Pro Perspectives 5/11/21

May 11, 2021

One of the great macro-traders of all time, Stan Druckenmiller, wrote an op-ed in the Wall Street Journal yesterday. 

When he shares his views, it's often a good idea to pay attention.  He tends to understand the big picture as well or better than anyone, because 1) his view is shaped by global liquidity … and 2) he has a lot of influence.   

For a guy that has made his fortune over the past forty years interpreting the impact of central bank policy, no time in his career has the environment been more in his wheelhouse.  With that, he has grown his $5 billion dollar fortune by 50% over the past seventeen months. 

So, what does he think now? 

He thinks the Fed should be ending emergency policies, and making its first rate hike — now

Instead, the Fed is telling us they won't raise rates for another two years. 

They are still buying $40 billion worth of mortgage bonds each month, despite the fact that the housing market is booming and supply is tight. 

They are still buying up $80 billion a month of Treasurys, depite the fact that the economy is growing at twice the long-term trend rate, and is on path to grow at double-digits in the second quarter. 

Worse, by continuing to buy Treasurys, they are giving Congress the greenlight to continue rubber stamping yet another, and another, multi-trillion dollar spending program.  As Druckenmiller says, the bond market is designed to be the arbiter of fiscal policymaking, as investors will vote with their feet (sell Treasurys), when the government is spending irresponsibly.  In this case, the Fed bond buying is masking any signal of disapproval from bond market investors.

So, as Congress might be observing the bond market for any negative signals, the Fed is effectively giving them justification to be even more aggressive. 

This policy stance (from the Fed and Congress), at this stage in the recovery, is toxic — and is leading to a massive debt service burden for the country, which in the view of Druckenmiller, will ultimately be resolved in a devaluation of the dollar and the loss of the world reserve currency status. 

My view/summary:  Unfortunately, when the line has been crossed, it has been crossed.  The Fed has told us and shown us over the past 12 years that they will do 'whatever it takes' to maintain confidence and stability.  With that message clear, the politicians can play them like a fiddle.  On Capitol Hill, they can carry out destructive wish list spending and/or policy, knowing that the Fed will be there to keep everyone's head above water (until they can't).  As Druckenmiller says, the dollar is the ultimate lynchpin.  If/when foreign investors dump the dollar, that's when the real pain arrives.  It won't be soon, but we are on the path.