Renowned billionaire investor Stan Druckenmiller has expressed his mounting concerns about the economy and disclosed substantial bullish positions in two-year notes. Druckenmiller, the founder of Duquesne Family Office, made this revelation during an interview with hedge fund manager Paul Tudor Jones at a recent conference.
In his own words, “I started to get really nervous” in recent weeks, prompting him to take significant leveraged positions in short-term notes. This move aligns Druckenmiller with other prominent investors, including Bill Ackman and Bill Gross, who have been voicing their concerns about the state of the economy.
Unlike Ackman, Druckenmiller is maintaining bearish positions on longer-term bonds due to his apprehensions about the increasing issuance of government debt. However, with his new bullish bets on two-year notes, he finds himself in a net long fixed-income position for the first time since 2020.
Druckenmiller, who previously managed money for George Soros for over a decade, has long been predicting a challenging period for the US economy. He has foreseen potential corporate profit declines of 20% to 30% and a decline in the value of commercial real estate.
During his interview with Tudor Jones, Druckenmiller pointed to anecdotal evidence suggesting that economic conditions are softening as pandemic stimulus measures wane. He emphasized that historically, simultaneous increases in interest rates, oil prices, and the strength of the dollar have had negative repercussions for the economy.
Druckenmiller’s paired long and short bond bets reflect his expectation of a steepening yield curve, a trend typically associated with Federal Reserve interest rate cuts. Two-year Treasury yields recently reached nearly 5.3%, the highest level in over a decade, as investors reacted to Fed Chair Jerome Powell’s commitment to keeping rates elevated for an extended period.
Druckenmiller expressed skepticism about Powell’s intentions, remarking that “Powell talks a good game, but let’s see what kind of game he’s talked about if the unemployment rate is 4.5% and rising.” As of September, the unemployment rate stood at 3.8%.
Should Druckenmiller’s economic outlook materialize, he anticipates that two-year yields could decline to 3%, while the yields on 10-year and 30-year bonds would remain at their current levels of approximately 5%. He voiced confidence in the normalization of the yield curve, a trade he expects to persist.
Druckenmiller also raised concerns about the potential impact of higher rates on corporate and household borrowers who locked in lower borrowing costs in previous years. As they seek to refinance in the next two years, he cautioned that vulnerabilities may emerge.
In addition to his economic insights, Druckenmiller criticized Treasury Secretary Janet Yellen for not taking advantage of near-zero interest rates during the pandemic to issue more long-term bonds, labeling it “the biggest blunder in the history” of the Treasury Department.
He further underscored his apprehensions about the growing government debt burden, warning that if interest rates remain where they are, the government’s interest expenses will reach 7% of GDP by 2043, equivalent to 144% of current annual discretionary spending.
Druckenmiller, with a net worth of $9.9 billion according to the Bloomberg Billionaires Index, remains a significant figure in the world of finance.
