Market Pulse: Buffett and Druckenmiller Speak
Market Pulse: Buffett and Druckenmiller Speak
This is what legendary investors Stanley Druckenmiller and Warren Buffett has to say about markets recently.
This newsletter issue summarizes what legendary investors Stanley Druckenmiller and Warren Buffett had to say about markets in recent public interviews.
I read through 41,700 words from the two interview transcripts so you don’t have to.
Druckenmiller and Buffett are two of the most long-running, consistently profitable investors in the world.
Warren Buffett needs no introduction, but fewer people know about Stanley Druckenmiller.
As a hedge fund manager, Druckenmiller somehow achieved 30%+ returns for over 30 years in his hedge fund Duquesne Capital Management.
If I told you that a hedge fund manager was able to do this, at the scale of billions of dollars, you’d think he was a financial crook! But no, Druckenmiller is just that good and he really did it.
Druckenmiller closed Duquesne to outside investors in 2010 and now manages the fund as a family office.
Fun fact: Druckenmiller worked with George Soros in 1992 to famously break the Bank of England by shorting the British pound sterling until the bank’s ill-advised peg of the pound broke.
Druckenmiller recently gave an interview on CNBC where he shared his thoughts on the market and economy right now.
Here’s a summary of what he said (you can find the full transcript here):
The US government is spending too much.
They’ve spent and spent and spent
“The private sector could not be more different today than it was in the Great Depression. Their balance sheets are fine. They’re healthy. All government needed to do was get out of their way and let them innovate. Instead, they’ve spent and spent and spent, and my new fear now is that spending and the -- and the resulting interest rates on the -- on the debt that’s been created are going to crowd out some of the innovation that otherwise would have -- would have taken place. We’ve got a 7 percent budget deficit at full employment.”
The US Treasury is to blame but the Federal Reserve is the great enabler
“I’d say it’s definitely the fiscal, but the Fed’s been the great enabler. And the latest thing is, we’re going to apparently -- well, we’ve already started. We’re going to shrink QT from $60 billion to $25 billion, and we’re going to land apparently at $7 trillion. Somehow because of the plumbing, all of a sudden, we need a $7 trillion balance sheet just to function.”
The Federal Reserve made a grave mistake pivoting in December.
Surprised with the Federal Reserve’s decision to make a dovish pivot in December
“I was perplexed with the December pivot if that’s what you’re referring to. It seemed to me the Fed was in a perfect position. Inflation was coming down, financial conditions were tightening. And to some extent, I feel like they fumbled on the five-yard line with the game on the line.”
“Look, I don't know where inflation’s going to be in a year. Jerome Powell doesn’t know where inflation is going to be. I don’t think anybody knows. But they worked so hard, and they did so much work when they went from basically zero to 5 percent. I’d hate to see them all throw it away here.”
You’re the Fed chair, you’re not a rockstar:
“No, because there’s not a zero percent chance that inflation has the bottom. I don’t know. What I would do is just say nothing and do Fed chair used to do. When you need to raise rates, raise ‘em. When you need to cut ‘em, cut ’em. Don’t go on “60 Minutes”. You’re not a rockstar, okay? You’re the Fed chairman. You’re supposed to be running monetary policy for the good of the country, not to be going on “60 Minutes”.”
Inflation looks like it’s going back up:
“We’re not guaranteeing you’re going to cut, but it’s weighted that way. And for the life of me, I can’t figure out why because if you look at the six-month rate of inflation, the chart’s very clear, it comes down from very rapid rates. And now, if anything, it looks like it’s turned up.”
Get rid of forward guidance:
“He says, we got to get rid of forward guidance. All this talking and all this forward guidance -- first of all, we’re all wrong on the economy quite often, me included, and when you put forward guidance out, unlike me when I’m wrong who tend to change my mind very rapidly, they sort of get trapped into the forward guidance and stuck in it.”
Don’t be obsessed with nailing the soft-landing. You can decades of prosperity from some short-term pain:
“I do worry that this obsession with nailing the soft landing, okay, my favorite Central Banker was Paul Volcker. He was not worried about nailing the soft landing. He put us into a terrible recession and we got 20 years of prosperity because of the pain we took for 18 months.”
