Billionaire investor Stanley Druckenmiller may be the best to ever do this, at least from a pure returns perspective. His company Duquesne Capital Management, which closed in 2010, generated an average annual return of 30% for three decades. That’s better than Warren Buffett and Berkshire Hathaway.
Although Duquesne Capital no longer exists, Druckenmiller still invests through the Duquesne Family Office and isn’t afraid to go against the grain. George Soros’ protégé is now making a bet that goes against the broader view of the market and the Federal Reserve, according to comments from people who heard him speak at a conference in early October. Does he know something that Wall Street doesn’t?
Betting on a bankrupt bond
Most of the market and the Federal Reserve believe that inflation will continue to slow and that the Fed will continue to cut rates through 2025. CME Group‘s FedWatch tool, which tracks the likelihood of interest rate changes by looking at one-month futures prices, indicates that the majority of traders (as of October 15) expect the Fed to raise rates by another 50 basis points this year will lower and return the benchmark interest rate to a target range of 3.25% to 3.50% by the end of 2025. Please note that these future interest rate projections are constantly changing.
The Fed’s dot plot is also currently showing a similar path. The scatter plot shows how each member of the Federal Open Market Committee (FOMC) thinks interest rates will move and then builds a consensus. The scatter plot is updated every three months. The Fed believes that now that inflation is lower, it should worry about the labor market, where unemployment has been steadily rising until the past two months. The Fed is trying to achieve a “soft landing” for the economy, with inflation falling and returning to the Fed’s preferred target of 2%, without previous rate hikes pushing the economy into recession.
Druckenmiller is taking the other side of this bet and reportedly recently revealed at a conference that he is shorting US government bonds. Bets on U.S. Treasury bonds now represent 15% to 20% of Druckenmiller’s portfolio, according to reports from what people at the conference said.
A bet against government bonds or bonds is essentially a bet against the current view that interest rates will fall. Bonds have an inverse relationship with bond yields, so when bonds fall, yields rise. The federal funds rate influences bond yields, although most yields do not move based solely on the federal funds rate. Druckenmiller also reportedly said that inflation could rise to 1970s levels. If inflation rises, the Fed won’t be able to cut rates as much as the market thinks, or even at all, because the economy will be too hot to stimulate with further cuts.
We don’t know the exact bet
We don’t know exactly what bet Druckenmiller is making. For example, we do not know the term of bonds that Druckenmiller is shorting. A shortage of two-year Treasury bills is different from a shortage of the thirty-year Treasury bond. Druckenmiller also reportedly said he is unsure how long it will take for the trade to unfold. It could take six months or six years, he said. Moreover, Druckenmiller is concerned about “bipartisan fiscal recklessness.”
For all we know, Druckenmiller’s bet could have more to do with government spending and the national debt than anything else. If debt levels become too high and the market begins to worry about the government’s ability to service its debt or interest payments, investors would demand higher interest rates because of the added risk, which would push bond prices lower.
Still, given his comments on inflation, Druckenmiller appears to be acting at odds with the Fed and the overall market. While retail investors should listen to Druckenmiller and try to get into his thinking, it’s not a good idea to completely change your strategy if the exact trade is not known. The motive of institutional investors is not always clear. But thinking about and being open to opposing viewpoints – and then doing your own due diligence – is what makes a good investor.
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Bram Berkowitz has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.
Does Stanley Druckenmiller know something that Wall Street doesn’t? The billionaire investor makes a big bet against the Federal Reserve. was originally published by The Motley Fool
