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CNBC Exclusive: CNBC's Joe Kernen Interviews Stanley Druckenmiller from CNBC Institutional Investor Delivering Alpha Conference in NYC Today


WHERE: CNBC'S "Squawk Alley"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Stanley Druckenmiller, Duquesne Capital Management Founder and Duquesne Family Office CEO & Chairman, live from the CNBC Institutional Investor Delivering Alpha conference in New York City on Wednesday, July 16th.

Following are links to the video of the interview on, and

Mandatory credit: CNBC Institutional Investor Delivering Alpha conference.

JOE KERNEN: All right. So when we have talked in the past, you were even more, I guess, strident about your biggest bets, biggest money. And we know how well you've done. We heard Julian Robertson. We know you 30 percent compounded return for years and years and years, betting against central banks. So if you can find a mistake, that's what you want to key on. It sounds like you've found a mistake. And given the depth of the recession in 2008 and now the type of measures the Fed has used, these were shock and awe measures compared to what was done in 2002 and 2003, and the notion that we could have something commensurate in terms of a bubble or in terms of a bubble bursting really scares me to the point where I listen to you, and if I believe what you're saying, I'm not sure what to hold. I'm not sure whether I hold anything at this point.

STAN DRUCKENMILLER: Well, that's a great question. First of all, at this point in time I don't see this as systemic. What we believe in 2005 and 2006 was that you had double leverage going on. People borrowed to buy their home and then they were borrowing against their home and the shadow banking system had accumulated those debts. While the Fed thought the crisis was containable, we thought no such thing because when the bad stuff gets into the banking system itself, it has huge, wider implications for the broader economy.

The current situation is a little trickier, Joe. First of all, like '04, I don't have great certainty how this mistake will end. In fact, I'm not even sure it's going to end badly.

JOE KERNEN: And it wouldn't be housing this time.

STAN DRUCKENMILLER: No. What I am sure is they're making a bad bet, a bad risk/reward. So you could go to the lottery and you could win the lottery, but it doesn't mean it was a good bet. When I look at this monetary policy and I look at all the money my firm has made in the past due to improper monetary policies, yes, it looks extreme. But since it hasn't infiltrated the banking system, I don't think at this point we're looking at an '08 or an '09 in our future anytime soon.

JOE KERNEN: And in terms of you said 2000 -- you gave a speech in 2004. You didn't make the bet for another year.

STAN DRUCKENMILLER: It was 2005, yes.

JOE KERNEN: And then you made the bet when, 2006?

STAN DRUCKENMILLER: I made a lot of money in '05 because I wanted to ride the overly aggressive policy. '06 I stunk. I had made some money but I left the party.

JOE KERNEN: You knew you were about three or four years early before '08. Okay. So we know where we are chronologically right now. You have been on Squawk Box and said as long as -- you sound like Chuck Prince. You're still dancing now basically. Until they raise rates you're going to dance, right?

STAN DRUCKENMILLER: Not that age -- first of all, I'm not like Chuck Prince because I can get out. I am still dancing, but Chuck Prince and the Fed, if they're wrong, cannot get out. I can get out in a week.

JOE KERNEN: Where do you think we are, though, in terms of the last time? It's impossible to say? Do you think it's 2005 right now?

STAN DRUCKENMILLER: We're not to a systemic phase. It will be interesting to see what goes on in the next year or two. I mean, I mentioned in my talk IPOs and credit.

So IPOs, as you probably know, we're right on the border of where we were in '99. In '99, 83 percent of IPOs went public had never earned a dime. Today that's 80 percent. It's the only other time in history we've approached that.

So for those who say how great it is that IPOs are encouraging investment, how good that is for employment, again it's myopic. It's good for employment today, but it's not good for employment -- it's like all the high-tech firms in '99. You got a job there and then you're laid off or fired or your company goes bust. So that's the IPOs.

When I look at credit, it's a little more problematic. You probably saw in the Economist this weekend, S&P, this year, corporate credit is growing as at a record rate, far faster than it grew in 2007. And S&P pointed out that 70 percent of debt issued is a B rating or worse. To put that in perspective, in the '90s, that number was 31 percent.

Do you remember all the hullabaloo in '07 about covenant light loans? They did a 100 billion in '07, and 38 percent of them were B rated. This year we're going to 300 billion. We did 260 billion last year, up from 90 billion a year, and 58 percent of them are B rated.

So anybody who says they are not a bubble, I just don't agree with it. But you've asked a better question, so what? Because the bubble is appropriate given monetary policy.

And normally the playbook says exactly what you said. You don't have to move till they raise rates. The only nuance I would put is the market had a nasty setback after QE1 ended. Had a nasty setback after QE2 ended. Japan had a nasty setback after they ended QE.

