Let’s just play the game I played
with my analysts back in 2003, 2004 and go through a
series of charts. So, this is the United States
households’ net worth per household. And it’s
textbook. You see the big drop in the financial
crisis. It’s textbook when you have consumer balance
sheets torn to pieces by a financial crisis to use
super-loose monetary policy to rebuild those balance
sheets, which the Federal Reserve did beautifully.

What’s interesting though is if you look forward by
2011, we had already exceeded the ’07 levels, which I
think a lot of people would agree was already an
overheated [ph.] period, and since then we’ve gone
straight up for two more years, and household net
worth is certainly in very, very good shape.

Here’s employment. As you can see after another big
problem after the financial crisis, the employment
market has largely healed, and we’re down at 5.6 on
the unemployment rate. Here’s industrial production.
Again, big drop after ’07. Look at this thing. It’s
screaming. Here’s retail sales. Again you see the
damage, but you see where we are now. You’re right
on a 60-year uptrend, which is actually very good.

And then I’m sure for those of you who are
unfortunate enough to watch CNBC and read other
financial statements, you’ll know that the fed is
absolutely obsessed with Japan. They’ve been talking
about this Japan analogy for 10 or 15 years now or
certainly since Bernanke took over. And let me just
show you something. This is the core CPI in the U.S.
I‘m sure you’ve heard the word “deflation” more than
you’d like to hear it in the last three or four
years. We’ve never had deflation. Our CPI has gone
up 40 percent over this time with not one period of
deflation. And at the bottom you see Japan, which is
down 15 percent. I did think there was a case, a
viable case in ’09, ’10 that we may follow Japan.

But you know what, I’ve thought a lot of things when
I’m managing money with great, great conviction, and
a lot of times I’m wrong. And when you’re betting
the ranch and the circumstances change, you have to
change, and that’s how I’ve always managed money.
But the feds‘ thesis to me has been proved dead wrong
about three or four years ago, which is okay, but
there was no pivot.

Here’s another one that I like to look at. Has
anybody heard on CNBC in the last week comparisons
with 1937 and the mistake the Federal Reserve made in
1937 because it is a constant thing they’re bringing
up? But again, here’s the net worth chart I showed
in the first slide in dark blue, but look at the
light blue line, which is net worth in 1935 in
the U.S. We’re not even close to the kind of numbers
we had in 1937. And if I showed you all those other
four charts, they wouldn’t have moved during the four
years either.

And finally, one more comparison with Japan. In
light blue is average net worth per household in the
U.S. In dark blue is Japan. If you took apples to
apples the same time period, there’s just no

So, my point is this, if I was giving you a quiz and
you looked at these five charts and you hear all this
talk about a deflation and depression and how
horrible things are, let me just say this, the
Federal Reserve was founded in 1913. This is the
first time in 102 years, A, the central bank bought
bonds and, B, that we‘ve had zero interest rates and
we’ve had them for five or six years. So, do you
think this is the worst economic period looking at
these numbers we’ve been in in the last 102 years?
To me it’s incredible.

Now, the fed will say well, you know, if we didn’t
have rates down here and we didn’t increase our
balance sheet, the economy probably wouldn‘t have
done as well as it’s done in the last year or two.

You know what, I think that’s fair, it probably
wouldn’t have. It also wouldn’t have done as well as
it did in 2004 and 2005. But you can’t measure
what’s happening just in the present in the near
term. You got to look at the long term.

And to me it’s quite clear that it was the Federal
Reserve policy. I don’t know whether you remember.
they kept coming up with this term back at the time,
they wanted an insurance policy. This we got to
ensure this economic recovery keeps going. The only
thing they ensured in my mind was the financial
crisis. So, to me you’re getting the same language
again out of policymakers. On a risk-reward basis
why not let this thing a little hot? You know, we
got to ensure that it gets out. But the problem with
this is when you have zero money for so long, the
marginal benefits you get through consumption greatly
diminish, but there’s one thing that doesn’t
diminish, which is unintended consequences.

