WHEN: Today, Monday, March 2nd
WHERE: CNBC's "Closing Bell"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Duquesne Capital Management Founder Stan Druckenmiller on CNBC's "Closing Bell" (M-F, 3PM-5PM ET) today. Video from the interview will be available on CNBC.com.
All references must be sourced to CNBC.
KELLY EVANS: Stan Druckenmiller, thank you for being here.
STAN DRUCKENMILLER: Pleasure.
KELLY EVANS: We just had another disappointing GDP report. We just had Alan Greenspan talking about how this economy is not great and won't be for some time. He and Larry Summers have compared this to the 1930s and to the Great Depression. Are you as concerned about how fragile the U.S. economy is today?
STAN DRUCKENMILLER: No. I would also characterize the economy as not great, but the Great Depression, I think those analogies were potentially viable four or five years ago. But when I look at the situation today, I don't see-- I don't see those kinds of comparisons being apt. Retail sales are at a new high, industrial production's at a new high.
Employment has healed substantially from a 10 to a 5.7% annual rate. But more important to me, if you look at-- net worth per household, in the Great Depression and also in Japan you had substantial declines that never really recovered-- years and years later. We went through a 2007 high back in 2013. And I think most economists and even the Fed would argue that 2007 was from an inflated level. So that's the big difference I see.
Those were financial crisises like this was. The textbook way to get out of financial crisis is for the Fed to try and-- rebuild the balance sheet with aggressive monetary policy. We've done that and we've succeeded and I think we've moved on. Now, is the economy great? No, it's not great. But with the debt overhang, I think great is probably too-- large of a target.
KELLY EVANS: Given those-- points you mentioned, does that mean as we see markets at all-time highs and the NASDAQ marching back towards 5,000 that all of that is justified, that-- that stocks at these levels, given the historic rally entering now maybe its seventh year, that all of that is fundamentally justified?
STAN DRUCKENMILLER: I don't really know what fundamentally justified means, Kelly. Markets are what they are. By historic fundamental measures we are extremely high. Stock markets and GDP, which I know is one of Mr. Buffett's favorite measures, is probably the highest it's been in the last hundred years with an eight-month exception around the 1999-2000 period.
Price-to-earnings are 17 times, which doesn't sound so bad, until you realize we have record margins and we have a dollar that's been strong. So you're going to get a headwind there for earnings next year and obviously zero interest rates with all sorts of financial engineering Olympics going on. So stock prices are high by historical measures.
Having said that, we have the most aggressive monetary policy we've had since the founding of the Federal Reserve in 1913. So stock prices should be high. So if you look at stock prices relative to rates, they're probably exactly where they should be. Now, some of the bears will argue, "Well, rates are going to go up." I can't-- if I believe that, fine, short bonds. Stock prices--
KELLY EVANS: You don't believe that then? You don't believe rates are going up?
STAN DRUCKENMILLER: I may, or I may not. What I'm saying is if-- I thought rates were going up-- I would short bonds. It's not a reason to short stocks. The reality is if you look at the metrics that historically move stocks, for today they're priced appropriately.
KELLY EVANS: And does that mean-- I guess now we have to go back and talk about when the Fed does move or when the Fed does raise rates. I know you're still long this market, generally speaking, but you also think that the Fed has to act now, don't you?
STAN DRUCKENMILLER: The Fed doesn't have to do anything. But-- I think it would be great if the Fed acted now, because I think the risk/reward of not acting is all skewed toward acting later, greatly increases the risk of the U.S. economy than acting earlier. I know that's the exact opposite of what a lot of Fed pundits and others are saying.
Where I come down there is-- frankly that the healing I mentioned earlier in our economic discussion has taken place to the degree that I think we can certainly handle 25 or 50 basis points would-- which would be-- still be extremely accommodative, we would have large negative real rates. But if we wait, what we've learned at zero rates is the debt, which frankly is the reason a lot of the people don't want to raise rates, 'cause the debt t-- is too high, the debt is accelerating exactly because we have zero rates.
So to me the risk/reward is balanced toward if you go now, you slow down sort of the accelerating geometric lives we're having in corporate debt. And I definitely think the markets can handle twenty- five to 50 basis points.
