Stanley Druckenmiller is one of the most accomplished macro traders the world has ever seen. He worked closely with the legendary trader George Soros at the Quantum Fund. In addition to being closely tied to Soros’ infamous ‘breaking’ of the British Pound, Druckenmiller made successful multi-billion dollar bets on the Deutschemark, helping to send the returns of the Quantum Fund over 60%. In 30 years as an investment manager, he never had a down-year, and managed to produce an average of 30% in that time. Perhaps more impressively, he averaged 50% p.a. during bear markets. So why then, would one of the world’s great currency and bond traders stop trading? A recent interview on RealVision offers some great insights (link to full interview at the bottom of the article).
Edited excerpt from transcript
“Since free money was instituted, I have really struggled. I haven't had any down years since I started a family office, but thank you for quoting the 30 year record. I don't even know how I did that when I look back and I look at it today. But I probably made about 70% of my money during that time in currencies and bonds, and that's been pretty much squished. It’s become a very challenging area, both of them, as a profit centre.
So, while I started in equities and that was my bread and butter my first three or four years in the business, I evolved into other areas. It's a little bit of Back to the Future, the last eight or nine years where I've had to refocus on the equity market.”
“I've also struggled mightily, and this is really concerning to me, it's about the most troubled I've been about my future as a money manager maybe ever, is what you mentioned; the cancelling of price signals. But it's not just the central banks, if it was just the central banks I could I could deal with that.
But one of my strengths over the years was having deep respect for the markets and using the markets to predict the economy, and particularly using internal groups within the market to make predictions. I was always open-minded enough and had enough humility that if those signals challenged my opinion, I went back to the drawing board and made sure things weren’t changing.
These algos have taken all the rhythm out of the market and have become extremely confusing to me. When you take away price action versus news from someone who's used for price-action-news as their major disciplinary tool for 35 years it’s tough, and it's become very tough.
I don't know where this is all going. If it continues, I'm not gonna return to 30% a year anytime soon. Not that I think I might not anyway, but one can always dream that when the free money ends we'll go back to a normal macro trading environment.”
“The challenge for me is these groups that used to send me signals, it doesn't mean anything anymore. I gave one example this year; the pharmaceuticals, which you would think are the most predictable earnings streams out there, so there shouldn't be a lot of movement one way or the other. From January to May, they were massive underperformers. In the old days, I'll look at that relative strength and I'll go this this group is a disaster. Okay Trump's making some noises about drug pricing in the background, but they clearly had chart patterns and relative patterns that would suggest this group’s a real problem. They were the worst group of any I follow from January to May. With no change in news and with no change in Trump’s narrative, and if anything, an acceleration in the US economy, which should put them more toward the back of the bus than the front of bus because they don't need a strong economy. They have now been about the best group from May until now.
I could give you 15 other examples. That's the kind of stuff that didn't use to happen. That's the major challenge of the algos for me, not what you're talking about. Now that might be a challenge for society and the investing public in general, and yes, I could get caught like anybody else in them.
There's probably some degree of having one foot out the door, that I otherwise might not have, because I do know this is in the background.
I skimmed the article, but there was something in the paper about how we're taking more measures to put in circuit breakers, whatever they call those things, to stop the phenomena you're talking about. Doesn't mean they'll be effective.”
Q: Why are they distorting the price signals?
“I'll tell you why it's so challenging for me. A lot of my style, as you build a thesis, hopefully that no one else has built, you put some positions on, and then when the thesis starts to evolve, and people get on, you see the momentum start to change in your favour, then you really go for it. You pile into the trade. It's what my former partner George Soros was so good at. We call it, if you follow baseball, it's the slugging percentage as opposed to batting average.
Well, a lot of these algos apparently are based on standard deviation models, so just when you would think you're supposed to pile on and lift off, their models must tell them that because you're three standard deviations from where you’re supposed to be, they come in with these massive programs that go against the beginning of the trend. If you really believe in yourself it's an opportunity, but if you're a guy that uses price signals and price action versus news, it makes you question your scenario.
If there's one thing I've learned, currencies probably being the most obvious, every 15 or 20 years there's regime change. Currencies traded on current account until Reagan came in. Then they traded on interest differentials. About five years ten years ago they started trading on risk-on risk-off. A lot of these algos are built on historical models, and I think a lot of their factors are inappropriate because they're missing, they're in an old regime, as opposed to a new regime. The world keeps changing.
But they are they are very disruptive if price action versus news is a big part of your process like it is for me.”
Q: Is this going to get worse or does it blow up?
“I pray it blows up but I don't see that happening, because money managers are so bad, I assume they're gonna outperform 95% of the money managers.
I don't know whether you've read Kasparov’s book, but he thinks the ultimate chess player is not the machine, it's the machine with a man and his intuition using the machine. I think there's always gonna be five or ten maybe, not a lot more, humans who the best machine in the world, the AlphaGo type thing, will never beat.”
Full interview – discussion of markets and investing starts at 10:09:
Amazing stuff, I'll have to read and re-read this interview. Eric Wells