People like me, others, when they get zero money –
and I know a lot of people in this room are probably
experiencing this, you are forced into other assets
and risk assets and behavior that you really don’t
want to do, and it’s not those concentrated bet kind
of stuff I met [ph.] earlier. It’s like gees, these
zero rates are killing me. I got to do this. And
the problem is the longer rates stay at zero and the
longer assets respond to that, the more egregious
behavior comes up.

Now. people will say well the PE is not that hard.
Where’s the beef? Again, I feel more like it was in
’04 where every bone in my body said this is a bad
risk reward, but I can’t figure out how it’s going to
end. I just know it’s going to end badly, and a year
and a half later we figure out it was housing and
Subprime. I feel the same way now. There are early
signs. If you look at IPOs, 80 percent of them are
unprofitable when they come. The only other time
we’ve been at 80 percent or higher was 1999.

The other thing I would look at is credit. There are
some really weird things going on in the credit
market that maybe Kenny and I can talk about later.

But there are already early signs starting to emerge.
And to me if I had a message out here, I know you’re
frustrated about zero rates, I know that it’s so
tempting to go ahead and make investments and it
looks good for today, but when this thing ends,
because we’ve had speculation, we’ve had money
building up for four to six years in terms of a risk
pattern, I think it could end very badly. Kenny, do
you want to come up? [applause]

Okay. I mentioned credit. I mentioned credit.
Let’s talk about that for a minute. In 2006 and
2007, which I think most of us would agree was not a
down period in terms of speculation, corporations
issued $700 billion in debt over that two-year
period. In 2013 and 2014 they’ve already issued $1.1
trillion in debt, 50 percent more than they did in
the ’06. ’07 period over the same time period. But
more disturbing to me if you look at the debt that is
being issued, Kenny, back in ’06, ’07, 28 percent of
that debt was B rated. Today 71 percent of the debt
that’s been issued in the last two years is B rated.
So, not only have we issued a lot more debt, we’re
doing so at much less standards. Another way to

SD: …at that is if those in the audience who know what
covenant-light loans are, which is loans without a
lot of stuff tied around you, back in ’06, ’07 less
than 20 percent of the debt was issued coy-light.

Now that number is over 60 percent. So, that’s one
sign. The other sign I would say is in corporate
behavior, just behavior itself. So, let’s look at
the current earnings of corporate America. Last year
they earned $1.1 trillion; 1.4 trillion in
depreciation. Now, that’s about $2.5 trillion in
operating cash flow. They spent 1.? trillion on
business and capital equipment and another 700
billion on dividends. So, virtually all of their
operating cash flow has gone to business spending and
dividends, which is okay. I’m enboard with that.

But then they increase their debt 600 billion. How
did that happen if they didn’t have negative cash
flow? Because they went out and bought $567 billion
worth of stock back with debt, by issuing debt. So,
what’s happening is their book value is staying
virtually the same, but their debt is going like
this. From 1987 when Greenspan took over for
Volcker, our economy went from 150 percent debt to
GDP to 390 percent as we had these easy money
policies moving people more and more out the risk
curve. Interestingly, in the financial crisis that
went down from about 390 to 365. But now because of
corporate behavior, government behavior, and
everything else, those ratios are starting to go back
up again.

Look, if you think we can have zero interest rates
forever, maybe it won’t matter, but in my view one of
two things is going to happen with all that debt. A,
if interest rates go up, they’re screwed and, B, if
the economy is as bad as all the bears say it is,
which I don’t believe, some industries will get into
trouble where they can’t even cover the debt at this

And just one example might be 18 percent of the
high-yield debt issued in the last year is energy.
And I don’t mean to offend any Texans in the room,
but if you ever met anybody from Texas, those guys
know how to gamble, and if you let them stick a hole
in the ground with your money, they’re going to do
it. So, I don’t exactly know what’s going to happen.
I don’t know when it’s going to happen. I just have
the same horrific sense I had back in ’04. And by
the way, it lasted another two years. So. you don‘t
need to run out and sell whatever tonight.

Will this unprecedented global money printing ever
stop? And what is your intermediate and long-term
view on inflation?