And it makes it a little more complicated. Are we supposed to look at the papering after the first interest rate rises or the rate itself? I would say lean more toward the rate itself. Because even after we start moving, as you can see by the charts I just showed, we are way behind. We are at once-in-a-century emergency levels. We've never had these rates before. But if you look at the 100 years of economic history, we're probably in the 40th percentile. We're not in the zero percentile. Do those charts look like 1932 or 1933 or 2008 to you?

JOE KERNEN: We just had PIMCO. They are changing from new normal to new neutral. There are cases that we're in an extended period of close to zero Fed funds rate where they deserve to be. So even though the Fed is exerting influence, the rates wouldn't be that much different even if the Fed wasn't in here. And the question of the day, and it's all I care about, is either the Fed is behind the curve, or there is enough demand destruction from the severity of the recession that all this is appropriate just to fill in from the demand of --

STAN DRUCKENMILLER: Joe, household balance sheet is at an all-time high. It's higher than it was in '07. You saw the industrial production chart. What are you talking about?

JOE KERNEN: Paul McCulley said yesterday that Bernanke and Yellen can take a victory lap. They have won. They have put the stake in the heart of inflation.

STAN DRUCKENMILLER: Let me read you the last victory lap.

JOE KERNEN: You told me that yesterday.

STAN DRUCKENMILLER: I don't want this to get personal. I've been wrong a lot of times.

JOE KERNEN: You're going to attack me now?


JOE KERNEN: Oh, Bernanke. All right.

STAN DRUCKENMILLER: In 1987, when the market crashed, I was convinced we were going to have a depression. So I'm not poking fun at people who have been wrong. But the victory lap thing, again the myopia of focusing on the moment instead of looking Bernanke picture.

This is Bernanke in 2004. I think, by the way, he is the greatest living economist.

"The great moderation, substantial climb in macroeconomic volatility over the past 20 years, is a striking economic development. I have argued today that improved monetary policy has likely made an important contribution not only to reduced volatility of inflation, but to the reduced volatility of output as well."

This was three years before the biggest shrinkage in 50 years in U.S. output. I'm not mocking the man. I'm just saying where does your confidence come from. I've heard all these projections three or four years down the road.

As for the zero percent, guys -- and I have tremendous respect for Bill Gross, he has a tremendous record. But this argument we got to stay at zero percent because the debt is too high, why do you think the debt is too high? Because we've had an asymmetric monetary policy for 30 years. It was 150 percent debt to GDP when Greenspan took over, and it was 390 at the crisis. We're only down to 350. If we keep rates at zero percent, as I just pointed out, the party is just starting. The debt is now going like this, whereas the benefits are going like this.

So the argument that we have to have zero rates because the debt is too high, it's a little scurrilous to me, because if rates stay at zero, the debt is going to explode. When do you ever pull the trigger? The answer is you don't.

JOE KERNEN: So people watching -- so we'll stay long -- for a little longer. You talked about IPOs and credit. And you've made the case to me that if there is one company that could represent kind of a poster child for a balance sheet orchestrated resurgence, it is IBM.

STAN DRUCKENMILLER: Oh, boy. Kevin Warsh and I wrote an editorial together a few weeks back on the balance sheet recovery and how corporations were more interested in buying back stock and financial engineering than investing in their business.

I would say IBM is the poster child. They literally faced a threat not too dissimilar to what Kodak and Xerox, in terms of a new technology starting them right in the face. Instead of increasing investment to combat the threat, they've actually borrowed a lot of money to buy back stock.

Let me give you a few shocking statistics. IBM's sales are where they were six years ago. Despite the increase you saw in sales, industrial production and corporate customers, they've had no increase in sales whatsoever.

In regards to the competitor of the Fed I just presented, they've had no increase in investment or capital spending. What have they increased? Their debt has tripled so they could triple their buy back.

This is their response. I don't mean to pick on IBM, but this is the whole U.S. economy. This is what we're doing. Capital spending is the lowest it's been relative to sales in many, many years. That's the reason productivity is down. We've got to get out of this financial engineering stuff and get more into investing in the real economy.

If you want to spur growth, I don't think zero interest rates are the answer, because they have unintended consequences. We need to do things like tax reform and cut back on regulation.

JOE KERNEN: We need to pass a law this week to prevent companies from leaving here. I think, why not throw in prevent companies from building factories anywhere but here. Do you think that will work?

STAN DRUCKENMILLER: Again, it's sort of Band-Aid policy. I heard some talk on your show about --

JOE KERNEN: I'm not going to name any ...