Very bullish on AI. Very bullish on Perplexity AI as a Google competitor.
“But no, long-term, we’re as bullish on AI as we’ve ever been.”
On Perplexity AI (Google search competitor): “I love Perplexity. Again a funny story -- my young partner, the one who has basically been behind all our AI play with his -- with his staff. He told me, I don’t know, in January, that all the kids on the West Coast weren’t using ChatGPT or Google anymore. They were using this thing called Perplexity AI. I fell so in love with it. We tried to get in on a round, that we were lucky enough to be accommodated. I love the founder Aravind Srinivas. He’s super aggressive, and with his team super innovative, but he’s also got humility. He’s everything we love in a founder. So there’s a land grab going on now in the answer machine business. It’s obviously a big task to take on Google, but if you think about it, Google has $300 billion in sales. If Perplexity even goes to $2 billion in sales, it’ll be a huge winner. Frankly, I’d say 90 -- 95 percent of my searchers now I use Perplexity, probably the best thing I could do for the viewers today, unless they’re listening to all my other stuff. Try this thing out, you’ll love it.”
Note: I tried Perplexity AI myself and love it. I’ve found that it’s significantly better than ChatGPT or Google Search in getting the up-to-date answers that I’m looking for in my research.
Sold out of most of his long positions in March.
“yes, we did -- we did cut that position and lot of other positions in late March. I just need a break. We’ve had a -- we’ve had a hell of a run. A lot of what we recognized has become recognized by the marketplace now. Powell was -- we expected Powell to come back and re-pivot which he subsequently did.”
On international markets, he’s very bullish on Argentina and Japan. He thinks China is uninvestable.
On Argentina: “The only free market leader in the world right now bizarrely is in Argentina of all places. Javier Milei. It’s going to be an interesting experiment. This is a highly, highly intelligent leader who was taught in the School of Austrian Economics… I’m not only invested in Argentina. By the way, do you want to hear how I invested in Argentina? It’s a funny story. I saw -- I wasn’t at Davos, but I saw the speech in Davos and it was about 1:00 in the afternoon in my office. I dialed up Perplexity and I said, give me the five most liquid ADRs in Argentina. It gave me enough of a description that I follow the old Soros rule, invest and then investigate. I bought all of them. We did some work on them. I increased my positions and so far, it’s been great.”
On Argentina: “By the way, do you want to hear how I invested in Argentina? It’s a funny story. I saw -- I wasn’t at Davos, but I saw the speech in Davos and it was about 1:00 in the afternoon in my office. I dialed up Perplexity and I said, give me the five most liquid ADRs in Argentina. It gave me enough of a description that I follow the old Soros rule, invest and then investigate. I bought all of them. We did some work on them. I increased my positions and so far, it’s been great. But we’ll see.”
On Japan: “I’ll just say we -- we’ve been, we’ve been invested in Japan, oh, since middle to late last year. I was lucky enough to start Duquesne in 1981 and those were the era of Boone Pickens and Carl Icahn changing corporate governance, and just multiply that times 10X what’s going on in Japan. It’s an amazing situation.”
On China: “We exited China in 2018. We haven’t made a single trade in security there other than their currency once in a while, I won’t say which way. I will never invest in China as long as the current leader is there. The reason I’ll never say never is if they had a change in leadership, I’d at least consider the situation. But to me -- I didn’t invest in Russia, and I’m not investing in China.”
On commodities, he’s very bullish on copper
“Copper is a pretty simple story, takes about 12 years, greenfield to produce copper, and you got EVs, the grid, data centers, and believe it or not munitions. These missiles all got enough copper in them and the world’s getting hot that we just think the supply-demand situation is incredible for the next five or six years.”
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In the past few issues, I’ve written about:
How the Federal Reserve is being torn asunder by a global tug of war of epic proportions
How multi-strat hedge funds are so wildly and consistently profitable
Why the US stock market won’t stop rising despite interest rates being at multi-decade highs
How the US Treasury rebelled against the Federal Reserve to stimulate the financial system
How the Bank of Japan is able to print an infinite amount of money without crashing the Yen
Now for what Warren Buffett, and his lieutenants, said in the Berkshire Hathaway’s recent 2024 shareholders meeting (you can find the full transcript here).