Well, the global money printing is interesting
because the United States is the world‘s central
bank. And Japan had this guy named Shirakawa running
the central bank, and he didn’t believe in this
stuff. So, what happened when he didn’t print the
money but the U.S. was printing the money and we’re
[inaud.], the Japanese yen started to appreciate and
it stayed appreciating, and it basically hollowed out
the country. And they were eventually forced, as you
know, two years ago into flooding their system with

You have a very, very similar situation going on in
Europe now. I know Mario Draghi and Angela Merkel
don’t like QE. They don’t like anything about it,
but again, the chump – I have this partner. I don’t
know if he’s in the room, Kevin Warsh who’s on the
Federal Reserve Board. He said Japan used to be the
new chump because they had the overvalued currency.
Now it’s Europe. So, their currency went from 82 say
back in 2000 all the way up to 160, and it was 140
last summer, and they’re absolutely getting murdered.
And now they’re apparently caving in and they’re
going to print money.

I don’t know when it’s going to stop. And on
inflation this could end up being inflationary. It
could also end up being deflationary because if you
print money and save banks, the yield curve goes
negative and they can’t earn any money or let’s say
the price of oil goes to $30, you could get a
deflationary event. If you had asked me this
question in late ’03, I’d have said well, this
probably ends with inflation, but by the time we
needed to, we figured out no, this is going to end in
deflation. So, the fed keeps talking about
deflation, but there is nothing more deflationary
than creating a phony asset bubble, having a bunch of
investors plow into it and then having it pop. That
is deflationary.

You mentioned some of your biggest winners in your
career. What is the biggest mistake you made and
what did you learn from it?

Well, I made a lot of mistakes, but I made one real
doozy. So, this is kind of a funny story, at least
it is 15 years later because the pain has subsided a little.
But in 1999 after Yahoo and America Online
had already gone up like tenfold, I got the bright
idea at Soros to short internet stocks. And I put
200 million in them in about February and by
mid-march the 200 million short I had lost $600
million on, gotten completely beat up and was down
like 15 percent on the year. And I was very proud of
the fact that I never had a down year, and I thought
well, I’m finished.

The Gun Slingers

So, the next thing that happens is I can’t remember
whether I went to Silicon Valley or I talked to some
22-year-old with Asperger’s. But whoever it was,
they convinced me about this new tech boom that was
going to take place. So I went and hired a couple of
gun slingers because we only knew about IBM and
Hewlett-Packard. I needed Veritas and Verisign. I
wanted the six. So, we hired this guy and we end up
on the Year — we had been down 15 and we ended up
like 35 percent on the year. And the Nasdaq’s gone
up 400 percent.


There’s nothing in this world, which will so violently distort a man’s judgment more than the sight of his neighbor getting rich.

JP Morgan, 1907


So, I’ll never forget it. January of 2000 I go into
Soros’s office and I say I’m selling all the tech
stocks, selling everything. This is crazy. [unint.]
at 104 times earnings. This is nuts. Just kind of
as I explained earlier, we’re going to step aside,
wait for the net fat pitch. I didn’t fire the two
gun slingers. They didn’t have enough money to
really hurt the fund, but they started making 3
percent a day and I’m out. It is driving me nuts. I
mean their little account is like up 50 percent on
the year. I think Quantum was up seven. It’s just
sitting there.

So like around March I could feel it coming. I just
– I had to play. I couldn’t help myself. And three
times during the same week I pick up a – don’t do it.
Don’t do it. Anyway, I pick up the phone finally. I
think I missed the top by an hour. I bought
$6 billion worth of tech stocks. and in six weeks I
had left Soros and I had lost $3 billion in that one
play. You asked me what I learned. I didn’t learn
anything. I already knew that I wasn’t supposed to
do that. I was just an emotional basket case and
couldn’t help myself. So, maybe I learned not to do
it again. but I already knew that.

Here’s one you may not be able to answer. Why are
the regulators so intent on penalizing our best

Because the regulators are appointed by politicians
and the banks make a perfect punching bag for what’s
going on. And I will say this, I think there were
very, very bad actors in ’06, ‘07. Let’s not kid
ourselves in the banking industries.

I agree.