STAN DRUCKENMILLER: I heard some talk on your show this morning about officers of companies being unpatriotic. So let me understand this. We elect the politicians to make laws for us, but they don't want to pass reform because they're worried about their jobs. And we're unpatriotic, we being the corporate community, because we're obeying the laws they have on the books? That's a little weird, if you ask me.



JOE KERNEN: I wasn't --

STAN DRUCKENMILLER: I mean, these guys, they are obeying the law. If you don't like it, change the law. But, of course, they want to change just this one law.

But if you need growth, we need overall comprehensive tax reform. By the way, it's easy. It's easy -- I guess it's not easy politically. But everybody knows what the answer is.

JOE KERNEN: Go to zero.

STAN DRUCKENMILLER: I don't know that everybody knows that. But when I say -- I heard somebody on your show this morning say that it wasn't right to have corporations pay zero.

JOE KERNEN: Did you hear the big story today?

STAN DRUCKENMILLER: I want to point out, I'm not for corporations paying zero. Corporations are owned by their shareholders. I'm just for shifting the burden of the taxation from the corporate level to the shareholder level. Warren Buffet's tax rate will go up, mine will go up. It will all go up to 40 percent. It will be transparent. There wouldn't be any more lobbying in Washington. People wouldn't be moving jobs to Ireland and God knows where else. In fact, those jobs might come to us if we had a zero percent tax rate.

But you still get the money out of the people that own the corporations. So the corporations are paying it. They're just paying it once and paying it transparently.

JOE KERNEN: Can you envisage some kind of excrement hitting the air conditioner scenario for me if you're right about this? Would inflation be -- would it be that the bond market gets out of control of the Fed and rises more quickly and people are on the wrong side of that. If it ends badly in a year, 18 months, whenever it ends badly, any idea what it would look like?

STAN DRUCKENMILLER: Yes, right now, as is, let's say the Feds start typing in the first quarter. We're going to have a bear market. We've had bear markets. We have had a lot of them in history. We got in trouble when we tried to cancel them out with asymmetric monetary policy the last 20 or 30 years.

I don't think at this point there's anything systemic going on. Depending on my mood, maybe we can talk in a year. But right now, I think if we address this fairly soon, there'll be a problem.

JOE KERNEN: You've made the point it would be nice if we had pulled back a little and had some dry powder in case something happens unforeseen again. It could be from anywhere around the globe that could cause it. Could be oil, could be anything. We have nothing to throw at it.

STAN DRUCKENMILLER: The markets are spoiled, and the policy makers are terrified of spoiling them. I understand if we do some of this, you may have a market hiccup, and growth certainly won't be for the next 10 or 12 months what it would have been if you don't do something. But I would be willing to bet a lot of money that it's going to be better over the next five or ten years than it would have been.

JOE KERNEN: Would you share -- you don't have to, but you could if you want. You told me when you were young and didn't have much to lose, that you would bet with a lot of testosterone. You didn't really phrase it that way. But you were -- you would be out there, and you could do 30, 40 percent a year.

You don't do that anymore. You're wealthy, you're more concerned about wealth preservation. When you're in that position, you can only -- you can't do it.

STAN DRUCKENMILLER: I would like to blame it on wealth preservation. I just don't have the guts that I used to.

JOE KERNEN: You don't anymore?

STAN DRUCKENMILLER: I would like a really sure bet, as you can see. I don't have a lot of certainty where we are to test it out. Yeah, when I look back at the results that people are talking about, I don't even know who is in that body. I can forecast as well as I ever did. But for whatever reason, I can't pull the trigger in the same manner.

JOE KERNEN: And if it was regular Squawk Box, I would use some of these terms. For some reason I feel much more -- who has the biggest guts now --


JOE KERNEN: -- in terms of making --

STAN DRUCKENMILLER: George Soros is 83 years old, and he still has them. And I don't understand it, because I'm 61 and mine are somewhere on the pavement.

JOE KERNEN: There was another guy you mentioned.

STAN DRUCKENMILLER: David Tepper. His forecasting record, he's had a lot more volatility than I have, but you talk about a guy who knows how to lay it on when he has a big opinion. That's the key to money management. It's making a lot of money when you're right and minimizing it when you're wrong.

JOE KERNEN: And that's the guy for right now. All right. This is good. This is good.


JOE KERNEN: I don't know. This is turned down so low.

STAN DRUCKENMILLER: I don't have one of those in my ear.

JOE KERNEN: We might as well be. This has been awesome, and I appreciate it. Just getting you here, I don't know if I have to do anything.

STAN DRUCKENMILLER: It shows what a "has-been" I am that I showed up. I didn't do this when I actually managed money for clients.

JOE KERNEN: Thank you very much. Thank you.

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