Billionaire investor Stanley Druckenmiller believes the Federal Reserve’s aggressive tightening measures will send the US economy into recession.
“Our base case is a hard landing by the end of ’23,” Druckenmiller said at CNBC’s Alpha Investor Delivery Summit in New York on Wednesday. “I’ll be stunned if we don’t have a recession in ’23. I don’t know the timing, but certainly by the end of ’23. I wouldn’t be surprised if it’s not bigger than the so-called garden variety average.”
And the legendary investor, who has never had a down year in the markets, fears something even worse could be in store. “I’m not ruling out something really bad,” he said.
Druckenmiller believes that the extreme quantitative easing and zero interest rates of the past decade created an asset bubble and a record-long bull market. But now the policy of accommodation is being reversed at a rapid pace, he said.
“All of these factors that cause a bull market, they don’t just stop, they reverse every one of them,” Druckenmiller said. “We’re in big trouble.”
The Fed is now in the midst of its most aggressive pace of tightening since the 1980s. Last week, the central bank raised interest rates by three-quarters of a percentage point for the third time in a row and promised more increases to beat inflation, sparking a big sell-off in risk assets. The S&P 500 hit a June low and hit a new bear market low on Tuesday after a six-day losing streak.
The investor said the Fed made a policy mistake when it came up with a “ridiculous passivity theory” thinking inflation was being driven by supply chain and demand factors largely related to the pandemic.
“When you make a mistake, you have to admit you’re wrong and move on with those nine or 10 months that they just sat there and bought 120 billion in bonds,” Druckenmiller said. “I think the effects of this will be with us for a long, long time.”
The consumer price index rose 8.3% in August on a year-over-year basis, near a 40-year high and beating consensus expectations.
Druckenmiller once ran George Soros’ Quantum Fund and became famous after helping make a $10 billion bet against the British pound in 1992. He later oversaw $12 billion as president of Duquesne Capital Management before closing his firm in 2010
“You don’t even have to talk about Black Swans to be worried here. To me, the risk reward of owning assets doesn’t make a lot of sense,” Druckenmiller said.