But the point I was making earlier is there was a
great enabler, and that was the Federal Reserve…


…pushing people out the risk curve. And what I
just can’t understand for the life of me, we’ve done
Dodd-Frank, we got 5,000 people watching Jamie Dimon
when he goes to the bathroom. I mean all this stuff
going on to supposedly prevent the next financial
crisis. And if you look to me at the real root cause
behind the financial crisis, we’re doubling down.
Our monetary policy is so much more reckless and so
much more aggressively pushing the people in this
room and everybody else out the risk curve that we’re
doubling down on the same policy that really put us
there and enabled those bad actors [ph.] to do what
they do. Now, no matter what you want to say about
them, if we had had five or six percent interest
rates, it would have never happened because they
couldn’t have gotten the money to do it.

What’s the future of the euro?

The currency or the union?

The currency

I think the euro needs to continue to go down because
eight of those countries have such a cost
disadvantage versus Germany right now. It’s about 40
percent because they haven’t been behaving themselves
since the euro was put together that you have severe
outright deflation not like pretend deflation like we
talk about on the board. It’s real deflation. And
they’ve got sclerosis. I can’t see Europe surviving
without the euro going down to somewhere in the
mid-80s. And if you think that’s a ridiculous
forecast, when I restarted Duquesne in 2000, the euro
was 82. Now, that was extreme. But let me ask you
this, think of the Europe and United States back in
2000 and think of them today. Do you think Europe
has made incremental gains versus the United States
or declines? So, to me it’s not unreasonable to see
the euro continue to go down.

The other thing I‘ll say, I do analyze currencies,
and it would be almost unprecedented to have a
10-month currency trend. Because all the
dislocations happen when your currency is overvalued
and it’s up long enough, it takes years to unwind
those dislocations. And it’s hard to argue the euro
is not in a trend. It’s down from 140 to 117. And
using the rule of time, I don’t think it’s
unreasonable to expect it to break 100 sometime in
the next year or two.

In terms of the euro region itself, there’s still a
lot of questions. That was put together for
political reasons really to create political unity.
And as most people in this room know, it’s doing just
the opposite. It’s creating political disunity. So,
I don’t think it’s even a given that that thing stays

Okay. You put money out with other managers. What
qualities and characteristics do you look for in
those people that you place money with?

Number one, passion. I mentioned earlier I was
passionate about the business. The problem with this
business if you’re not passionate, it is so
invigorating to certain individuals, they’re going to
work 24/7, and you’re competing against them. So,
every time you buy something, one of them is selling
it. So, if you‘re with one of the lazy people or one
of the people that are just doing it for the money,
you’re going to get run over by those people.

The other characteristic I like to look for in a
money manager is when I look at their record, I
immediately go to the bear markets and see how they
did. Particularly given sort of the five-year
outlook I’ve given, I want to make sure I’ve got a
money manager who knows how to make money and manage
money in turbulent times, not just in bull markets.

The other thing I look for, Kenny, is open-mindedness
and humility. I have never interviewed a money
manager who told you he’d never made a mistake, and a
lot of them do, who didn‘t stink. Every great money manager I’ve ever met, all they want to talk about is
their mistakes. There’s a great humility there. But
and then obviously integrity because passion without
integrity leads to jail. So, if you want someone
who’s absolutely obsessed with the business and
obsessed with winning, they’re not in it for the
money, they’re in it for winning, you better have
somebody with integrity.


You’ve expressed concerns about entitlement. What’s
the solution? You got a loaded crowd here now. Be

That’s a rough one. So, if you go back to 1965, the
senior poverty rate in this country was 30 percent,
and it’s 9 percent now. I think everybody can
applaud that’s a great achievement. The problem is
you go back to 1965, your child poverty was 21
percent, and now it’s 25 percent. So, all the gains we’ve made in terms of poverty the last 40 years have accrued to the
elderly. If you look at the average per capita
income in this country, we’re spending 56 percent of
every worker’s dollars on the elderly, and we’re
spending 7 percent on children.

So, how would I solve it? Well, I couldn’t because
if I wanted to do it, nobody would ever vote me in
office. But I would just say that some solutions are
a combination of tax reform dealing specifically with
the problem because the longer this goes on, the more
you’re either going to have to raise taxes or cut
spending down the road because of compounding. I
would freeze — forget COLAs. I would freeze all the
entitlement payments right now because they’ve
already taken such a tremendous share away from the
rest of our population.

