Druckenmiller on CNBC

[EliG]

CNBC Transcript: Stanley Druckenmiller Speaks With CNBC's Kelly Evans Today

 

https://www.cnbc.com/2017/12/12/cnbc-exclusive-cnbc-transcript-stanley-druckenmiller-speaks-with-cnbcs-kelly-evans-today.html

 

[JayGatsby]

Here's the WSJ article he refers to: https://www.wsj.com/articles/u-s-shoppers-wield-smartphones-to-keep-a-lid-on-consumer-prices-1513036486

 

Glad he called it out. The dogma of the article really makes no logical sense (that I can think of), yet the article never questions whether the underlying criteria is actually what's flawed.

[thowed]

Many thanks for this - I always find he has something interesting to say.

 

He's on pretty fiery form there, and it all seems pretty reasonable (unless you're a hedge fund manager...).

[Liberty]

Here's the 30-min video:

 

https://www.cnbc.com/video/2017/12/13/watch-cnbcs-full-interview-with-legendary-investor-stanley-druckenmiller.html

[VersaillesinNY]

Thanks for the links. Stan Druckenmiller is always interesting. I feel that Kelly Evans could have better prepared the questions. She even thought that Druckenmiller supported the Donald during the Presidential campaign while in fact Stan had publicly supported John Kasich on cnbc.

[Viking]

Interesting comments. Thanks for posting the link to the video.

 

Some of my takeaways (feel free to correct any errors as I watched the video earlier today):

1.) going back 700 years inflation averaged 1%; inflation was much higher in the 70’s but perhaps that is the outlier. Perhaps current rate of inflation is perfectly normal.

2.) current phase of innovation (greatest in over a century) is likely what is resulting in low inflation and this is not a bad thing.

3.) if current low rate of inflation is normal Fed policy of low rates and quantitative easing is wrong. He feels fed should normalize rates/Fed balance sheet as soon as possible.

4.) by June of 2018 we should start to see some impact of all the central banks reversing quantitative easing.

3.) current low global rates and global QE is creating bubles in all financial markets. Free money will tend to do that.

[rb]

Interesting comments. Thanks for posting the link to the video.

 

Some of my takeaways (feel free to correct any errors as I watched the video earlier today):

1.) going back 700 years inflation averaged 1%; inflation was much higher in the 70’s but perhaps that is the outlier. Perhaps current rate of inflation is perfectly normal.

2.) current phase of innovation (greatest in over a century) is likely what is resulting in low inflation and this is not a bad thing.

3.) if current low rate of inflation is normal Fed policy of low rates and quantitative easing is wrong. He feels fed should normalize rates/Fed balance sheet as soon as possible.

4.) by June of 2018 we should start to see some impact of all the central banks reversing quantitative easing.

3.) current low global rates and global QE is creating bubles in all financial markets. Free money will tend to do that.

Some thoughts:

 

1. There weren't great statistics being kept half a millennia ago. So I wouldn't put much stock in the inflation rate of 1682.

 

2. Not really the greatest phase of innovation in over a century. Introduction of AC motors, etc was way more significant. Though we can argue about the timing. Anyway if there's so much innovation why are productivity gains so small? If innovation is what's keeping inflation low that's because it's causing a large expansion of aggregate supply. If that's true we should see big productivity gains.

 

3. This actually makes no sense. Why should Fed policy be wrong? Just because he likes high rates? If the rates are artificially low why isn't there a shortage of credit?

[Cigarbutt]

Thought experiment:

For reference only look at page 6 of the pdf document:

http://www.hydroquebec.com/publications/en/docs/comparaison-electricity-prices/comparison-electricity-prices-2017.pdf

 

Let's say the Federal Reserve of Energy becomes a critical input for the supply of energy in North America and, in order to stimulate aggregate demand, decides to fix the price of electricity everywhere at 7,07.

 

What happens to supply?

I submit that there would be no shortage.

 

What happens to private players in the industry?

I submit that there would be a risk of capital misallocation

 

What about unintended consequences for ignoring markets signals?

I submit there are a few, including slowing of innovation and waste.

 

I enjoy the low electricity bills but still, I wish that rates would reflect the true cost.

The above Federal Reserve of Energy scenario would assume that the lunch is free.

 

 

[EliG]

A former deputy governor of the Bank of Canada wrote a column arguing that central bankers should

 

(a) abandon short-term inflation targeting

(b) focus more on avoiding "boom-bust" credit cycles

 

The Dangerous Delusion of Price Stability

https://www.project-syndicate.org/commentary/central-banks-low-inflation-agenda-by-william-white-2017-12

 

[Viking]

Rb, I think Druckenmiller’s concerns with interest rates and QE is they are creating bubbles in many asset classes (or at a minimum very inefficient distortions).

