Stanley Druckenmiller interview (2018)

[Guest cherzeca]

Thanks for posting link to 50 minute interview. Very interesting to get his views one year later. He sounded pretty bullish about stocks in the near term: monetary easing, decent economy, some improvement on trade front. My concern is i am hearing this from lots of people...

 

It is more important to focus on data than anecdotal.

I am bullish because I like what I see here.

 

how are outflows calculated? 

 

if I sell equity there is no outflow because someone bought my equity.  then I could take my cash and put it into bond market, which is an outflow, but how does anyone know what I did with my cash on the second step of the chain? 

 

I think this is a bogus stat, but correct me if I am wrong

 

My guess is they look at the net creation/destruction of fund shares.

 

If a mutual fund experiences more withdrawals then deposits, assets are sold and the share count is reduced. If that cash doesn't flow into another equity mutual fund increasing the share count, then you've ended up with a pretty clear net reduction in equities via a net reduced share count of equity mutual funds.

 

Not a perfect system for measurement as it overlooks individual security contributions, but probably a reasonably good measure

 

to take it a step further, I take my equity redemption and invest in a bond fund....oooh, that is a net equity reduction, net bond addition....except it isn't since on the either side of my equity sale is an equity buy, and on the other side of my bond buy is a bond sale

 

I suppose as you suggest there are metrics as to mutual fund/etf size that an be tracked but fund flows seems a slippery data point to follow...especially when compared to good old pricing data...and pricing data would indicate that equities are attractive.

[muscleman]

How can a market go up when money flows out? This does t make any. sense. Sure there are buybacks, mergers and equity swap for debt, but those are long term trends. It would posit that Markets can go up, if money flows in.

 

The data is for tracking RETAIL investor flows, and in general they are the worse investor of all classes.

[Spekulatius]

How can a market go up when money flows out? This does t make any. sense. Sure there are buybacks, mergers and equity swap for debt, but those are long term trends. It would posit that Markets can go up, if money flows in.

 

The data is for tracking RETAIL investor flows, and in general they are the worse investor of all classes.

 

So, basically this chart means that retail investors made a big mistake, nothing else. What conclusions can we draw from this? It’s not clear to me that anything is relevant for investment decisions.

[Liberty]

^The following table could be helpful:

https://www.marketwatch.com/story/buybacks-are-the-dominant-source-of-stock-market-demand-and-they-are-fading-fast-goldman-sachs-2019-11-06

 

Buybacks are not a cause, they're a symptom. Symptom of lots of cash on the balance sheet that can't be reinvested at good returns right now, so returned to shareholders. If it didn't come out as buybacks, it would either be higher dividends (which also tend to increase valuations as they rise), or more investments which would probably lead to higher growth, which also has an impact on valuations (unless the ROIC is under WACC or generally destroys value).

[RuleNumberOne]

European Union GDP has risen a total of 2% in the last 6 years - that is not an average of 2% per year, but a cumulative 2% since 2013.

 

This is why interest rates are set to negative. The German and Austrian savers who were still gorging on Italian debt this year won't get paid. Neither will the French banks who own hundreds of billions of Euros of Italian debt.

 

You don't have to look farther than the European bank stock prices. Just like Italy's GDP growth has stayed in the -0.1% to 0.1% range every quarter for 2 years, European bank stock prices have stayed in single digits since the financial crisis ended.

 

When is the crash? They have been able to cover it up for nearly 10 years now. The FT stopped reporting anything financial and focuses on US politics instead.

[Cigarbutt]

^The following table could be helpful:

https://www.marketwatch.com/story/buybacks-are-the-dominant-source-of-stock-market-demand-and-they-are-fading-fast-goldman-sachs-2019-11-06

Buybacks are not a cause, they're a symptom. Symptom of lots of cash on the balance sheet that can't be reinvested at good returns right now, so returned to shareholders. If it didn't come out as buybacks, it would either be higher dividends (which also tend to increase valuations as they rise), or more investments which would probably lead to higher growth, which also has an impact on valuations (unless the ROIC is under WACC or generally destroys value).

My first reflex was to say that the post was only factual (basic data) in nature and that I did not necessarily agree with the interpretation or the conclusion but, of course, you're correct in the sense that I wonder about the symptom-disease conundrum that may exist.

i hope to become a holder of a basket of long-term compounders (if i can find them) and the potential bias may have something to do with the fact that the underlying framework for stocks is a supply and demand function and there have been several opportunities where estimating who was on the other end of the trade was critically important.

