Notes From Underground: A Tribute to Stanley Druckenmiller

Today’s trade was supposedly a risk on/risk off as all of July’s news that failed to impact the market became relevant today. Argentina, Gaza, Ukraine, Portuguese banks … all these issues became reasons for the 2 percent selloff in global equity markets. The problem with the pundits in search of a correlative rationale failed to find the traditional correlations. The SPOOS sold off forty points and the bonds actually closed lower. The YEN, which has been the safe harbor for global investors, remained unchanged for most of the trading session. GOLD, the ultimate haven, lost $14 and closed miserably for the month. Tomorrow’s GOLD action will be critical as we closed under the 200-day moving average. A CLOSE under 1276.50 after the unemployment report will be the end of my bullish outlook on GOLD until some other technicals provide support.

The YIELD CURVES did steepen as there was unwinding from the very profitable trades since February. Gold even diverged from the U.S. dollar as the greenback failed to rally, even though it has offered safety during times of stress. Tomorrow’s unemployment data will provide us with a view about investor angst. If the data is above consensus and the stocks fail to find any rally it will be a tell that the BULL is tired and in need of a respite. If BOND YIELDS also rise in the face of weakening stocks it will be a sign that the FED‘s policy is being questioned by the market. Again, the bonds actually closed lower on the day as yields rose despite the stock market drop.

Tomorrow’s anticipated jobs statistics: Nonfarm payrolls at 230,000; unemployment rate at 6.1%; and, most importantly, the average hourly earnings rate to rise 0.2%. This is Yellen’s litmus test as Randy Kroszner stated so well in his analysis of the FOMC meeting. Today’s Employment Cost Index (ECI) report showed a q/q rise of 0.7%, which was larger than the market expected and was what originally caused the selloff in the BOND market. Watch to see if the average hourly earnings exceeds the previous highest print of May, which came in at 0.4%.

My opinion for the last six months is that Yellen desires wage growth as the most important element in the continued healing of the economy. Higher wages will beget healthier consumer demand. But as Jim Paulsen rightly said, “good news for Main Street is not necessarily good news for Wall Street.” If productivity remains stagnant, higher wages come at the expense of corporate profits. I will say it again, Janet Yellen is not a friend of Wall Street. Regardless of the maintenance of zero interest rates, ZIRP is for the lazy.

The supreme global macro trader has been Stanley Druckenmiller. As I previously noted, he gave a great speech and interview at CNBC’s Alpha Conference. A guide to what makes a great analyst a great trader is the ability to admit I AM WRONG. The first question any quality analyst/trader asks is, “WHAT IF I AM WRONG?” Evolving from that question is the necessity to establish loss parameters to insure surviving for another day. Every good trader is often wrong in the fundamentals and timing of the trade. The wisdom I try to convey to my readers is the culmination of 37 years of global macro trading. Let my scars provide a platform for your success.

My criticism of the FED and other policy makers is that being wrong is not in the model. Crunch enough data and the probabilities of success increase. This is the mantra of the Fed, and, of course the foreign policy establishment: “We have a high probability of being right but we don’t know the cost of failure.” Think of Robert McNamara and the best and brightest that brought us Vietnam. More recently we had Senator John Kerry go to Syria and proclaim that President Assad was a reformer and there was no need to worry about Syria devolving into civil and political strife. Well, 180,000 Syrians have died in the following three years but without a hint of being wrong. It is in this vein that I quote Stan Druckenmiller from his speech at ALPHA.

“My job for 30 years was to anticipate changes in the economic trends that were not expected by others, and, therefore not yet reflected in security prices. I certainly made my share of mistakes over the years, but I was fortunate enough to make outside gains a number of times when we had different views and various central banks. Since most investors like betting with the central bank, these occasions provided our most outside returns and the subsequent price adjustments were quite extreme.” In direct response to current central bank policy, Druckenmiller says: “I don’t know whether we’re going to end with a malinvestment bust, due to misallocation of resources. Whether its inflation, or whether the outcome will actually be benign. I really don’t. But neither does the Fed.”

This is a powerful thought and if we all do our work we will find the best investments for the least risk as we continue to decipher the financial effects of a global zero interest rate policy. As I like to say, “Unfortunately for all the math utilized in the Fed models, the end result is it “AIN’T ROCKET SCIENCE” for there is not predictable outcome for return to a safe landing.


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10 Responses to “Notes From Underground: A Tribute to Stanley Druckenmiller”

  1. Daniel Says:

    The Fed is well aware that their models and approach include a baked-in probability of failure (and they have probably also attempted to project its cost). Unfortunately in the age of forward guidance, publicly acknowledging such possibilities increase the chance of realizing them. Apparent overconfidence is either the result of extreme ignorance or admirably sophisticated knowledge of endogeneity. My prior leans toward the latter.

  2. Chicken Says:

    Nice elevator rides reinforce angst and doubt. It was nice having the advanced heads-up, and Yellen basically didn’t provide much enthusiasm in my view.

    Meanwhile Governor Rolex provides a tiny peek behind the political iceberg of dirty deeds done dirt cheap.

  3. yra Says:

    Chicken–who is Governor rolex???

  4. Chicken Says:

    Sorry yra, perhaps I don’t follow the meaningful list of current events. The reference was to Bob R(olex). McDonnell

  5. arthur Says:

    Yra, thanks!!!

  6. Chicken Says:

    Rates are certainly coming to me. Wow, nice gift (or is it?)

  7. Chicken Says:

    Here we are 1276, what to do?

  8. Rudy Koehler Says:

    Still on Holidays? When do we see new posts?

    Rudy Koehler
    President •
    Direct 416-691-6669 x 23 •Toll Free 1-888-691-8080

  9. Alex F Says:

    The Yellen Uncertainty Count:
    21 Coulds, 20 Buts, 11 Woulds, 7 Mights, and a magnificent 56 Ifs.

  10. yra Says:

    alex–beautiful summarization and it was a dovish statement as she thru the fed models aside and is now a pragamatist—paragraph three of the first page- Rudy I will be back writing soon ,very soon

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