A few days ago, we shared an anecdote from hedge fund legend Stanley Druckenmiller – a former George Soros analyst and iconic macro investor – who recounted a painful, nearly career-destroying experience where he ignored the warnings of his gut and jumped on the tech bubble bandwagon far too late. The error cost the firm $3 billion when the crash arrived, prompting Druck to resign.  Here’s what Druckenmiller, who converted his hedge fund Duquesne Capital into a family office back in 2010, said at the time:

“So, I’ll never forget it. January of 2000 I go into Soros’s office and I say I’m selling all the tech stocks, selling everything.

This is crazy at 104 times earnings. This is nuts. Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day and I’m out.

It is driving me nuts. I mean their little account is like up 50 percent on the year. I think Quantum was up seven. It’s just sitting there…”

 

“So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally.

I think I missed the top by an hour. I bought $6 billion worth of tech stocks… and in six weeks I had left Soros and I had lost $3 billion in that one play.”

“You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again. but I already knew that.”

An apt lesson, and perhaps the reason why despite taking a lot of heat this year for sitting out most of the summer COVID-19-inspired rally in tech or other home-friendly shares, he has refused to succumb to the euphoria and Albert Edwards probably did a victory lap back in June when Druck announced that he was selling all his stocks and would instead pile into Treasuries.

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In any case, fast forward to today when speaking on CNBC this morning, the billionaire investor warned that Wall Street’s “raging party” might soon give way to a brutal worldwide hangover.

“Everybody loves a party … but, inevitably, after a big party there’s a hangover,” Druckenmiller said adding that “Right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40% on stock splits. That brings no value, but the stocks go up.

Druck also rejected the notion that stock splits are good for anyone other than management and insiders.

Tesla shares rallied 82.5% between Aug. 11 — when the company announced a 5-for-1 stock split — and Aug. 31, when the split took effect. Apple, meanwhile, jumped 34.2% between July 30 and Aug. 31 on news of a 4-for-1 stock split. The stock has fallen more than 12% since the split took effect.

The S&P 500 is up more than 51% after hitting an intraday low on March 23. Last week, the broader-market index hit an all-time high before a roll-over in tech shares knocked it back below that level.

“I have no clue where the market is gonna go in the near term. I don’t know whether it’s going to go up 10%; I don’t know whether it’s going to go down 10%,” Druckenmiller said. “But I would say the next three-to-five years are going to be very, very challenging.”

Back in March, the Fed’s unprecedented response to the crisis probably was the right thing to do to stop million of Americans from sliding into poverty, Druck said. But the Fed has now taken things to such an extreme, Druckenmiller is more worried about a painful period of untstoppable inflation over the next 3-5 years, contrary to that other investing icon, Jeff Gundlach who sees pandemic-driven deflation as far as the eye can see.

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Saying that the Fed did a “great job” in March by cutting rates and launching unprecedented stimulus programs to sustain the economy, the value investor added that the follow-up market rally “has been excessive.” He also said that for the first time in a while, he is worried about inflation shooting higher. “The merging of the Fed and the Treasury, which is effectively what’s happening during Covid, sets a precedent that we’ve never seen since the Fed got its independence,” Druckenmiller said, echoing our own summary from April .

“It’s obviously creating a massive, massive mania in financial assets” and for evidence just look at the FAAMGs or Dave Portnoy’s twitter account.

Looking ahead, Druckenmiller warns that the next three to five years will get “very challenging” for investors, as runaway inflation – as high as 10% – is unleashed in the next 4 or 5 years. One wonder just how much gold Druckenmiller is long…

While more stimulus may not fix the problem, the Fed should still be “open-minded” since people are suffering. Alas, we are far too deep inside the rabbit hole to have a credible solution (as Rabobank’s Michael Every wrote last week), since staving off starvation tomorrow could means dealing with raging inflation for the next ten years.

After the interview, stock-pumper extraodinaire Jim Cramer Druckenmiller for having the temerity to warn American retirees to take their money and run just because he missed the most artificial rally in history.

Somebody should tell ‘Jimmy Chill’ that brokerages like Schwab will happily sell customers a $5 slug of Amazon stock, no splits necessary. They can do the same thing with Apple and they could have before the comeback.

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Of course, Druck isn’t the only one who harbors these concerns. Another skeptic identified by the FT  as Andrew Parlin published a piece where he warned today’s “US stock bubble could be the biggest in history.” Yesterday Jeff Gundlach also chimed in, saying on the latest DoubleLine call that “One week ago today it seemed like stocks were going to infinity” and adding that the S&P 500 is in “nosebleed territory. This is not a cheap market.”


Via Zerohedge