As inflation fears rattle the market, billionaire hedge fund manager Stanley Druckenmiller is placing the blame on the Federal Reserve's unprecedented efforts to bolster the economy, blasting the central bank’s ongoing pandemic stimulus efforts as “the most radical policy” since World War II—one that could ultimately destabilize the U.S. dollar and tank asset values across the board.
KEY FACTS
Speaking to CNBC’s Squawk Box, Druckenmiller called the Fed’s historically low interest rates and $120 billion in monthly asset purchases “totally inappropriate” now that the economy has normalized, pointing to economic data, including gross domestic product, that's back to pre-pandemic levels.
Of particular concern to Druckenmiller, the recovery in U.S. retail sales has been like “nothing we’ve ever seen,” having taken just six months for them to get back to pre-pandemic trends; to compare, it took about six years for retail sales to recover following a sharper decline during the Great Recession.
“I can’t find any period in history where monetary and fiscal policy were this out of step with the economic circumstances—not one,” Druckenmiller said, conceding that he “couldn’t have been more wrong” last year when he said a V-shaped, or quick and sustained, economic recovery was a “fantasy.”
Druckenmiller cautioned that once the Fed is forced to raise interest rates—which it would need to do to combat any problematic inflation—the federal government’s massive debt load, buoyed by fiscal stimulus spending, will become unsustainable.
He projects that if yields on the ten-year Treasury rise to the projected level of 4.9%, the government would be spending close to 30% of GDP each year simply paying back interest expense (compared to 2% last year) unless it monetizes the debt, which experts think is unlikely and Druckenmiller believes would have “horrible implications” for the U.S. dollar.
The 40-year investing veteran went as far as to say the high debt loads could cause the dollar to lose its reserve currency status, which enables its use by central banks and in international trade, and “risk an asset bubble blowing up,” echoing concerns among experts worried that the stock market is more interest-rate-sensitive than ever before.
CRUCIAL QUOTE
“Last spring we did more . . . purchases of Treasurys than we did the entire time from 2009 to 2018, and frankly, I don’t have a problem with that. We were in a black hole, and no one knew where we were headed,” Druckenmiller said Sunday, adding he has “no doubt whatsoever” that “we are in a raging mania in all assets” as a result of the stimulus money pumped into the economy. “What I have a problem with is the Fed is expected to do $2.5 trillion of quantitative easing after vaccine confirmation—and after retail sales reached their [past] trend and are now above trend.”
CONTRA
In a Friday note, Oanda analyst Edward Moya called the disappointing April jobs report a “game changer” for investors who have been “overly confident” in the economic recovery and critical of the Fed for continuing its unprecedented monetary support. “The miss is a big surprise that justifies the Fed’s cautious stance,” Moya said. The economy added 266,000 jobs in April—roughly one fourth of the 1 million job gains economists were expecting.
TANGENT
In a March research note, Charles Schwab chief fixed income strategist Kathy Jones said the bank believes “the dollar’s role as the dominant global currency looks secure.” She cited data showing the U.S. dollar is still used in about 40% of global trade and nearly 80% of all cross-border transactions and said that no existing currency seems likely to supplant the dollar “anytime soon.” The closest candidate, according to Jones, is the euro, which has a much less liquid bond market than the U.S. dollar—making it harder for foreign investors to hold much of the currency.
KEY BACKGROUND
Stocks are plunging Tuesday as investors worry about a potentially alarming inflation reading in Wednesday's consumer price index release. "With China and the U.S., the world’s two largest economies, showing signs of rising inflationary pressures, investors are getting nervous,” Sophie Griffiths, a market analyst at Oanda, wrote in a Tuesday note. “The overriding fear is that pandemic stimulus combined with reopening economies will spark a sharp drive high in inflation, forcing central banks to take action, tightening policy and potentially slowing down the economic recovery.” Economists are expecting a 2.3% rise in core consumer prices year over year, up from 1.6% in April. Griffiths says that “a significantly higher” reading is “likely to send tech stocks tumbling again.”
This article originally appeared on Forbes.