 

Despite the above, the 'demand' table is interesting in several respects. In the past, share buyback activity has been significantly pro-cyclical which goes against a contrarian bias and is possibly a cyclical trend that will continue. Also, retail investors are typically trend-followers and I don't understand why (apart from net positive ETF funds flows) why there has been a net negative outflow of funds during an episode where momentum was clearly a fundamental factor. I think i understand why pension funds and other institutions have decreased their direct stock exposure overall because of a growing attraction to various alternative assets (private equity, real assets etc) but the trend is significant nonetheless.

 

Another interesting feature that does not stand out is the fact that the absolute value of stock exposure may increase even with equity withdrawal as long as price appreciation remains larger than the withdrawal rate. I remember also studying this phenomenon (the reverse phenomenon) when markets go down when some people tend to think that there are more sellers than buyers which does not really matter from the angle of a single one-to-one transaction.

[TwoCitiesCapital]

Thanks for posting link to 50 minute interview. Very interesting to get his views one year later. He sounded pretty bullish about stocks in the near term: monetary easing, decent economy, some improvement on trade front. My concern is i am hearing this from lots of people...

 

It is more important to focus on data than anecdotal.

I am bullish because I like what I see here.

 

how are outflows calculated? 

 

if I sell equity there is no outflow because someone bought my equity.  then I could take my cash and put it into bond market, which is an outflow, but how does anyone know what I did with my cash on the second step of the chain? 

 

I think this is a bogus stat, but correct me if I am wrong

 

My guess is they look at the net creation/destruction of fund shares.

 

If a mutual fund experiences more withdrawals then deposits, assets are sold and the share count is reduced. If that cash doesn't flow into another equity mutual fund increasing the share count, then you've ended up with a pretty clear net reduction in equities via a net reduced share count of equity mutual funds.

 

Not a perfect system for measurement as it overlooks individual security contributions, but probably a reasonably good measure

 

to take it a step further, I take my equity redemption and invest in a bond fund....oooh, that is a net equity reduction, net bond addition....except it isn't since on the either side of my equity sale is an equity buy, and on the other side of my bond buy is a bond sale

 

I suppose as you suggest there are metrics as to mutual fund/etf size that an be tracked but fund flows seems a slippery data point to follow...especially when compared to good old pricing data...and pricing data would indicate that equities are attractive.

 

Right. But if you redeem, it's not necessarily a buy. If there is an inflow into the equity fund offsetting your redemption, net shares are unchanged. If you redeem and there isn't an offsetting inflow the mutual fund has to sell assets to find your withdrawal and that mutual fund share is destroyed. A clear net outflow.

 

This can be measured across the system, but not sure if this is how they're doing it.

[Munger_Disciple]

 

Right. But if you redeem, it's not necessarily a buy. If there is an inflow into the equity fund offsetting your redemption, net shares are unchanged. If you redeem and there isn't an offsetting inflow the mutual fund has to sell assets to find your withdrawal and that mutual fund share is destroyed. A clear net outflow.

 

This can be measured across the system, but not sure if this is how they're doing it.

 

If you redeem a mutual fund shares and there is no offsetting inflow and no cash buffer at the fund, the mutual fund sells the underlying portfolio stock to raise cash to satisfy the redemption. So there is no net outflow out of equities because (as others pointed out) for every seller there is a buyer unless a company bought back shares and retired them.

[TwoCitiesCapital]

 

Right. But if you redeem, it's not necessarily a buy. If there is an inflow into the equity fund offsetting your redemption, net shares are unchanged. If you redeem and there isn't an offsetting inflow the mutual fund has to sell assets to find your withdrawal and that mutual fund share is destroyed. A clear net outflow.

 

This can be measured across the system, but not sure if this is how they're doing it.

 

If you redeem a mutual fund shares and there is no offsetting inflow and no cash buffer at the fund, the mutual fund sells the underlying portfolio stock to raise cash to satisfy the redemption. So there is no net outflow out of equities because (as others pointed out) for every seller there is a buyer unless a company bought back shares and retired them.

 

We're agreed that every buy has a sell and vice versa. But I don't think that means you can't have net inflows and outflows.

 

 

Consider buying $1000 of stock. 3 years later you need the money and are forced to sell all your shares for $900.  What's the impact? Is that an inflow? And outflow? Net neutral?

 

I'd argue that it's an outflow of value/money and could be measured by the value of the sale. I.e. mutual funds selling shares to meet redemptions and reducing share count.

 

Maybe you can also use $ volume traded and market capitalization changes to further hone in on the activity, but just because every sale is met with a but doesn't mean you don't have periods of inordinate demand or supply. That's why the price has to fluctuate to meet it.

[Munger_Disciple]

Consider buying $1000 of stock. 3 years later you need the money and are forced to sell all your shares for $900.  What's the impact? Is that an inflow? And outflow? Net neutral?