One of the reasons I think that is if you look at bunds, five-year bunds did an auction last week, minus eight basis points, Spanish five-year is 55 basis points, Italian bonds, 55 basis points. If the Fed was ever going to raise rates and not have it dramatically impact financial conditions, this is a golden opportunity right here, right now. Because there's so much foreign money that I think will be attracted to treasury rates that it will not affect the curve as it traditionally has if the Fed starts moving.
KELLY EVANS: And what if they don't move? What then?
STAN DRUCKENMILLER: Well, I think we're going to continue to see what we've-- what we've seen. Corporate debt was $3.5 trillion-- in 2007, arguably a period and-- many would describe as bubbly. It's 7 trillion now. So it's gone from 3.5 trillion to 7 trillion. As you know, most of that mix has been in more highly leveraged stuff, Covenant-Lite loans-- high yield, that's where the majority of the rise has been. And if you look at corporations have been using it for, it's all financial engineering.
KELLY EVANS: Speaking of financial engineering, Warren Buffett today again was advocating for what IBM is doing. He actually-- had this to say: "What we like, and particularly the company itself, is buying the stock as most companies are. Our interest in the company is increasing day after day. And if the company is buying it, we're not laying out a dollar. If we're buying it, we're laying out the money, but we're buying it cheaper. And I like buying anything. Look around the room. I like buying things cheap." What do you make of his comments and his support for IBM despite the financial engineering you just cited as a concern?
STAN DRUCKENMILLER: Well, I saw the interview with Mr. Buffett. And the other thing he said is an investor should never let someone else's opinion drive their decision in stocks. Mr. Buffett and I have a different opinion on IBM. I certainly respect his opinion. But I have my own.
My guess is looking at the situation, Kelly, he thinks IBM's problem is cyclical. I think it's secular. And if you think a company has a secular problem, particularly with sales being lower than they were six years ago when the economy was much worse, the last thing they should be doing is buying back stock. But-- if it's a cyclical problem, I'm sure it'll work out, that the market will ferret this out and one of us will be right and one of us will be wrong.
KELLY EVANS: What about some of the names that you do like here? Where do you see the value?
STAN DRUCKENMILLER: Well, it's interesting because you mention I was long risk. The lion's share, if not all of that on a net basis, is not in the United States. I have positions in the United States, but net-net because of the valuations we talked about and because I'm encouraged by what I'm hearing out of the Fed in terms of them tightening, I'm not all that excited about the U.S.
But I do have large exposure in Japan and Europe. Both those markets are not only cheaper than the U.S., they have monetary policy that is just on the front end is very, very expansive. As you know they're doing QE. The one thing we learned in the United States about QE is it definitely inflates financial asset prices. So the majority of my long exposure is in Japan and Europe, not in the United States.
KELLY EVANS: Aren't you worried in Europe about the possibility of Greece leaving the Euro Zone and causing some sort of cataclysm for the market?
STAN DRUCKENMILLER: I prefer it didn't happen. Because if you're long something, you never want an uncertain event to take place. But I actually went into the scare last week, or maybe it was two weeks ago, of Greek exit -- long. And my knowing was this is totally different than 2011.
The banks do not own Greek debt to the extent that they did then. There's another factor here with QE just starting. Mario Draghi can ring fence Spain and Italy by buying their debt in the open market. So I think the comparisons are really, really weak to 2011. And given the fear that was in the market and is in the market because of it, I think it's-- I think a Greek exit is totally priced in.
KELLY EVANS: Or possibly could it even be-- a positive for markets? Is that even remotely possible in your eyes?
STAN DRUCKENMILLER: Well, it doesn't have to be a positive, but markets can go up on it. I remember vividly back in 1991 when we were all waiting to-- buy the United States down 5 or 6% when we started bombing-- if-- war took place in Iraq, and sure enough, we did start bombing. But the market didn't accommodate us and give us the 5 or 6% down move when the bombing started. In fact, it opened up 3.5 or 4% and never traded there again.
