Legendary investor Stan Druckenmiller, founder of Duquesne Capital
Management LLC, told the Sohn Investment Conference in New York last week
that he is bullish on gold and bearish on the stock market. Gold, he told the
conference, "is our largest currency allocation."
Druckenmiller recommended that investors sell their equity holdings.
"The bull market is exhausting itself," he told the conference. A
major factor has been the Federal Reserve's easy money policy, which has
resulted in "reckless" corporate behavior.
Growing corporate debt is increasingly used for financial engineering,
rather than in R&D that could lead to productivity improvements,
Druckenmiller said. According to him, from 2012 to 2015, use of debt for U.S.
nonfinancial firms for stock buybacks and M&A increased from $1.25
trillion to $2 trillion, while debt for R&D and office equipment grew
from $1.55 trillion to only $1.8 trillion.
"The corporate sector today is stuck in a vicious cycle of earnings
management, questionable allocation of capital, low productivity, declining
margins and growing indebtedness," Druckenmiller added.
The slowing Chinese economy as another reason to sell equities, according
to Druckenmiller. He believes that stimulus measures by China have
"aggravated the overcapacity in the economy." While he had hope two
years ago that the Chinese were willing to accept the tradeoff of a slowdown
to gain reform, the Chinese "have opted for another investment-focused
fiscal stimulus, which may buy them some time but will exacerbate their
problem. They do not need more debt and more houses."
Instead, Druckenmiller has made a move to gold. "It has traded for
5,000 years and for the first time has a positive carry in many parts of the
globe as bankers are now experimenting with the absurd notion of negative
interest rates," he said. "Some regard it as a metal, we regard it
as a currency, and it remains our largest currency allocation," he
added. Among his investments are holdings in the SPDR Gold Trust.
Druckenmiller gained fame in 1992 when, as lead portfolio manager for
George Soros' Quantum Fund, the fund shorted the British pound, a trade that
is widely believed to have made $1 billion in profits. Druckenmiller's
Duquesne Capital averaged annual returns of 30% before he converted it to the
Duquesne Family Office in 2010.
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