Submitted by Taps Coogan on the 19th of December 2018 to The Sounding Line.

Legendary investor Stanley Druckenmiller sat down with Bloomberg on the eve of today’s Fed meeting to issue a stern warning to the Fed to stop hiking interest rates or else risk making a historic policy error. During the hour long interview, Mr. Druckenmiller shares his insights into what he believes to be an unfolding bear market and discusses warning signs of a major economic slowdown.

Stanley Druckenmiller:

“The reason I started… complaining (about the Fed) four or five years ago was I became very concerned, particularly when they started QE3, that we hadn’t learned our lessons from the past and we were going to create yet another bubble in financial assets, which would lead to yet another bust, which would lead to even more radical monetary policy, and less discipline in terms of government spending and so forth… A few years ago, I started saying if you wanted to create a deflationary bust, I would do exactly what the Fed was doing. Since 2010 corporate non-financial debt has grown from $6 trillion to $9.6 trillion. Where I am from that’s about a 60% increase. During that time corporate earning increased 27%. So how in the world did the S&P earnings (stock returns) increase 60%? It’s because all that borrowed money went to finance buybacks and M&A. So this entire trillions and trillions of dollars that were… a result of investors being pushed by the Fed to… take more risk, resulted in a big debt buildup, resulted in Donald Trump feeling comfortable doing more fiscal spending, resulted in Barrack Obama saying he did not want to balance the budget on the backs of old people… We’ve developed yet another bubble and we are now sort of in the position, potentially…, where we were in early 2007… If you look at the coincident economic indicators, which I wish the Fed did, they actually look at lagging indicators…, they all look quite good… If you look at the indicators I have historically used in my business, they’re not quite red yet, but they are definitely amber and they are setting off warning signs… The best economist I know is the inside of the stock market. When the Fed looks at the stock market…, they are probably just looking at the S&P. But the decline in the S&P… is a bit of a mirage because, if you look inside the stock market, the cyclical elements of the economy, particularly the front-end cyclicals show a completely different picture than the defensive parts of the stock market. So auto stocks are down 30%…. Building stocks are down 35%. Banks… are down 25%. The Russel 2000 is down over 20%. Retail equities are down over 20%. So how in the world could the S&P only be down 10 or 11%…? It’s because utilities, staples, and pharmaceuticals, which are economically defensive, are actually up… The inside of the stock market is saying there is something not right here…“

“Every time I’d talk, someone in the audience would raise their hand and say ‘well what would you do if you were at the Fed,’ because I was complaining they weren’t starting and they weren’t (tightening) fast enough, and I would always say the same thing. I said I would sneak one in every time I could under booming financial conditions, and hopefully get to 3%… I don’t call hiking rates on top of shrinking your balance sheet $50 billion a month, when the S&P just went down 13%, and all the cyclical stocks we talked about are down somewhere between 25 and 40%, I don’t call that ‘sneaking one in’ when financial conditions permit it… What are we solving for here? I don’t quite get it”

There is much more to the interview, so enjoy it above.

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