 

The best personal example I have is real estate pricing in Vancouver (clearly a bubble). People are blaming foreign buyers and calling for government help to allow young and low income people to buy which creates very poor public policy. My view is if you want to address housing affordability in Vancouver you need to start by normalizing interest rates (perhaps a 5 year fixed rate of 4 to 5%). Of course this cannot happen as it would crash the housing market and remove the only pillar of growth (for Canada). Crazy low interest rates are possibly creating the mother of all bubbles in many financial assets.

 

Until the ECB and Japan end QE and get rates normalized the party will continue; all the money they are injecting into the system will be put to use. However, it does look like we are coming to the end of the game (or at least this chapter) possibly in the next 24 months. While it has been fun on the way up, it likely will be very uncomfortable on the way down.

[scorpioncapital]

I think Buffett said this too - when rates are low you can afford to take your money out slowly. In the consumer realm, this means basically carry a debt forever until you die - almost a free lunch on the individual level. If rates are high or much higher, it means you need to get your money - return - out faster. On the personal level this means liquidation, bankruptcy for those who got in last or have income issues - in other words, you run out of time before the goal of dying with the largest debt. If you think about it, it's imminently rational - why would any consumer not stream out a huge debt over their entire lifetime and live off the banks and state and then die with a state old age pension? It's an upside down world :)

 

[randomep]

2.) current phase of innovation (greatest in over a century) is likely what is resulting in low inflation and this is not a bad thing.

 

This one comment really made me think? Are we really in a great phase of innovation? Hard to tell while we are in the middle of it.....

 

 

[HJ]

2.) current phase of innovation (greatest in over a century) is likely what is resulting in low inflation and this is not a bad thing.

 

This one comment really made me think? Are we really in a great phase of innovation? Hard to tell while we are in the middle of it.....

 

We certainly are.  Things like wide adoption of wireless communication, carrying a powerful computer anywhere you go, google translate is incredibly good, available to everybody on demand for free, advances in genetic engineering, even horizontal drilling and fracking, all happening more or less at the same time, iPhone is only 10 years old!  Nothing short of miraculous. 

[randomep]

2.) current phase of innovation (greatest in over a century) is likely what is resulting in low inflation and this is not a bad thing.

 

This one comment really made me think? Are we really in a great phase of innovation? Hard to tell while we are in the middle of it.....

 

We certainly are.  Things like wide adoption of wireless communication, carrying a powerful computer anywhere you go, google translate is incredibly good, available to everybody on demand for free, advances in genetic engineering, even horizontal drilling and fracking, all happening more or less at the same time, iPhone is only 10 years old!  Nothing short of miraculous.

 

 

But GDP growth isn't super high to reflect this, or is the gdp numbers not accurate?

 

[Guest Cameron]

2.) current phase of innovation (greatest in over a century) is likely what is resulting in low inflation and this is not a bad thing.

 

This one comment really made me think? Are we really in a great phase of innovation? Hard to tell while we are in the middle of it.....

 

We certainly are.  Things like wide adoption of wireless communication, carrying a powerful computer anywhere you go, google translate is incredibly good, available to everybody on demand for free, advances in genetic engineering, even horizontal drilling and fracking, all happening more or less at the same time, iPhone is only 10 years old!  Nothing short of miraculous.

 

 

But GDP growth isn't super high to reflect this, or is the gdp numbers not accurate?

 

It would be in productivity gains which don't reflect it.

We moved a lot of bits and not enough atoms.

[Cigarbutt]

In terms of new technology: "Nothing short of miraculous"

 

For some reason: "It would be in productivity gains which don't reflect it."

 

Some say the gains are not there yet. Some say the gains are there but not measured.

Will someone explain?

 

https://www.bls.gov/opub/btn/volume-6/below-trend-the-us-productivity-slowdown-since-the-great-recession.htm

 

Looking at the official productivity numbers, one can feel it but we just don't see it.

 

In the early 60's, the wage gap (chart 6) showed that the real earner was lagging to some degree. In the period from 2007-2016, the difference (gap) is comparable in absolute value and is still harvested by the capital providers. Productivity gains are below trend however.

 

In the early 60's, an archbishop of Wales wrote to the London Times: "To a simple fellow like myself it seems that the lower prices which increased production makes possible would benefit everybody, but I recognize there must be a flaw in my thinking, for increased productivity has not brought—and does not seem likely to bring— lower prices. Presumably there is some good reason for this. Will someone explain?"

 

Where are the common men's yachts?

Will someone explain?

 

Maybe the answer for the central bank is to start managing directly the rate of productivity gains. ???

 

 

[Guest Cameron]

In terms of new technology: "Nothing short of miraculous"

 

For some reason: "It would be in productivity gains which don't reflect it."

 

Some say the gains are not there yet. Some say the gains are there but not measured.

Will someone explain?