 

Seems neutral to me. In your example when you buy stock for $1000 you sent $1000 to someone else. Your inflow to the market is balanced by the outflow to counter-party. The same thing in reverse happens when you sell for $900. I don't see why supply/demand for a certain stock affects the net inflows or outflows. In private markets (for example) such as real estate, you could have a freeze in the market (similar to very wide blown out bid/ask spreads in public markets) with very few transactions taking place as we had in 2007-2011. Even in that scenario, outflows = inflows = approximately $0.

[Gregmal]

Maybe its over simplifying it, but my understanding of outflows has always related to ETF and funds and is as simple as the net of new investor money vs existing investor money. You have $1M of new shares issued but $5M worth of existing investors requesting redemptions... thats $4M net outflow. This wouldn't be something that applied to individual securities IMO.

[muscleman]

Maybe its over simplifying it, but my understanding of outflows has always related to ETF and funds and is as simple as the net of new investor money vs existing investor money. You have $1M of new shares issued but $5M worth of existing investors requesting redemptions... thats $4M net outflow. This wouldn't be something that applied to individual securities IMO.

Yep. That's what my understanding is. Stock pickers are not the less sophisticated investors. The least sophisticated investors usually have no knowledge of the markets, but wants to make money anyway in market rallies, so they invest in MF and ETFs. Now that the stock selection process is removed from them, the only decision they can make is timing, which is even harder than stock selection. The stock market is a zero sum up game (excluding dividends and fees.), so there has to be someone losing, and it is therefore important to watch what the less sophisticated group does because usually they are the suckers.

[TwoCitiesCapital]

Consider buying $1000 of stock. 3 years later you need the money and are forced to sell all your shares for $900.  What's the impact? Is that an inflow? And outflow? Net neutral?

 

Seems neutral to me. In your example when you buy stock for $1000 you sent $1000 to someone else. Your inflow to the market is balanced by the outflow to counter-party. The same thing in reverse happens when you sell for $900. I don't see why supply/demand for a certain stock affects the net inflows or outflows. In private markets (for example) such as real estate, you could have a freeze in the market (similar to very wide blown out bid/ask spreads in public markets) with very few transactions taking place as we had in 2007-2011. Even in that scenario, outflows = inflows = approximately $0.

 

Maybe we need an extreme example to illustrate.

 

There's a single share of stock outstanding that was purchased for $1. That individual now wants to sell.

 

I buy it from that individual for $1 million. Now the market capitalization of that company has shot through the roof from $1 to $1 million dollars - but it's not a net inflow to equities because my $1 million flowed to an individual who now took it "out"?

 

How do we explain the massive gap in market capitalization from the before scenario to the after scenario if flows were '"neutral"?

 

The flows are positive because I was willing to pay X percentage more for the share than the prior buyer.

 

So as long as the combination of volumes of shares  multiplied by average prices is rising you've got net inlows. If that same product is contracting, either due to falling prices OR falling average volumes, you've got net outflows.

 

 

[Munger_Disciple]

 

Maybe we need an extreme example to illustrate.

 

There's a single share of stock outstanding that was purchased for $1. That individual now wants to sell.

 

I buy it from that individual for $1 million. Now the market capitalization of that company has shot through the roof from $1 to $1 million dollars - but it's not a net inflow to equities because my $1 million flowed to an individual who now took it "out"?

 

How do we explain the massive gap in market capitalization from the before scenario to the after scenario if flows were '"neutral"?

 

The flows are positive because I was willing to pay X percentage more for the share than the prior buyer.

 

So as long as the combination of volumes of shares  multiplied by average prices is rising you've got net inlows. If that same product is contracting, either due to falling prices OR falling average volumes, you've got net outflows.

 

 

 

We shall agree to disagree. I don't think your extreme example makes any difference. All that happened is that you transferred $1M to someone else so the net inflows are zero.

 

Just as a thought experiment, let us say that in your "extreme" example, you sold your stock for $1 to someone else the day after you bought for $1M. So now we are supposed to think there are massive outflows the next day after having massive inflows the previous day? I don't think so.

[CorpRaider]

I've heard/read Jack Bogle make this argument a number of times ("no cash on the sidelines"), and I get the semantics but to me he was just being cute. I think its kind of like a currency exchange rate...business equity (or other assets) for dolla dolla bills and the rate changes with the flows (all else being equal).

[RuleNumberOne]

TwoCities and MungerDisciple,

 

Sentiment is a bigger driver, not just inflows/outflows. We can see this if we use 100 shares of a company instead of 1 share.

 

If the stock was trading at $5/share on Monday and a speculator pays $15 for one share on Tuesday, we get a net inflow of $10 ($15 - $5), but the market cap jumps by $1000 (100 shares x $10).

