There’s already a big event today: the Fed decides on interest rates. This comes just one day after the best stock market gain since 1896 after an election.
Stan Druckenmiller, a famous trader, says that he has recently made one big macro call that was right and one big macro call that was wrong.
“I was sure that inflation would go down when this whole inflationary episode started, which was about two or three years ago. I was wrong about that, but I was right about being worried about the economy,” Druckenmiller told Nicolai Tangen, CEO of Norges Bank Investment Management and host of podcasts with famous people in the financial world.
Druckenmiller, who used to work for George Soros and now runs his own money for the Duquesne Family Office, said, “You can take this with a grain of salt since I had one right and one wrong there. I’ve switched to being more worried about inflation going forward than the economy itself.”
In the 1970s, inflation hit its lowest point about two years after its highest point. It then began to rise again. If you compare U.S. consumer prices to the same time last year, they went up the most in June 2022 and then went down.
“If the 1970s happen again,” he said, “the bottom of inflation would be right about now.” “Sometimes I worry that the Fed has declared victory too soon,” he said. “I’m not as sure as I was in 2021 that inflation was going to rise—that year, the money supply grew by 40% and a lot of other things were going on—but I’m also not sure that they’ve put an end to this and won the battle either.”
When interest rates were cut by a half point, credit spreads were tight, gold hit new highs, the stock market was roaring, and there wasn’t a lot of weakness in the economy. “That just makes me nervous that this thing could turn up again,” he said.
The conversation came out on Wednesday, but it took place before the election. He said that if Trump wins, there might be a rise in morale because people want less government control, higher taxes (which, on the surface, cause inflation), and a stop to immigration, which has helped the economy grow without making inflation rise faster.
He says there will be a “reckoning” on the budget at some point, even though the U.S. hasn’t been “Liz Trussed” yet. This is a reference to the budget of the U.K. prime minister, which caused bond rates to rise.
“Even though everything we’re doing is much more radical than what the Brits were doing,” he said. “The market has been okay with the budget deficit so far because the U.S. dollar is the reserve currency.”
Druckenmiller says that the refinancing of U.S. mortgages and business debt has kept things from getting worse for now, but the debt will still be there in the future.
“This is just a guess, but I think the problem will happen sometime between late 2025 and early 2026,” he said. Druckenmiller said that he would be short more U.S. government bonds than he is now if he was more sure that the U.S. budget would blow up.
The market
