Happy Tuesday, traders…
Jeff here.
Over the past year or so, I’ve been taking a pretty contrarian view of the markets…
While it feels like nearly everyone else out there is endlessly bullish, ready to buy the next hot AI stock at higher and higher prices, my 25 years of trading experience tells me to be cautious in this tape.
I can’t ignore the flashing red warning signs in the global economy, the geopolitical landscape, and the stock market itself.
This is why I’ve warned you repeatedly about the looming risks in this insane “everything bubble.”
I’ve discussed my lack of confidence in the Fed, why I think Nvidia Corporation (NASDAQ: NVDA) is wildly overvalued, and my opinion that inflation remains a major risk for markets.
The problem is that most traders don’t want to hear this stuff. They see asset values rising across the board — and they can’t stand to miss out.
But now that we’re nearing this huge worldwide catalyst (the general election), I’m starting to hear the insider/institutional narrative change a bit…
I noticed this in multi-billionaire Stanley Druckenmiller’s recent interview on Bloomberg TV, where he echoed several of the exact same concerns I’ve been writing about recently.
This guy is a legend, famous for making a fortune by “shorting the Bank of England” — and then achieving 30% annualized returns for three decades without a single red year through his fund Duquesne Capital.
You don’t return 30% for 30 years straight without possessing an incredible ability to predict market movements. And now, Druckenmiller is sounding the alarm in a major way.
Let’s look at six key takeaways from his fascinating interview…
Fed Up with the Fed
Druckenmiller started by criticizing the Federal Reserve’s approach to forward guidance.
Forward guidance is when the Fed signals its intentions regarding future monetary policy, like keeping interest rates low or raising them.
In 2021, Druckenmiller believed the Fed was “playing with fire” by sticking to its near-zero interest rate policy and continuing its massive bond-buying program, even as the economy was bouncing back strongly from the pandemic.
Fast forward to today, Druckenmiller expresses similar concerns. He argues that the Fed’s forward guidance trapped them into continuing dovish policies that were no longer needed, ultimately leading to higher inflation.
Now he hopes the Fed doesn’t repeat the same mistake. He thinks the Fed should be more adaptable and less reliant on forward guidance, especially when the data doesn’t align with their forecasts.
I couldn’t agree more. I’ve been critical of the Fed’s obsession with the value of the stock market (despite what’s actually going on in the economy).
The Risk of Further Inflation
One of the biggest themes of Druckenmiller’s interview was inflation.
Back in 2021, inflation started to rise well above the Fed’s 2% target, but it took the Fed over a year to raise interest rates.
Druckenmiller saw the writing on the wall early. He was concerned that the Fed’s inaction would lead to runaway inflation, and he was right — the inflation rate soared to over 9% at its peak.
Now, he points out that inflation is still above target, hovering between 2.5% and 3.25%, but the Fed is already cutting.
Once again, the Fed’s timing is off…
Even though it’s lower than last year, there’s still a risk of another inflationary spike, similar to what happened in the 1970s.
Back then, inflation briefly cooled off before surging again to even higher levels, forcing the Fed to tighten aggressively.
Druckenmiller warns that if the Fed continues to cut — as they are signaling with their forward guidance — it could lead to another inflation spike, creating a “nightmare” scenario for stocks.
This is exactly what I wrote about two weeks ago.
The Real State of Monetary Policy
A major point Druckenmiller makes is that despite the Fed’s claim that monetary policy is “restrictive” — meaning it’s holding back the economy — there’s little evidence to support that claim.
He cites several factors: record highs in the stock market, strong bank earnings, a booming GDP, and even surging cryptocurrency markets — all indicators I’ve brought up recently as well.
In other words, the economy still looks strong and doesn’t appear to be tightening under the supposedly restrictive interest rate policies.
For Druckenmiller, the fact that these economic indicators are so strong suggests that the Fed’s policy may not be as hawkish as it thinks.
If the economy is still running hot while inflation remains elevated, it could signal that more aggressive tightening might be needed to cool things down.
Amen — Why is the Fed cutting rates with markets at all-time highs?!
General Election Predictions
Druckenmiller doesn’t just focus on the Fed — he also gives his views on the upcoming 2024 presidential election and its potential impact on the markets.
While he doesn’t have strong convictions about who will win, he notes that “the inside of the stock market” is indicating a Trump victory.
He says this is evident in the performance of bank stocks, oil futures, and even Trump’s social media company Trump Media & Technology Group Corp. (NASDAQ: DJT), which is up 156% in the past 30 days.
He breaks down four possible scenarios:
Blue sweep (Democratic control of the presidency and Congress): He sees this as highly unlikely but believes it would lead to a very rough time for stocks due to higher taxes, lower business confidence, and increased regulation.
I agree, this is the worst-case scenario for markets.
Red sweep (Republican control of the presidency and Congress): Druckenmiller expects this scenario would boost business confidence and deregulation, possibly strengthening the economy.
But he also warns a red sweep might inspire more restrictive Fed policy, which could lead to higher bond yields — and possibly snuff out a stock market rally.
(I’m not sure I agree with this part, but it’s an interesting take.)
Trump win (with a blue branch of Congress) or Harris win (with a red branch of Congress): In these mixed scenarios, he predicts less drastic changes and a continuation of the current landscape, with few major shifts in market conditions.
His Big Nvidia Mistake
Toward the end of the interview, Druckenmiller discussed one of his most talked-about recent trading decisions — selling off his shares in Nvidia.
This is a company he had previously expected to hold for several years.
But despite believing in the long-term potential of artificial intelligence (AI), he decided to sell his entire Nvidia stake after the stock steamrolled from $300-$900 (pre-split) in a short period.
At that point, he thought the valuation had become too rich. He now admits that was a mistake, as the stock has soared another 400 points since he exited.
He says he will re-enter Nvidia if the valuation comes down to levels he can stomach.
It’s really interesting to hear a trader of this caliber try to grasp the Nvidia valuation (a number I’ve been trying to make sense of for years now).
The Fragility of the Bond Market
Finally, Druckenmiller shared his thoughts on the bond market, revealing that he shorted bonds when the Fed cut rates by 50 basis points, believing it was a big mistake.
He sees bonds as having a much higher risk of moving up in yield (which means prices fall), especially if inflation picks up again next year.
While he doesn’t have a precise prediction for where bond yields will go, he sees more upside risk to yields than downside.
Whether you agree with his views or not, Druckenmiller’s track record and market insights make his opinions worth listening to.
It’s nice to hear one of the legends of the game agree with many of the things I’ve been talking about for a while now.
Maybe none of these risks will lead to serious near-term downside, but you need to be aware of them.
Trade safe,
Jeff Zananiri
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