The Federal Reserve is doing a good job but the US Treasury is spending too much.
“It’s interesting, I think media enters into this and the focusing that focuses on the Fed and they, you know, they just love it because things are always happening and economists are always saying what’s going to happen with the fed and everything else. But the fiscal deficit is what should be focused on. And Jay Powell is not only a great human being, but he’s, he’s a very, very wise man, but he doesn’t control fiscal policy.”
“And every now and then he sends out a kind of a disguised plea for please pay attention to this because that’s where the trouble will be if we have it.”
“And I would say with the present fiscal policies, I think that something has to give, and I think that higher taxes are quite likely, and the government wants to take a greater share of your income, or mine or Berkshire’s, they can do it. And they may decide that someday they don’t want the fiscal deficit to be this large, because that has some important consequences, and they may not want to decrease spending a lot, and they may decide they’ll take a larger percentage of what we earn and we’ll pay it.”
Buffett is very bearish. Berkshire Hathaway has $182 billion in cash and this is up from $168 billion a quarter ago. Buffett expects this to reach $200 billion by the end of June.
“I don’t think anybody sitting at this table has any idea of how to use [the cash] effectively. And therefore, we don’t use it. And we don’t use it now at 5.4%. But we wouldn’t use it if it was at 1%.”
“So our cash and treasury bills were 182 billion at the quarter end. And I think it’s a fair assumption that they brought probably about 200 billion at the end of this quarter. We’d love to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money.”
“…I don’t mind at all, under current conditions, building the cash position. I think when I look at the alternative of what’s available, the equity markets, and I look at the composition of what’s going on in the world, we find it quite attractive.”
Trimming the Apple position.
A lot of Berkshire Hathaway’s large cash position comes from the trimming of its largest investment, Apple.
Berkshire Hathaway sold another 115 million in Apple shares last quarter.
Buffett continues to call Apple a “wonderful business”, and an even better business than Coca Cola, but his large Apple stock sales for cash tells a different story.
Wait-and-see approach for AI. Sees lots of potential. Compares it to nuclear weapons.
“And last year I said that we let a genie out of the bottle when we, when we developed nuclear weapons, and that Genie has been doing some terrible things lately. And the power of that genie is what, you know, scares the hell out of me. And then I don’t know any way to get the genie back in the bottle. And AI is somewhat similar.”
“But I do think, as someone who doesn’t understand a damn thing about it, that it has enormous potential for good, an enormous potential for harm. And I just don’t know how that plays out.”
Climate change is causing problems for the Insurance and Utilities industries, which Berkshire Hathaway has a lot of exposure to.
PacifiCorp
PacifiCorp is facing $30 billion in new claims made last month from 1,000 plaintiffs who blame the company for causing the 2020 Labor Day wildfires in Oregon. PacifiCorp has already paid or owes $825 million in claims due to other wildfire-related lawsuits.
Berkshire Hathaway owns more than 90% of PacifiCorp
“When I think of PacifiCorp, we’re in a place where, first and foremost, all that litigation will be challenged because the basis for it, at least we believe, there are places where it’s unfounded”
Insurance. Prices have to go up because of climate change
Solution? Do it one year at a time: “Climate change. Climate risk is certainly a factor that has come into focus in a very, very big way more recently. Now, the one thing that mitigates the problem for us, especially in some of the reinsurance operations we are in, is our contractual liabilities are limited to a year in most cases. So as a result of which, at the end of a year, we get the opportunity to reprice, including the decision to get out of the business altogether if we don’t like the pricing in the business. But the fact that we are making bets that tie us down to one year at a time certainly makes it possible for us to stay in the business longer term than we might have otherwise because of climate change.”
“Clearly, prices need to go up. It is difficult to be very scientific about how much the prices need to go up. They need to go up a lot. And we keep increasing prices and hope we stay ahead of the curve. But that doesn’t happen in all cases.”
“…certainly for the next several months. I think the insurance industry, in spite of climate change, in spite of increased risk of fires and flooding, it’s going to be an okay place to be in. Climate change increases risks and in the end it makes our business bigger over time. But not if we, if we misprice them, we’ll also go broke. But we do it one year at a time, overwhelmingly.”
Not surprisingly, succession is top of mind.
