Druckenmiller and Trump were right

[meiroy]

Spekulatius,

 

The stock market is connected to the real economy.  That's why we, value investors, make money.  When certain sectors, or what Druckenmiller calls the inner stock market are down significantly it says something about the economy. This can cause a feedback loop by itself negatively impacting it as well.  It's also important to note that Druckenmiller is not just saying "the stock market drops so there will be a recession", we tend to focus on that here because we invest in stocks but that's just part of it.

 

The Fed was wrong not to increase rates earlier when they had the chance and they are wrong again now. Same old, same old.

 

 

[Viking]

My understanding is the bond market does a much better job of communicating what might be happening in the future in the real economy... the stock market not so much.

 

I recently re-read the Mr Market parable that Graham uses in the Intelligent Investor. I wonder what Buffett would say about the current fall in stock prices and what it was communicating about the future path of the US economy (not much is my guess) :-)

 

Druckenmiller is a very smart guy. Humble enough to admit he is also often wrong.

[meiroy]

https://www.bloomberg.com/news/articles/2018-12-20/dudley-says-fed-needed-financial-tightening-to-restrain-economy

 

"“Their view is, the economy is growing at an above-trend pace, we already have a very tight labor market, we need to slow the economy,” Dudley said in a Bloomberg Television interview Thursday. “Somewhat tighter financial conditions aren’t really a bad thing. They’re probably a necessary thing for the Fed to achieve its objectives.”"

 

What. The. Fuck.

 

How is his inflation objective thingie going? Is he looking at the number and seeing it at 4% next year? We are living in an age of exponential innovation + a huge economy like China exporting its deflationary prices. Inflation is not going to go significantly up anytime soon. And what would happen if wages rise a bit, it's not like they have risen significantly for years. Hence Trump. Why slow down the economy NOW? it will break it and cause a recession.  He should have done it before when they had the chance. 

 

"“If the stock market were to keep going down, and the economy starts to weaken, then the Fed will definitely take a pause.”"

 

So, here, we can clearly see that he does consider the stock market as a factor. He is also willing to wait until something breaks and then do something about it. Hey, that's exactly what they did in 2005-2007. Worked great. (no, I'm not saying we'll get 2007 again.)

 

 

[scorpioncapital]

If you are a conspiracy theorist, the Fed is counteracting Trump's policies of creating inflation by increasing rates equal to the newly created inflation. Generally, inflation only really works if the interest rate is chronically below the rate of inflation, otherwise you by definition don't get any inflation. The conspiracy part is in who is this FED and why are they pouring cold water on Trump's government? Like Greece when the ECB threatened to cut them off and Greece blinked. Are Central Banks the new, unelected authoritarian leaders that are pulling the strings behind the scenes, toppling or endorsing puppet governments?

 

 

[Spekulatius]

If you are a conspiracy theorist, the Fed is counteracting Trump's policies of creating inflation by increasing rates equal to the newly created inflation. Generally, inflation only really works if the interest rate is chronically below the rate of inflation, otherwise you by definition don't get any inflation. The conspiracy part is in who is this FED and why are they pouring cold water on Trump's government? Like Greece when the ECB threatened to cut them off and Greece blinked. Are Central Banks the new, unelected authoritarian leaders that are pulling the strings behind the scenes, toppling or endorsing puppet governments?

 

The Fed chairman has been elected by Trump, so no conspiracy there. Their mandate is low inflation and full employment. If an elected president is going to push inflation, the central bankers should absolutely run counter, if they do their job and don’t get fired.

Same in the EU, except their mandate is more biased towards low inflation. This is because upon formation, the EU central bank was created after to mirror the German Bundesbank. The Bundesbank only mandate was low inflation. Full employment wasn’t their mandate.

 

We expect too much from central banks, as if they can steer the economy. I don’t think they can. They can in the short run to some extend but almost anything they do has long term consequence that runs counter the short term action. Nobody really knows if the QE has any LT consequences and what and when they may transpire. It would probably be better if central bankers would do less not more.

[opihiman2]

Glad that the Fed is staying the course.  Time to take the pain.  Get those rates up there and normalize yields.  Back in the late 90's, you could get Treasuries for 7% yields.  I remember my savings account had 5% yields.  Not everything revolves around equities.  In fact, if you bought bonds in the late 70's and rolled over duration yoy, you would have returned something like 15000% to 2009. 