 

https://www.bls.gov/opub/btn/volume-6/below-trend-the-us-productivity-slowdown-since-the-great-recession.htm

 

Looking at the official productivity numbers, one can feel it but we just don't see it.

 

In the early 60's, the wage gap (chart 6) showed that the real earner was lagging to some degree. In the period from 2007-2016, the difference (gap) is comparable in absolute value and is still harvested by the capital providers. Productivity gains are below trend however.

 

In the early 60's, an archbishop of Wales wrote to the London Times: "To a simple fellow like myself it seems that the lower prices which increased production makes possible would benefit everybody, but I recognize there must be a flaw in my thinking, for increased productivity has not brought—and does not seem likely to bring— lower prices. Presumably there is some good reason for this. Will someone explain?"

 

Where are the common men's yachts?

Will someone explain?

 

Maybe the answer for the central bank is to start managing directly the rate of productivity gains. ???

 

Most of the innovation we speak of has come from entertainment. Social Media, iPhones etc. you could make the argument these innovations have made us less productive.

 

On the optimistic side, how do you measure the productivity gains that have been had as a result of Google, having any answer you want at your fingertips has to account for something.

 

Or maybe those productivity gains are being had in other countries.

[HJ]

GDP numbers and productivity numbers are all macroeconomic estimates which are terribly imperfect.  They measure things that sometimes are only useful to economists themselves(and politicians that they work for).  The rest of us are only told that they are important statistics.  They don't necessarily correspond to human progress, or even their trajectory doesn't necessarily measure the trajectory of human progress. 

 

Take the invention of printing press, there's no question it was, over time, an incredibly powerful and important invention to humanity.  But where is that in GDP numbers around the time they were invented (if any of the economists were ever to attempt to venture an estimation for that period of time using their modern day techniques)?  Take something like the wide adoption of wireless communication, it may not be on par with the invention of printing press, but there's no question that it represents important progress and over time betters humanity.  Plus, as some have pointed out, these may not have necessarily showed up in US or developed market GDP. 

 

But I am of a firm belief that the advancement in communications technology, the spread of internet, availability of cheap computing power to every person in whatever form it takes, all represent very important innovations to humanity that somehow economists will prove incapable of measuring.  And politicians, other than Al Gore, won't attempt to take credit for. 

[randomep]

 

My thinking regarding innovation/productivity gains is not an academic exercise, but a very practical one. I want to know if we are growing our wealth in real terms. If we truly are growing our wealth in real terms, then it must go to someone. And I want to grab as much as possible through investments. If not then all this QE and low interest rates is creating a bubble that will end badly because ultimately investing is a zero sum game and our gains will have to be given back.

 

If we aren't going to grow wealth, then ya...... a third -50% crash in my investing lifetime is probably going to happen.

[Cigarbutt]

Trying to bridge the macro with the micro.

 

Technology can certainly be fun and exciting but I think that the net effect, on the kind of productivity improvements over financial engineering concept that Druckenmiller refers to, has been, so far, relatively marginal.

 

Think of the following versus productivity

-e-mails

-people texting while driving

-last time you went to the doctor/dentist/accountant/lawyer

-last time you were involved in the deployment/maintenance of a "new" IT system

 

So, a lot of potential but also a lot of time-consuming distraction.

And let’s not talk about social media.

 

It may be fair to say that the introduction of the washing machine had a more significant impact on down to earth real productivity than the iPhone(s). :)

 

For those who say that the GDP number simply does not pick up the IT intangible input, I submit that when goodwill shows up on the asset side, the implicit earning power should be expected to manifest in a very tangible way down the road in a time value decay dependent way.

 

I suggest that significant real productivity gains have not come to life in a big way so far. But they will.

Despite the swamp, the central bank, the inequality, the demographic decline or whatever you think is hindering “progress”.

Inevitably.

 

2 opposing views

 

Techno-pessimist:

www.nber.org/papers/w18315.pdf

 

Techno-optimist:

https://www.amazon.ca/Race-Against-Machine-Accelerating-Productivity-ebook/dp/B005WTR4ZI

 

The latter is available, in its entirety, on the internet with minimal work.

That’s what I call productivity. :)

 

[dowfin1]

This working paper supports your view that productivity gains will come.  The final paper is behind a pay wall however.  http://www.nber.org/chapters/c14007.pdf

[randomep]

Trying to bridge the macro with the micro.

 

 

Think of the following versus productivity

-e-mails

-people texting while driving

-last time you went to the doctor/dentist/accountant/lawyer

-last time you were involved in the deployment/maintenance of a "new" IT system

 

So, a lot of potential but also a lot of time-consuming distraction.

And let’s not talk about social media.

 

It may be fair to say that the introduction of the washing machine had a more significant impact on down to earth real productivity than the iPhone(s). :)

 

 

Ok if you want to look at our daily lives lets see:

 

Number of times I don't have to go to the bank to transfer some money, deposit a check.

