Stanley Druckenmiller, George Soros’ former investment partner, is extremely bearish on the American market and equities in general. “We are deep into the longest period ever of excessively easy monetary policies,” he says, yet this “radical dovishness” has not only prevented firms and individuals from deleveraging, but has encouraged them to take on more debt, which has been frittered away on “financial engineering” rather than investment.
This isn’t just the fault of America. China shares the blame – rather than continue to reform its economy and accept a lower growth rate, the Chinese government has tried to maintain breakneck rates of expansion by launching successive waves of stimulus. This has seen China’s national debt explode, even though its growth (and thus its ability to repay the debt) has dramatically slowed.
Until now, Druckenmiller has always believed that the “tidal wave of central bank money worldwide would propel financial assets higher”. However, he now feels that “higher valuations, three more years of unproductive corporate behaviour, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself”.
Even the Federal Reserve’s policies may be “increasing, not lowering, the odds of the economic tail risk they are trying to avoid”. As a result, he is bullish on gold, especially as the opportunity cost of holding it has dropped with near-zero, or even negative, interest rates.