On succession for Buffett, Berkshire Hathaway executive Greg Abel will take Buffett’s spot
“I think the responsibility ought to be entirely with Greg [for making capital allocation decisions]. The responsibility has been with me, and I farmed out some of it, and I used to think differently about how that would be handled, but I think the responsibility should be that of the CEO.”
There are also concerns about Ajit Jain retiring from leading Berkshire Hathaway’s insurance business
“We won’t find another Ajit, but we have an operation that he has created and that at least part of it. There are certain parts of it that are almost impossible for competitors to imitate, and if I was in their shoes, I wouldn’t try and imitate them. And so we’ve institutionalized some of our advantages, but Ajit is. Well, his presence allowed us to do it and he did it. But now we’ve created a structure that didn’t exist when he came in 1986. Nothing close to it existed with us or with anybody else. And insurance is the most important business at Berkshire.”
Overall, Buffett had this to say about succession concerns:
“When you’ve got somebody like Greg and Ajit, why settle for me, basically? So it’s worked out extremely well.”
“And I almost can’t imagine anything working better because Greg in a year accomplishes. I mean, he sees more of them, understands more about their problems, you know, can give them suggestions. He’s got incredible amounts of energy and nobody has more wisdom than Ajit about insurance. And they’ve got access and insurance to him now. They had it before we stuck some of those titles on insurance.”
“And I think at the end of the day, as Tim Cook has proved to us, it will be the biggest non issue of the day. The earth will still keep revolving around the axis.”
Having read through and summarized both speaking events, I’ve noticed several important common themes.
💡 First, both Druckenmiller and Buffett think that fiscal spending is a massive problem.
Druckenmiller was harsher towards Federal Reserve Chairman Jerome Powell, accusing Powell of making a grave mistake by pivoting monetary policy too early in December and this is threatening to reignite inflation. He even goes so far as to accuse Powell of trying to be a “rockstar” by talking too much to the media.
Buffett was kinder to Powell, calling Powell a “very, very wise man”. He thinks that Powell is doing the best job he can but he’s currently under the mercy of the fiscal policy makers over at the US Treasury.
💡 Both Druckenmiller and Buffett are also very bearish on the market right now.
Druckenmiller sold out of most of his long positions in March. At the same time, Buffett is aggressively trimming Berkshire Hathaway’s large Apple position to build a massive cash position instead ($182 billion now and he expects this to reach $200 billion by the end of June).
💡 Druckenmiller is more bullish on AI and is much more willing to invest in new technology than Buffett.
For example, while Buffett admits that he doesn’t “understand a thing about [AI]” and doesn’t know how the technology will play out, Druckenmiller bought Nvidia even before ChatGPT came out and rode the stock from $150 to $900. Now he’s made a venture investment in an AI-powered Google search competitor, Perplexity AI.
Buffett appears to be at risk of missing the AI wave like he missed the FAANG wave but he doesn’t seem concerned about making the same mistake twice.
💎 A Word To Premium Subscribers
We are approaching a period of significant global financial volatility.
Central banks and national governments worldwide will implement broad-sweeping financial policies to avoid or, at the very least, attenuate the effects of this coming surge in volatility.
I reckon this is similar in order of magnitude to how the markets moved around the Great Financial Crisis and around the pandemic.
Being ahead of the curve of this volatility, and understand what could be done and what mostly likely will be done to fix the situation, will be immensely rewarding.
I’ve noticed that this is very rarely discussed in financial media, but there are so many Brief Important Snippets about it from Very Important People that don’t make the headlines.
For the next few Premium newsletter issues I will be focused on researching and sharing everything I can about this event.
As always, FinanceTLDR is not a financial cure-all. What I can promise you, however, is my full and unbridled curiosity for how our financial system works.
can you tell at least roughly, what are you talking about?
We are approaching a period of significant global financial volatility.
Central banks and national governments worldwide will implement broad-sweeping financial policies to avoid or, at the very least, attenuate the effects of this coming surge in volatility.
I reckon this is similar in order of magnitude to what the markets around the Great Financial Crisis and around the pandemic.
Being ahead of the curve of this volatility, and understand what could be done and what mostly likely will be done to fix the situation, will be immensely rewarding