 

Anyways, I'm all in cash / cash eq.  Going long bonds soon.  My thesis is when we get another recession and corporate bonds start blowing up, the Fed will revisit ZIRP.  T-bills will go ballistic again. 

[Dalal.Holdings]

Jim Cramer touted for wisdom on here? Please.

 

What are we, a banana republic? The central bank head of India recently resigned because the Prime Minister wanted easing next year (an election year for him). Do we want to go down this path???

 

Whether a sitting President can fire anyone at the Fed is questionable (https://www.google.com/amp/s/www.forbes.com/sites/patrickwwatson/2018/09/06/how-trump-could-fire-powell-and-rebuild-the-fed/amp/).

 

Why the change of heart in here? Anyone recall David Einhorn and his talk of “jelly doughnuts” by the fed many years ago? Suddenly now we want easing?

 

But hey, I guess your portfolio is down a few points now and you can’t take it, so we should destroy the precedent of an Independent Fed that has made this country what it is...

 

Guess we all (Trump included) just want it to be 2017 again with unnatural low volatility across the board and surging asset prices...

 

If volatility like this scares you (after many years of rising asset prices) and you resort to lashing out at the Fed, you have no business actively investing, IMO.

[Liberty]

Trump is a highly leveraged real-estate guy. Surprising to anyone he'd want forever zero interest rates?

 

Druck said he's more about removing forward guidance on the fed, and he's be for raising interest rates in a couple months and has been for normalizing them in the past, so it's not like he's taking the same position as Trump.

[Dalal.Holdings]

Trump is a highly leveraged real-estate guy. Surprising to anyone he'd want forever zero interest rates?

 

Druck said he's more about removing forward guidance on the fed, and he's be for raising interest rates in a couple months and has been for normalizing them in the past, so it's not like he's taking the same position as Trump.

 

Guess we should give the Fed a third mandate like Druck seems to imply (because Druck seems to believe that Mr. Market is the world’s best economist—Ben Graham would disagree): the Fed should maximize the S&P 500. Surely that will lead to great long term economic prosperity.

[rb]

Jim Cramer touted for wisdom on here? Please.

 

What are we, a banana republic? The central bank head of India recently resigned because the Prime Minister wanted easing next year (an election year for him). Do we want to go down this path???

 

Whether a sitting President can fire anyone at the Fed is questionable (https://www.google.com/amp/s/www.forbes.com/sites/patrickwwatson/2018/09/06/how-trump-could-fire-powell-and-rebuild-the-fed/amp/).

 

Why the change of heart in here? Anyone recall David Einhorn and his talk of “jelly doughnuts” by the fed many years ago? Suddenly now we want easing?

 

But hey, I guess your portfolio is down a few points now and you can’t take it, so we should destroy the precedent of an Independent Fed that has made this country what it is...

 

Guess we all (Trump included) just want it to be 2017 again with unnatural low volatility across the board and surging asset prices...

 

If volatility like this scares you (after many years of rising asset prices) and you resort to lashing out at the Fed, you have no business actively investing, IMO.

.

+1. Great point about volatility. It's funny to see these people wet their panties with the VIX at.... 28.

 

Markets take a dip off of high valuations and the Fed is conspiring.... to do its job. Pfft. Let it burn.

[SHDL]

As you know, madness is like gravity — all it takes is a little push!

[writser]

Jim Cramer touted for wisdom on here? Please.

 

What are we, a banana republic? The central bank head of India recently resigned because the Prime Minister wanted easing next year (an election year for him). Do we want to go down this path???

 

Whether a sitting President can fire anyone at the Fed is questionable (https://www.google.com/amp/s/www.forbes.com/sites/patrickwwatson/2018/09/06/how-trump-could-fire-powell-and-rebuild-the-fed/amp/).

 

Why the change of heart in here? Anyone recall David Einhorn and his talk of “jelly doughnuts” by the fed many years ago? Suddenly now we want easing?

 

But hey, I guess your portfolio is down a few points now and you can’t take it, so we should destroy the precedent of an Independent Fed that has made this country what it is...

 

Guess we all (Trump included) just want it to be 2017 again with unnatural low volatility across the board and surging asset prices...

 

If volatility like this scares you (after many years of rising asset prices) and you resort to lashing out at the Fed, you have no business actively investing, IMO.

 

Well said.

