With blue-chip stocks near all-time highs, the party in the market can continue for a while longer, but it could end "very badly," Stanley Druckenmiller, founder of hedge fund Duquesne Capital, told CNBC on Tuesday.
"If you're going to play [in stocks] — and I'm a professional investor without clients, and I'm playing in the game — for God's sake play in liquid instruments," he said in a "Squawk Box" interview. "There are plenty of public securities out there … that's where you should be playing. … [So] if you change your mind, and if the signs come that this game is coming to an end, you can get out."
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Druckenmiller added that the Federal Reserve's easy money policy is forcing investors into stocks: "They're great value only relative to zero interest rates. They're not great value on an absolute basis."
"It's one thing to control short-term interest rates," he said. "It's another thing when you're taking 75 to 80 percent of the bond supply and holding that price down. … This is a big, big gamble to be manipulating the most important price in free markets, [interest rates]."
Admitting he's mystified by fixed-income movements, Druckenmiller said "there's no reason that bonds should go down" with the Fed printing money. "Bonds are being subsidized by the same thing equities are. If you print enough money everything is subsidized," he said.
Druckenmiller also called the Fed's bond-buying program — now in round three of quantitative easing — the biggest "wealth transfer" and "trickle-down" monetary policy.
"Those purchases are cancelling market signals," he warned. "The bond market and the stock market have provided wonderful signals for many years as to potential problems."
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"Maybe we're in the 7th or 8th inning" of the stock market rally and it could end in one of two ways, Druckenmiller cautioned. "With a mal-investment bust like in 2007 and 2008. … Or it could end in monetizing the debt and off we go in inflation."
He added: "I think a lot of people knew by early, mid-'08 that there was problem, but the reason they were hung, because they were [in] instruments they couldn't get out of." Druckenmiller reiterated that investors should put money in assets that they're able to sell, if needed.