You know, it’s funny. if you go back to as late as
1970, entitlements were 28 percent of all federal
outlays. Now they’re 72 percent. And when you start
talking about oh my God, we can’t freeze this stuff,
why not? You just picked up 50 points of share on
everybody. Why not freeze it? And, you know, Ken
and I have talked. I mean it’s ridiculous that our
Social Security is not means tested. It’s
ridiculous. I mean the fact that he’s getting – what
is your monthly check?

Twenty-five hundred dollars a month.

It’s ridiculous.

And Elaine gets another thousand.

While we have 24 percent of the kids in this country
in poverty and probably, you know, the elephant in
the room is obviously the health care system. You’ve
got to get the market into the equation so people see
the cost and they have to make an economic decision.
A lot of this goes into end-of-life payments. You
wonder if you had to pay 30 to 40 percent of the bill
instead of not even knowing what the bill is, whether
different choices would be made.

But you talk about entitlement. The federal debt
right now is $17 trillion. The reason it‘s
$17 trillion and not higher is because all those
payments that are promised to Kenny, a lot of the
people in this room, myself not too far in the
future, they’re not on the government balance sheet.
Any company in America if you owe payments of that
certainty, it would be a debt. In the U.S.
government accounting it’s revenue.

If you present valued what we have promised to
seniors in Medicare and Social Security and Medicaid
payments, the federal debt right now under gap
accounting would be $205 trillion, not 17 because we
have a demographic boom, which is the other side of
the baby boom. As everybody knows in this room, it’s
the grey boom. We are creating 11,000 seniors in
this country every day. Every day we’re creating
11,000 new seniors, and we’re only creating about 18
percent of youth employed to support those payments
to them. So, we’ve got a big problem, and it really
doesn’t start until 2024, 2025, but if you wait ’til
2024, it’s too late. It’s not unlike climate change.

It’s probably not a problem for 30 years, but if you
wait 30 years, you can’t fix it. So, you got to
start now.

This is my question, is there any way possible you
think that we could have a soft landing from all the
excesses we’ve had in the last 10 or 15 Years?

Anything’s possible. I sure hope so.
And I haven’t committed. I’m not net short equities. I mean the
stock market right now as a percentage of GDP is
higher than – with the exception of nine months from
’99 to — it’s the highest it’s been in the last
hundred years of any other period except for those
nine months. But you know what, when you look at the
monetary policy we’re running, it should be – it
should be about where it is. This is crazy stuff
we’re doing. So, I would say you have to be on alert
to that ending badly. Is it for sure going to end
badly? Not necessarily. I don’t quite know how we
get out of this, but it’s possible.

KL: Okay. Stanley, fabulous. Thank you so much.

Thanks, Ken.

Great, great night.



The Price of a Supply Shock

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

*The Bear Traps Report’s institutional client flatform includes; financial advisors, family offices, RIAs, CTAs, hedge funds, mutual funds, and pension funds.

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This is Part II of our Cobra Effect Series.

What are Commodities Pricing In?

The Price of Gold

Days to reach Round Numbers

$1900-$2000: 7  (All-Time record achieved Aug 4, 2020)
$1800-$1900: 5
$1700-$1800: 121
$1600-$1700: 61
$1500-$1600: 155
$1400-$1500: 43
$1300-$1400: 1228

Bloomberg data

Breaking: “Fed Weighs Abandoning Pre-Emptive Rate Moves to Curb Inflation” WSJ, Sunday, August 2, 2020

“The Federal Reserve is preparing to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation, a practice it has followed for more than three decades. Instead, Fed officials would take a more relaxed view by allowing for periods in which inflation would run slightly above the central bank’s 2% target, to make up for past episodes in which inflation ran below the target.” – WSJ

Our Larry McDonald: “Since mid-May, we have stressed to clients, this type of policy action is coming. This is a historic adjustment for the Fed. They’re all in the Larry Summers’ Camp now, ‘don’t hike interest rates until you see the whites of inflation’s eyes’ is the thinking – laid out publicly by the former, Sr. Clinton Administration Treasury official. Larry is now on the OUTSIDE looking in – and VERY loud doing so. It’s a far-more social justice focused central bank now. The push-back the Fed has received on the “inequality” front is at all times highs. It’s a heavy topic of conversation around Capitol Hill. Make NO mistake about it, politics’ heavy hand in central bank policy is entering a whole new level.”