 

Also, finally some interesting things are happening in the market. Cheap stocks! Don't get distracted by X blaming Y for doing 0.25% Z, blah blah blah. It's the narrative of the week on CNBC (and here), who gives a shit. Eyes on the ball.

[Liberty]

Trump is a highly leveraged real-estate guy. Surprising to anyone he'd want forever zero interest rates?

 

Druck said he's more about removing forward guidance on the fed, and he's be for raising interest rates in a couple months and has been for normalizing them in the past, so it's not like he's taking the same position as Trump.

 

Guess we should give the Fed a third mandate like Druck seems to imply (because Druck seems to believe that Mr. Market is the world’s best economist—Ben Graham would disagree): the Fed should maximize the S&P 500. Surely that will lead to great long term economic prosperity.

 

I'm not sure if Ben Graham would disagree, actually. He still respected the market a lot (was actually incredibly conservative and insiste on huge margins of safety because he understood how hard this is). The market is often wrong, but that doesn't make it more wrong than any single random economist or group of economists. The choice isn't between a group that's right and a group that's wrong, but between who's less wrong... The hard part is more interpreting what the wisdom of the crowd is saying and getting the message through short term noise, rather than anything else, and even then you'll often be wrong (but more than any talking head on TV or at the fed? ¯\_(ツ)_/¯ ).

 

As for your (I assume) sarcastic suggestion, I'd say that if the goal was to maximize the health of the market over long periods (10-20 years increments), that would be pretty close to just "make sure the economy is running well, not too hot, not too cold". If the goal was over the short term, that would indeed just encourage bubbles.

 

Just guessing, though, as nobody can be sure about any of this, which is also part of what makes it so hard. It's those people with so much certainty that are the most dangerous...

[Dalal.Holdings]

The only thing one should be sure of is that Mr. Market is not to be trusted. It worked for Graham and it worked for Buffett (who is a lot more successful than Druck or Cramer for some reason).

 

The other thing to be sure of is that it’s worth preserving something that helped create the greatest prosperity the world has seen over 100 years (Fed dual mandate and Fed independence). No one can be trusted to “maximize the S&P”, but managing inflation and employment with independence from politics has a great track record.

[Liberty]

The only thing one should be sure of is that Mr. Market is not to be trusted. It worked for Graham and it worked for Buffett.

 

The other thing to be sure of is that it’s worth preserving something that helped create the greatest prosperity the world has seen over 100 years (Fed dual mandate and Fed independence). No one can be trusted to “maximize the S&P”, but managing inflation and employment with independence from politics has a great track record.

 

We're not disagreeing.

[SHDL]

The other thing to be sure of is that it’s worth preserving something that helped create the greatest prosperity the world has seen over 100 years (Fed dual mandate and Fed independence).

 

Not that I disagree with the other things you said, but the Fed in its current form (with its dual mandate and independence) has a surprisingly short history - it certainly does not go back 100 years.

[Dalal.Holdings]

:D

 

Funny that both Jim Cramer and Stanley Druckenmiller jumped in at the peak of the tech bubble in 99-2000 (Stan likes to exclude his results at Quantum when he quotes how he earned "30% over 30 years"). Guess they believe in those hidden signals the market whispers to them a little too much. I keep in my records a speech of Cramer's in 2000 to remind myself of who he is (must explain why his day job is now working for CNBC and not managing money):

 

https://equitymates.com/lets-review-jim-cramers-2000-stock-picks/

 

https://www.fool.com/investing/general/2008/08/27/jim-cramers-regrettable-investment-advice.aspx

 

"[Y]ou have to throw out all of the matrices and formulas and texts that existed before the Web. You have to throw them away because they can't make money for you anymore, and that is all that matters. We don't use price-to-earnings multiples anymore at [his hedge fund]. If we talk about price-to-book, we have already gone astray. If we use any of what Graham and Dodd teach us, we wouldn't have a dime under management."

 

"You should be buying things and accept that they are overvalued, but accept that they're going to keep going higher. I know that sounds irresponsible, but that's how you make the money. Right now, up is down, left is right, peace is war."

 

I wonder how Berkshire Hathaway fared with its investments through the tech bubble and its bursting...Is that old crank Buffett still managing money or did he get a job at CNBC too?

[SHDL]

"You should be buying things and accept that they are overvalued, but accept that they're going to keep going higher. I know that sounds irresponsible, but that's how you make the money. Right now, up is down, left is right, peace is war."