To this day it hasn't traded there again. So my guess is were you to get a Greek exit, if I'm right on Europe-- it wouldn't matter in the market. It might not even accommodate those who are waiting for some kind of decline on a Greek exit to buy--'cause I just don't see it being a material factor.
KELLY EVANS: What are the European names that you're particularly exposed to-- and long here then?
STAN DRUCKENMILLER: You know, a few months ago we started buying the-- I would say global consumer brands who are primarily stable in nature like-- Unilever or Pernod Ricard or L'Oréal. But recently we've shifted into more cyclical names like Volkswagen, BMW, Airbus. When you get the-- you get the tailwind of-- the euro having gone from 140 to 120, which will give them an earnings push in addition at a lower energy. And they are great consumer brand names in and of themselves.
KELLY EVANS: And you're not worried about the weak euro eroding in that position?
STAN DRUCKENMILLER: No, the weak euro is actually quite positive, because we hedge all our stocks so it gives you an earnings tailwind.
KELLY EVANS: Investing in the U.S., you mentioned that you think the rally looks-- that-- that stocks look unappealing here if the Fed does begin to move--
STAN DRUCKENMILLER: I wouldn't say they're unappealing. I don't have any long bias like most investors. I need a reason-- to be invested in the market. And I don't think-- I think the U.S. is appropriately priced. So I'm basically constructive on the U.S. I think it's benign. But I just think Europe and Japan are much, much more attractive.
KELLY EVANS: Do you applaud the Fed for then what it did to get us to this point? Does your concern center around them not now exiting the picture soon enough? Or do you still think that they have done too much and been too responsible for the run-up on asset prices and that that could reverse as they exit the picture?
STAN DRUCKENMILLER: Oh, it's a complicated question. I love what the Fed did in 2009. I thought it was creative, I thought it was brilliant. I thought the risk/reward was totally on the side of what they did. And they act with great courage and with great force.
Certainly QE3, but even for me QE2, I think their job was done and I think what they've done since then is unnecessary. So I do not applaud them for their policy the last two years. I will say that I was greatly encouraged by Chair Yellen's testimony last week. I know a lot of pundits read it as a dovish --- I thought she clearly is-- putting June on the table.
Whether they go in June-- whether they go in June or not will be data-dependent. But I think we're finally going to be out of this forward guidance game and hand-holding money managers and, you know, giving our next spoon of sugar. And it will be up to the data. So I thought-- I was very encouraged by her testimony.
KELLY EVANS: And if they proceed and start to raise rates to normalize policy, what is your biggest concern then structurally about the U.S. going forward here, if you have these concerns?
STAN DRUCKENMILLER: Well, we have-- we do have too much debt. And we particularly have a lot of debt in the corporate sector. And that's why some great minds don't want to raise rates here, because the debt is so large. But when I look at the healing that's taken place, again on a risk/reward basis, if you don't raise rates now, the debt's just going to continue to accelerate at the pace its gone the last two years, and it would be much greater. But of course whenever you raise rates-- with this much debt around, there's a concern. I frankly think the market can handle it, but that's why there are markets. I might be right, I might be wrong.
KELLY EVANS: And then about the demographics issue that you've raised before-- the aging of the population, last word. Is that going to hold us back materially in the future?
STAN DRUCKENMILLER: Oh, it most certainly is and it's a classic example of politicians and everyone else in this country looking at today and not looking at tomorrow. But we have so many issues in this country and the elderly have taken such a substantial share of the economic pie from the rest of the population-- it's one of the reasons we're in the predicament we're in.
But the problem is the elderly are now growing at 11,000 per day, that's the amount of people that turn 65 every day, whereas young adult workers are growing at about 3,000 per day. So you're going to have less and less of a worker base to support them. And this is going to go on all the way to 2030. So it's certainly going to be a problem.
KELLY EVANS: Do we need more people?
STAN DRUCKENMILLER: More people would---- be one thing that would help. W-- we also need to start shifting some of that pie from one generation to the other.
KELLY EVANS: And you can see Congress perhaps taking steps towards working on that, but they have their work cut out. Stan Druckenmiller, we'll leave it right there. Thank you so much for being here.
STAN DRUCKENMILLER: Thank you.
KELLY EVANS: Appreciate it.
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