 

Consider the stock HEI (Heico). From 2018's peak price of $93 in September 2018, it jumped to $147 nine months later and is down back to $116. That performance was driven by "sentiments", not buybacks. Heico jumped by 60% from the 2018 peak to the 2019 peak, big multiple expansion, no buybacks. On the other hand, we can find less "storied" stocks with multiple contraction but huge buybacks during the same 2018-2019 period - such as CSCO.

[RuleNumberOne]

The focus on buybacks increasing EPS misses the debt used to fund those buybacks.

 

https://www.bloomberg.com/news/articles/2019-12-19/this-funny-thing-happened-on-the-way-to-the-stock-market-record

 

"With balance sheets getting too big to fail, the Fed came to the rescue in each recession with interest-rate cuts to reduce the carrying cost of all that debt and to prop up the value of rate-sensitive stocks, bonds, and other assets. It worked like a ratchet. Rates fell in each successive cycle because the bigger balance sheets grew, the lower interest rates needed to be, Levy says.

 

True, households in the U.S. have paid down some of their debt since the 2007-09 financial crisis. But the nonfinancial corporate sector has gotten even deeper into hock. “Corporate America’s fragile debt pile has emerged as a key vulnerability,” Oxford Economics Ltd. senior economist Lydia Boussour wrote on Oct. 31. Half of investment-grade corporate bonds are in the lowest tier by credit rating, vs. 37% in 2011. And 80% of leveraged loans are covenant-lite, vs. 30% during the financial crisis, she wrote.

 

Lagarde has a bigger problem than does Fed Chair Jerome Powell. She’s up against ratios of private nonfinancial-sector debt to gross domestic product above that of the U.S. The ratios in Australia, Canada, China, and South Korea are, in fact, higher than the ratio was in the U.S. at its 2009 peak, according to the Bank for International Settlements. That’s why Levy predicts the next crisis will begin abroad. “It may not be as bad for the United States as in 2008-2009; it is likely to be worse for most of the rest of the world,” he wrote."

[Munger_Disciple]

I've heard/read Jack Bogle make this argument a number of times ("no cash on the sidelines"), and I get the semantics but to me he was just being cute. I think its kind of like a currency exchange rate...business equity (or other assets) for dolla dolla bills and the rate changes with the flows (all else being equal).

 

Perhaps you are confusing supply/demand for an asset with net outflows and inflows? If there is a huge demand for business equity then the price people are willing to pay goes up. But it is still a zero sum transaction (ignoring trading fees) because for every buyer there is a seller. Same dynamic exists for currency trades. The exceptions are when a company issues additional shares or buys back existing shares. Bogle was right.

[TwoCitiesCapital]

 

Maybe we need an extreme example to illustrate.

 

There's a single share of stock outstanding that was purchased for $1. That individual now wants to sell.

 

I buy it from that individual for $1 million. Now the market capitalization of that company has shot through the roof from $1 to $1 million dollars - but it's not a net inflow to equities because my $1 million flowed to an individual who now took it "out"?

 

How do we explain the massive gap in market capitalization from the before scenario to the after scenario if flows were '"neutral"?

 

The flows are positive because I was willing to pay X percentage more for the share than the prior buyer.

 

So as long as the combination of volumes of shares  multiplied by average prices is rising you've got net inlows. If that same product is contracting, either due to falling prices OR falling average volumes, you've got net outflows.

 

 

 

We shall agree to disagree. I don't think your extreme example makes any difference. All that happened is that you transferred $1M to someone else so the net inflows are zero.

 

Just as a thought experiment, let us say that in your "extreme" example, you sold your stock for $1 to someone else the day after you bought for $1M. So now we are supposed to think there are massive outflows the next day after having massive inflows the previous day? I don't think so.

 

Yes. Which is how you end up in the same place you started - it would take a net "out flow" of $1 million to get you back to the same place truly neutralize.

[muscleman]

What you guys just discussed is  the total inflow/outflow of money to the whole stock market, which is quite different from the net inflow/outflow to the mutual fund + ETFs.

[TwoCitiesCapital]

What you guys just discussed is  the total inflow/outflow of money to the whole stock market, which is quite different from the net inflow/outflow to the mutual fund + ETFs.

 

Yes, but they can be approximated as ETFs and Mutual funds make up a MASSIVE portion of the market. No one is saying it's an exact science down to the penny.

[Liberty]

Druckenmiller interview at the NY economic club from a few days ago:

 

https://youtu.be/wKwoMuB2Tck

[VersaillesinNY]

Druckenmiller interview at the NY economic club from a few days ago:

 

https://youtu.be/wKwoMuB2Tck

 

Many thanks Liberty!

[Liberty]

New interview by Druck:

 

[dcollon]

Thank you for posting the interview Liberty