Legendary investor Stanley Druckenmiller warns that there is a “high probability” that the stock market will remain “flat” for an entire decade

Legendary investor Stanley Druckenmiller warns that there is a "high probability" that the stock market will remain "flat" for an entire decade

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After a higher-than-expected inflation reading spooked investors on Tuesday, the Dow Jones Industrial Average sank more than 1,200 points in the stock market’s worst performance since June 2020.

Earlier that day, Stanley Druckenmiller, one of Wall Street’s most respected minds, argued that the pain will not be temporary and that stocks face a decade of sideways trading as the global economy undergoes a tectonic shift.

“There’s a high probability in my mind that the market, at best, is going to be a little bit flat for 10 years, something like this time period from ’66 to ’82,” he said in an interview with Alex Karp, CEO. from software and artificial intelligence firm Palantir.

Druckenmiller added that with inflation rising, central banks raising rates, deglobalization taking hold and the war in Ukraine dragging on, he believes the odds of a global recession are now the highest in decades.

And given Druckenmiller’s track record, investors would do well to heed his warnings.

The legendary investor founded his hedge fund, Duquesne Capital, in 1981 and routinely outperformed most of his Wall Street peers for decades to come, generating an average annual return of 30% between 1986 and 2010, according to Yahoo. Finance.

But Druckenmiller really made a name for himself when he led George Soros’ bid against the British pound in 1992, helping the billionaire pocket an incredible $1.5 billion in profit in a single month.

Druckenmiller eventually closed his hedge fund in 2010 and turned it into a family office, a type of private company set up by wealthy families to manage their money, as many hedge funds tend to do when they unofficially retire. But the views of major investors remain widely followed on Wall Street.

reformed smokers

Druckenmiller’s argument for why the stock market is facing a decade of “flat” trading is based on the idea that central bank policies are shifting around the world from a supportive to a restrictive stance.

This change is the result of the globalization that characterized the last decades and faded amid the war in Ukraine and tensions between the United States and China. Druckenmiller points out that globalization has a deflationary effect because it increases the productivity of workers and accelerates technological advance, but that no longer exists.

“When I look back at the bull market that we’ve had in financial assets really starting in 1982 … all of the factors that created that not only stopped, but reversed,” he said, referencing current deglobalization trends as the split between the US and China, along with a move towards more government spending and more regulation since the 1980s.

Druckenmiller went on to explain how central banks have responded to the disinflation caused by globalization since the 1980s, and in particular after the Great Financial Crisis of 2008, with unsustainable policies that now need to be reworked.

“The response after the global financial crisis to disinflation was zero rates, and a lot of money printing, quantitative easing. That created an asset bubble in everything,” he said.

Central bank officials around the world are now backing away from near-zero interest rates and quantitative easing, a policy of buying mortgage-backed securities and government bonds in hopes of spurring lending and investment. , which have strengthened financial assets in recent decades. .

“They’re like reformed smokers,” Druckenmiller said. “They went from printing a bunch of money, like driving a Porsche at 200 miles per hour, to not just taking their foot off the gas, but hitting the brakes.”

To this point, the US Federal Reserve has raised rates four times this year to fight inflation, and it’s not the only central bank trying to lower consumer prices with tighter monetary policy. From the UK to Australia, central bankers around the world are taking a more conservative approach and raising interest rates.

While that means financial assets, including equities, will likely underperform over the next decade in Druckenmiller’s opinion, there is some positive news.

“The good thing is that there were companies that did very, very well in that environment back then,” Druckenmiller said, referring to the flat stock market trading seen between 1966 and 1982. “That’s when Apple Computer was founded, Apple Computer was founded. Home Depot.”

Druckenmiller also issued a warning to investors regarding his dovish outlook, saying this is the most difficult time in history to make economic forecasts and that he has a history of “bearish bias” that he has had to iron out his entire career. professional.

“I like the dark,” he said.

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