Stanley Druckenmiller is a storied trader. He was George Soros’s trader in the glory days of the Quantum Fund. According to something I heard on The Market Huddle podcast, the trade he was most proud of was the decision not to short the Deutschmark at the time Kohl was unifying Germany and promising that the currency held by the residents of the East would be exchangeable 1 for 1 with DM. Most traders thought that this would be inflationary and would result in a devaluation of the currency. In fact, the DM continued as a very strong currency.
Obviously, the strong export performance of (West) Germany helped a lot, but Druck’s idea (according to Kevin Muir) was to do with cultural ideas in Germany. The idea was that the lessons of what happens when you allow very high inflation to take hold were so well learned by Germans that the Bundesbank would never allow inflation to take hold, no matter how much pain would be inflicted by the tight monetary policy need to offset the effect of a large one-off increase in the money supply.
Anyway, I was reminded of this incident a while ago while speaking to an ordinary guy about the UK, and what would happen about house prices. He was thinking of buying, but was nervous because a combination of recession and high interest rates would probably drive down prices. He explained that he had decided to go ahead with his purchase because “the UK economy is dominated by housing.” This was a guy who makes no pretence of any sort of knowledge of economics, but who was able to absorb the evidence of his own eyes.
Once you get into this way of thinking, you’ll start to look on the world differently. US equities are insanely overvalued. Half the SP500 are loss-making (but, the losses of this half are conveniently ignored when coming up with an overall P/E or P/S ratio for the whole index). But the index keeps going up because politicians are in the pocket of big business and will make sure that nothing ever causes too much damage to the index. In the old days, it was possible for a CEO to say, “What’s good for General Motors is good for America.” Now, it’s, “What’s good for the SP500 is good for America.” although they don’t actually say it out loud any more. Admittedly, some sectors in the index get even more favourable treatment: banks, the ‘magnificent seven’, healthcare, defence and so on.
It’s interesting to think about which are the ‘golden’ sectors in other markets. I guess residential real estate and transport infrastructure would be China’s version, agriculture France’s, car manufacturing Germany’s.
Of course, these exercises of political power by segments of society comes at a cost. Resources are diverted away from the most productive sectors and shovelled into ones with a poor return (because all marginal gains from capital formation in them have largely been achieved).
What would Druck do now? Well, we know what his holdings are. The top ten are:
So, a couple of comms companies, Disney, a gaming company, a copper miner, and some classic mega-caps. I guess the government is not going to let MSFT go broke, given that its software runs on nearly very government computer there is. I am not sure this portfolio supports my thesis. Maybe the ideas is already to widely understood that it already in the price.