Stagflation Triggers on the Rise

The probability of stagflation is soaring, its impact on asset prices and your portfolio will be profound. Let us explore.

The week we learned, Bank of America’s private client wealth hedges using precious metals are surging. More and more investors feel uncomfortable with extremely low bond yields – sky-high bond prices, they’re looking at a risk-parity conundrum (we address this dynamic below). In 2011, these protective measures reached a 9.6% allocation. Today, it’s down at 2.5% and moving NORTH from 1.3% last year. Their strategist Harnett has referenced 20-25% exposure.

See our bullish note on the commodities sector here. 

Supply shocks rear their ugly head when governments institute policies that slow down the economy while dramatically increasing the money supply. Both of these events transpired in 2020. First, January’s shut down of China’s $13T economy was a wake-up call for the planet, creating a colossal supply shock. Total nonfarm employment there – much of it manufacturing – is 580 million, almost four times the U.S.’s labor force. Then in March, the West instituted lockdowns while dramatically increasing the money supply. The causes of stagflation are well known and have been thoroughly studied by economists for decades. We can tell you with certainty, more than a half-century of economic theory will be upended if stagflation doesn’t arrive in fierce force in the 2020-2022 period.

Stagflation vs. Depression

The spread between the U.S. ten year Treasury bond yield and the S&P 500’s dividend yield is Grand Canyon Esque, near 60-year wides. Central banks are forcing capital into very strange places. Investors have fewer and fewer choices each day. The thinking? Stagflation beats depression all day long, see our Cobra Effect here.

Uncle Sam Needs a Loan

On Monday, the U.S. Treasury said it needs to raise nearly $950B in the three months through September to fund COLOSSAL deficit spending, that’s $270B more than they projected in May. One large problem, the Treasuries average weighted maturity across its portfolio is down to 63 months, that’s the shortest window since 2012. Look for the U.S. Treasury to seel a large bundle of longer-dated bonds this month and next.

Distorting the True Cost of Capital, COMES with A PRICE

As central bankers distort the true cost of capital, the side effects are mathematically incalculable. We’ll never know how many Bernie Madoffs maybe sipping mint juleps on the Hamptons this summer? If Lehman didn’t fail, would Bernie have ever been caught? Failure is a good thing, a cleansing thing and so is a “true cost of capital” which the free-market used to forge each day, but NO more. Many people think Keynes was a lower interest rates kind of guy, using the cost of capital – monetary policy – to stimulate an economy. That part is true, but it just might be the most significant half-truth coming out of the last 100 years of modern economics. Above all, he was a believer in the natural rate of interest. When you juice fiscal policy in a short period of time by $5T and hit the monetary policy accelerator at the same time by $3T, the spread between the true cost of capital and the artificial, or the central bank suppression rate – is COLOSSAL.  Today, by our calculation – over 85% of the planet’s bonds yield less than 2%, just two years ago this number was 36%, using the Bloomberg terminal. Keynes even warned against distortions/side effects of lowering the cost of capital BELOW a market-driven, natural rate. Keynes might be considered a right-wing radical today, complete with an Antifa mob on his front doorstep every morning. We delve into the explosive side effects here in the Cobra Effect.  

