One of the investing community's most respected voices expressed great concern about mounting debt and the outlook for the global economy. At yesterday's much-anticipated Sohn Investment Conference in New York, billionaire investor Stanley Druckenmiller of Duquesne Capital plainly advised to get out of stocks and buy gold.
The two overarching reasons that Druckenmiller gave for his recommendation were worsening myopia (short-sightedness) from the Federal Reserve and the resulting reliance upon debt and financial engineering by China as well as corporations in the U.S.
He said that "the bull market is exhausting itself" while companies and central banks continue to chase short-term earnings at the expense of sustainable growth. He scoffed at the notion that the Fed is actually "data dependent" as it often likes to claim, warning that "This kind of myopia causes reckless behavior" in the markets.
Druckenmiller pointed out that global debt keeps rising at an alarming pace even as growth has essentially halted: net cash flow is now negative when measured year-on-year. The Fed is pulling from future growth and future consumption through financial engineering in the interest of short-term earnings and immediate band-aids.
His suggestion was that the Federal Reserve is overdue for reforms that amount to a huge overhaul. However, we all know this is highly unlikely to happen, which leads Druckenmiller to sharply downgrade his outlook for the world economy. He also expressed great concern that China was similarly relying too heavily upon debt to boost construction projects and cover up its slowing economy.
Dump Stocks, Buy Gold
"The conference wants a specific recommendation from me. I guess 'Get out of the stock market' isn't clear enough," Druckenmiller told the crowd. To support that he practices what he preaches, he shared that gold remains his company's "largest currency allocation" in the hedge fund's portfolio. While "Some regard it as a metal, we regard it as a currency," he added. Business Insider reported that "He advocated that investors switch their portfolio to gold."
Not only is leverage reaching dangerous and unprecedented levels, but central banks are repeatedly exacerbating the problem by pushing off dealing with it into the future in order to keep markets happy. The longer this goes on, and the longer that these fundamental problems are ignored, the more dire the situation for the global economy becomes. In other words, the deeper the hole is dug. Mr. Druckenmiller clearly believes—reasonably so—that these issues will blow up in our faces long before they are ameliorated.
So far this year, Duquesne Capital has gained 15% for its shareholders. One investor in the firm even claimed that Duquesne has never posted an annual loss in its 35-year history. Between 1986 and 2010, the firm averaged annual returns of 30%. Druckenmiller founded the hedge fund in 1981.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.