 

It really sounds like he quoted the wrong line.  The line he should have quoted here is: IGNORANCE IS STRENGTH.

[no_free_lunch]

The only thing one should be sure of is that Mr. Market is not to be trusted. It worked for Graham and it worked for Buffett (who is a lot more successful than Druck or Cramer for some reason).

 

The other thing to be sure of is that it’s worth preserving something that helped create the greatest prosperity the world has seen over 100 years (Fed dual mandate and Fed independence). No one can be trusted to “maximize the S&P”, but managing inflation and employment with independence from politics has a great track record.

 

Really?  I guess it's subjective and hard to prove but I tend to think American prosperity had much to do with free market capitalism.  Certainly the us economy grew strongly and the market made people rich before the fed was introduced.  Maybe the US succeeded in spite of the fed. 

 

If you look at the massive amount of debt that was introduced over the last 30 years I have to blame that largely on the fed and their slow hand on interest rate increases.

 

I don't think trump should be trying to influence the fed, I think he should be trying to abolish the fed.

[rb]

Right. Because boom-bust and bank runs were so much fun.

[Dalal.Holdings]

The only thing one should be sure of is that Mr. Market is not to be trusted. It worked for Graham and it worked for Buffett (who is a lot more successful than Druck or Cramer for some reason).

 

The other thing to be sure of is that it’s worth preserving something that helped create the greatest prosperity the world has seen over 100 years (Fed dual mandate and Fed independence). No one can be trusted to “maximize the S&P”, but managing inflation and employment with independence from politics has a great track record.

 

Really?  I guess it's subjective and hard to prove but I tend to think American prosperity had much to do with free market capitalism.  Certainly the us economy grew strongly and the market made people rich before the fed was introduced.  Maybe the US succeeded in spite of the fed. 

 

If you look at the massive amount of debt that was introduced over the last 30 years I have to blame that largely on the fed and their slow hand on interest rate increases.

 

I don't think trump should be trying to influence the fed, I think he should be trying to abolish the fed.

 

You blame the fed for debt levels? Does the Fed create the budget or enact massive tax cuts without reducing spending? Does the Fed control gov't spending at all? The Fed is "slow" with interest rate increases? I guess you then support Powell because you support high interest rates? Oh, and on the Fed being "slow", Paul Volcker's term contradicts you.

 

Of course free markets played a role--the U.S. grew in the 19th century with free market capitalism. Since the Fed was created (1913) however, the U.S. has done much better (fewer panics, boom/bust magnitude reduced) and has become the world's largest economy. The U.S. economy of the 20th century >> 19th century U.S. economy.

 

Oh, you're an "abolish the Fed" kind of person. No point in engaging further.

[no_free_lunch]

I think you could keep deposit insurance.

 

You haven't seen any boom bust since the fed?

 

What I have seen is the US and all developing economies jack their debt levels up to war era levels in the middle of normal times.  I guess that is part of prosperity.  ::)

[no_free_lunch]

Oh, you're an "abolish the Fed" kind of person. No point in engaging further.

 

OK.  Well I will engage you nonetheless.  I don't think it's such a wild idea to be against central planning, ok?  USSR had a central bank as well.  I think the differentiator IS the free markets.  I am okay with deposit insurance, financial regulation and I see how you might have to intervene in a 2008 scenario, but otherwise why are we letting a small cabal of intellectuals control the economy.  Everywhere else in the economy we accept that business know best.

 

If we do have to have a fed I actually do like that he is raising rates.  I don't agree with trumpy on this.  However, based on the above, why do we need these magicians to be involved.  Let rates do what they will.

 

I think that without the fed keeping rates on the floor, yields would be higher and the govenment wouldn't be able to run these deficits.

[rb]

If the fed were keeping the rates on the floor as you say as in way below what they should be you should see an inflationary spiral. Is that what you're seeing?

[no_free_lunch]

There has been asset price inflation like crazy here in Canada.  Housing prices doubling or tripling against near flat incomes?  I think that is all interest rates.  The other way to look at it, if the fed is just mirroring what the market would do, then why do we need the fed?

 

The thing that really concerns me is the crazy stuff you are seeing elsewhere.  Negative interest rates?  Bank of Canada buying home loans?  It seems like as the facade starts to unravel they are reaching deeper and deeper when really maybe it was all caused by them artificially messing with the system.