Will the Real John Maynard Keynes Please Stand Up

The U.S. recession of 1973-1975 marked the end of the post-WWII expansion and was considered unusual in having both high unemployment and high inflation. However, the term “stagflation” was invented in the UK by British politician Ian Macleod back in 1965, again in 1970, and again in 1973. John Maynard Keynes actually outlined how the components of unemployment and inflation could co-exist in his writings. Sadly, important parts of Keynes’ body of work were ignored by many establishment economists during that era and beyond. The point is – Keynes was very nuanced and complex. The following generation dumbed and pared him down. For instance, he wrote that if interest rates were too low for too long, financial interest rates would flow to financial assets (stocks, bonds, real estate) and be diverted away from labor, which explains the slow employment growth and financial asset boom during the post-Lehman failure years, circa 2008-2016. We argue large chunks of Keynes’ writings have been ignored by the modern economic establishment. Keynes was redefined and simplified such that the critiques of the simplified Keynes often used ideas that later economists had purged from. There are passages in the original Keynes doctrine that a neo-Keynesian would find horrifying. Pure comedy indeed. From the dominant economic theory from the end of World War II to the early 1980s was really a Keynesians-for-dummies policy wherein recession and inflation were mutually exclusive, a view symbolized in the now debunked, Phillips curve.

Death of the Phillips Curve**

Being a single-equation economic model, the Phillips curve was readily embraced by politicians, because it was so simple, even a politician could understand it. A rare accomplishment, bravo. Phillips argued increased employment causes increased wages i.e. follow-on inflation. Ironically, Phillips himself viewed this as a trivial observation. It was Milton Friedman who destroyed it on theoretical grounds and who correctly predicted the 1973-1975 recession. Unfortunately, in the 2015-2020 economic regime, the Phillips Curve has thoroughly embarrassed scores of economists globally.  Employment gains, NOT only didn’t lead to inflation pressures but also fueled disinflation. Economists spent far too much time focused on economic theory and not enough on economic risks tied to a runaway U.S. dollar which proved to be HIGHLY deflationary, exponentially so.

**The Phillips curve is an economic theory developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. The theory claims that economic growth comes inflation, which in turn should lead to more jobs and less unemployment.

Beware of Economists too Deep on the Weeds

It was in Manhattan, February 2015. As I stepped out of a cab, freezing cold ice-water filled up my right shoe. The dreaded pothole got me again.  Late for a meeting, I scurried up the 36 marble stairs leading to the entrance of 245 Park. Moving into the crowded elevator, a few minutes later, 22 of us were in the conference room on the 28th floor. The topic of discussion; the Phillips curve and 8-10 rate hikes our Soc Gen economists saw coming over the next 24 months. Their conviction was on a high perch that day and I brought just two questions. First, why and how could the Fed hike rates 8 times -heading into the 2016 Presidential election? Second, wouldn’t the side effects from a strong dollar cut the Fed off at the knees as they tried to hike rates 8x – while the rest of the developed world was easing monetary policy? In a world filled with far more dollar-denominated debt, each rate hike in 2015 carried the power of 3 rates hikes in the 1990s. Financial conditions would tighten dramatically I argued. Economists would hear NONE of it, their Phillips curve had all the answers. By the end of 2016, the Fed hiked rates just two times and the Phillips curve sent a busload of the Street’s economists into temporary retirement. The lesson?  Economists should spend far more time focused on leverage and risk metrics, than out-dated models.

Major US Pension Fund

Risk-Free Rate vs. Risk-Adjusted Return Target

2020: 0.55% vs. 7.0%
2010: 4.00% vs. 8.5%

*So, a decade later – US ten year Treasuries are yielding 3.5% less, but pension funds are still targeting 7%. How’s that work? Risk-Parity Conundrum or nightmare?

Colossal Complacency equals Danger

As a global investment community, our recent experience with this economic theory train wreck coming out of the Phillips Curve’s demise is the foundation for today’s rich complacency around the prospects of stagflation and or inflation. You can’t cut it with a knife – it’s that thick – downright dangerous. The Risk-Parity Conundrum: We now have over $110T of the planet’s wealth yielding less than 1.50% (a few years ago this number was less than $25T). Up until a month ago, everyone trusted risk-parity modeling in protecting their hard-earned capital. Some more hard-earned than others! Faith is risk-parity is in full retreat today with metals up 30-40% in Q2, see our bullish note on the commodities sector here. 

In the UK of the 1960s and 1970s, the relationship between inflation and the money supply was not understood by the government. The money supply grew untethered, resulting in inflation. Every trick in the book was used to combat inflation except for reigning in money supply growth. The result was a slower economy with higher prices.

