MW Druckenmiller: I'm worried the Fed declared victory on inflation too early

By Steve Goldstein

Legendary investor said if there's a deficit problem, it would emerge late in 2025 or early 2026

Just one day after the best post-election stock market gain since 1896, there's already a big event: the Fed's interest-rate decision.

Legendary investor Stanley Druckenmiller says he's got one big macro call right and one big macro call wrong recently.

"When this whole inflationary episode started, and I'd say two years ago or a year and a half ago, I was very confident that inflation was going to come down, which I was right on, but I was worried about the economy, which I was completely wrong on," Druckenmiller told Norges Bank Investment Management CEO Nicolai Tangen, who also produces podcasts with finance luminaries.

"You can take this with a grain of salt since I had one right and one wrong there, I've switched to being more worried about inflation going forward than the economy itself," said Druckenmiller, formerly George Soros's right-hand man who now manages his own money for the Duquesne Family Office.

If there's a repeat of the 1970s experience, the inflation bottom would be right about now, he said. "I'm a little worried that the Fed has declared victory too early," he said. "I don't have conviction like I had in 2021 that inflation was going to go up, that's when the money supply was growing 40% and all sorts of things were happening, but I also don't have conviction that they've snuffed this thing out and won the battle."

He said the decision to cut interest rates by a half point with credit spreads tight, gold at new highs, the equity market roaring and no material weakness in the economy, "that just makes me nervous that this thing could turn up again."

The interview was published Wednesday but conducted before the election. He said if Trump wins there could be animal spirits rising on hopes for deregulation, as well as tariffs "which on the margin are inflationary" and a reversal of immigration which has helped the economy grow without inflation accelerating.

He says there will eventually be a "reckoning" on the budget though the U.S. has not been "Liz Trussed" yet - a reference to the U.K. prime minister whose budget triggered a surge in bond yields.

He said the reason the market so far has tolerated the budget deficit is because the U.S. dollar is the reserve currency, "even though if you look at everything we're doing it's much more radical than what the Brits were doing."

The refinancing of both U.S. mortgages and corporate debt has prevented any serious issues for now, says Druckenmiller, but that debt will roll over.

"If we're going to have a problem, it's probably more like late 2025, early 2026, but you just don't know," he said. Druckenmiller said he would be more short than he is now on U.S. government bonds if he had more conviction on a U.S. budget-related blowup.

The market

U.S. stock futures (ES00) (NQ00) pointed higher ahead of the Fed decision. Gold (GC00) and oil (CL00) slipped.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5929.04    1.98%   2.37%   24.30%  35.28% 
   Nasdaq Composite                                                     18,983.47  2.02%   3.78%   26.46%  39.07% 
   10-year Treasury                                                     4.448      15.80   38.30   56.71   -17.40 
   Gold                                                                 2671.9     -2.98%  0.93%   28.97%  36.05% 
   Oil                                                                  71.07      0.77%   -5.98%  -0.36%  -5.97% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

The Fed decision is due at 2 p.m. Eastern - no dot plot this month - and Chair Jerome Powell's press conference at 2:30 p.m. Expect a rate cut and a bunch of election-related questions thrown at Powell that he'll try to duck. Jobless claims data also is set for release.

Lyft shares $(LYFT)$ jumped as the ride-hailing company reported stronger-than-expected sales and guided for gross bookings above estimates.

Qualcomm $(QCOM)$ topped analyst expectations for its sales outlook as the microchip maker upped its stock buyback authority to $15 billion.

Microchip designer Arm Holdings $(ARM)$ reported stronger-than-forecast revenue.

Prison operators Geo Group $(GEO)$ and CoreCivic $(CXW)$ report results, after both their stocks surged in anticipation of more immigrant detentions.

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The chart

Drill baby drill? Well, good luck with that. HFI Research points out that oil production in the U.S. has basically plateaued since 2022. "What people fail to understand is that while the federal government could provide tax breaks on capital investments and expedite infrastructure build-out, U.S. shale production has matured and the Permian [Basin] is not what it used to be. Producers with tier 1 acreages have to manage the long-term value of the assets and this means a slow-and-steady approach to tackling the remaining inventory," says the report.

Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   DJT     Trump Media & Technology 
   GME     GameStop 
   PLTR    Palantir Technologies 
   TSM     Taiwan Semiconductor Manufacturing 
   SMCI    Super Micro Computer 
   AMZN    Amazon.com 
   AAPL    Apple 
   NIO     Nio 

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-Steve Goldstein

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November 07, 2024 06:30 ET (11:30 GMT)

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