Number of times I don't have to drive to the bookstore / library to learn to do some do it yourself project, like build my own gutter, retaining wall, etc.

Number of times I don't have to have to run around department stores to comparison shop.

Number of less cars on the road because young people rather play with their smartphones than drive.

 

Number of less times I have to go to the DVD store or movie theatre because I can get movies on demand (whether legal or illegal).

 

and the list goes on and on.... those are productive things because it means I get more entertainment and time saved with less greenhouse gases......

 

 

[Guest Cameron]

Trying to bridge the macro with the micro.

 

 

Think of the following versus productivity

-e-mails

-people texting while driving

-last time you went to the doctor/dentist/accountant/lawyer

-last time you were involved in the deployment/maintenance of a "new" IT system

 

So, a lot of potential but also a lot of time-consuming distraction.

And let’s not talk about social media.

 

It may be fair to say that the introduction of the washing machine had a more significant impact on down to earth real productivity than the iPhone(s). :)

 

 

Ok if you want to look at our daily lives lets see:

 

Number of times I don't have to go to the bank to transfer some money, deposit a check.

Number of times I don't have to drive to the bookstore / library to learn to do some do it yourself project, like build my own gutter, retaining wall, etc.

Number of times I don't have to have to run around department stores to comparison shop.

Number of less cars on the road because young people rather play with their smartphones than drive.

 

Number of less times I have to go to the DVD store or movie theatre because I can get movies on demand (whether legal or illegal).

 

and the list goes on and on.... those are productive things because it means I get more entertainment and time saved with less greenhouse gases......

 

Does this make you a better employee or more productive at work, which is ultimately what matters the most.

From 1999-present VC funds have had a negative real mean return by funding companies solving incremental problems. We don't need a bike-sharing or umbrella sharing company.

Tesla making an electric vehicle is cool, but its not getting me to work or anywhere else faster. Hyperloop would have more of an impact on productivity gains than Tesla.

In terms of speed of transportation we peaked in the 60s and have actually fallen slightly every year. Ironically the largest fortunes I can think of in the US has had to do with transportation whether it was directly or indirectly. (Ford, Rockefeller, Vanderbilt). The cost of approving drugs is significantly higher than what it was when most of the major drugs we take for granted were created. Wind and solar are already long established forms of alternative energy and are only being incrementally improved on but nuclear fission beats both of those. We have enough power in all of our nuclear weapons to power the whole world for 10,000 years.

 

All 3 of these have one very important issue in common.

 

I have my qualms about Musk but at-least his idea's are solving real problems and not incremental ones.

[Cigarbutt]

Cameron,

Why do you feel so strongly against incremental problem-solving?

The working paper referenced by dowfin1 does a good job at describing how we may need both type of problem solving: insight ("real problem") and incremental.

 

Insight problem solving is more the Eureka sudden 0 to 1 realization that Mr. Thiel describes. Outside the box, breakthrough and genius-type.

I submit that a case can be made for entrepreneurs who combine known innovations and put the result in application. Analytical and motivated type.

Think Ray Kroc. He did not invent anything specific (hamburgers and fries existed before) but he combined concepts and used scale in a very innovative way. I would tend to put Micheal Dell in the same category.

 

I may see your point when creating more of the same is labeled as incremental.

 

[Guest Cameron]

Cameron,

Why do you feel so strongly against incremental problem-solving?

The working paper referenced by dowfin1 does a good job at describing how we may need both type of problem solving: insight ("real problem") and incremental.

 

Insight problem solving is more the Eureka sudden 0 to 1 realization that Mr. Thiel describes. Outside the box, breakthrough and genius-type.

I submit that a case can be made for entrepreneurs who combine known innovations and put the result in application. Analytical and motivated type.

Think Ray Kroc. He did not invent anything specific (hamburgers and fries existed before) but he combined concepts and used scale in a very innovative way. I would tend to put Micheal Dell in the same category.

 

I may see your point when creating more of the same is labeled as incremental.

 

He did invent the idea of fast food which is innovative in its own right. Think of the assembly line that he created. Thats a massive increase in employee productivity as well as entertainment and a time saver for those who are consumers. I would consider this a real issue that needed to be solved because of the shear amount of time wasted at drive throughs before. It was as important an invention as the mason jar.

 

Maybe I should say we have more incremental problems being solved today rather than what I would call real problems, and as I alluded I don't think its because we are any less creative than we were 20 or 50 years ago. The 3 area's I described have serious regulatory hurdles to overcome.

 

It makes more sense for a 20 something college kid to learn coding and create an app than study chemistry and hope you can get enough funding not just to do research but also to go through the approval process. It takes $99 to get an app up on the App Store I think.

 

I look at Snapchat as something that would be an incremental problem. I could just be being cynical again.