Stagflation and Money Supply
Many people forget, from 1971 to 1974, gold was 325% higher, while everyone remembers the 475% surge from 1977 to 1980. The U.S., stagflation commenced after an egregious expansion of the money supply was initiated to counter the precipitous increase in oil prices caused by the October 1973 oil embargo announced by the Organization of Arab Petroleum Exporting Companies to punish those countries that had supported Israel in the Yom Kippur war which lasted from October 6th to October 25th, 1973, led by Egypt and Syria against Israel. Oil prices initially increased by 17%, but at its peak, prices shot up 400%.

Bretton Woods

The groundwork for the subsequent expansion of the money supply was laid once the US had its adjustment during the Bretton Woods Agreement on August 15th, 1971 (the United States halted the conversion of dollars into gold and devalued the dollar by 10%. One catalyst, France was aggressively redeeming its dollars for gold, which helped precipitate the emergency move by U.S. President Richard Nixon). The expansion in the money supply caused a classic price/wage spiral, wherein price increases driven by the oil shock caused wage increases allowed by the expansion of the money supply which of course was in turn allowed now that the US was no longer on the gold standard strictures under Breton Woods. “Wages chase prices and prices chase wages”, as the saying goes. This is the genesis of the Fed’s continuous blather about inflation expectations, which now virtually has been laid to rest by the current pandemic.

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Supply Shocks

Current Keynesians argue that monetary and fiscal policies are effective against adverse variations in demand but wholly useless in adverse variations in supply. There are several ways to cause a supply shock, but one way is for the government to severely restrict production, as of course is happening now! By our calculation, entering Q2, over 415 – gold, silver, copper, iron, coal, and uranium mining, development, and exploration assets across the globe have ceased or scaled back production (meaning operating stockpiles and with limited workforce).

The standard Keynesian model tells us supply increases as price increases. However, when supply is artificially restricted, that relationship breaks down. Instead, inflation jumps as production collapses. An updated view would add that as money is created to give to those out of work, inflation is later inevitable.

The question is, why don’t we see inflation? The answer is: you don’t have to see inflation initially simultaneously but subsequently before economic recovery. In other words, we aren’t there yet, but metals are predicting we soon will be.

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. […] Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

John Maynard Keynes, 1938

The sad fact is, if Keynes was alive today, he would NOT be considered a Keynesian. We know because we have lived through it, that an increase in money supply alone doesn’t cause inflation. But an artificially restricted economy, by the government, by fears of Covid-19, have set the table for stagflation. Society cannot possibly quantify the unintended consequences, silver is screaming this fact. It’s NOT every month you see a 35% surge in silver – unless your names are Sonny and Cher. 

And by the way, not all firms lose during stagflation. It is a well-observed phenomenon that the largest firms have the greatest pricing power.

Oddly enough, the largely Keynesian analysis above is not intellectually inconsistent with the Austrian school view that an increase in money supply benefits most of the initial recipients of the money, at least not under the circumstances we see currently. The producers receive the money later, thus benefit less. Traditionally, this has been viewed as anti-Keynesian, at least by members of the Austrian school. But as in so many other examples, they overlap more than the proponents care to admit.

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“The increase in the money supply rate of growth coupled with the slowdown in the rate of growth of goods produced is what the increase in the rate of price inflation is all about. (Note that a price is the amount of money paid for a unit of a good.) What we have here is a faster increase in price inflation and a decline in the rate of growth in the production of goods. But this is exactly what stagflation is all about, i.e., an increase in price inflation and a fall in real economic growth. Popular opinion is that stagflation is totally made up. It seems therefore that the phenomenon of stagflation is the normal outcome of loose monetary policy. This is in agreement with [Phelps and Friedman (PF)]. Contrary to PF, however, we maintain that stagflation is not caused by the fact that in the short run people are fooled by the central bank. Stagflation is the natural result of monetary pumping which weakens the pace of economic growth and at the same time raises the rate of increase in the prices of goods and services.”

Frank Shostak, Austrian School Economist

Many may well conclude that supply disruption coupled with monetary expansion combined should lead to stagflation since either one alone might.  How long does it take? About a year. 2021 will see inflation outpace GDP, and noticeably. That is to say, stagflation.

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