After a higher-than-expected inflation reading spooked investors on Tuesday, the Dow Jones Industrial Average fell more than 1,200 points in the worst stock market index since June 2020.
On the same day, Stanley Druckenmiller, one of Wall Street’s most respected minds, argued that the pain will not be temporary and that stocks face an entire decade of sideways trading as the global economy goes through a tectonic change.
“There’s a high probability in my mind that the market, at best, will be pretty flat for 10 years, much like that period from 1966 to 1982,” he said in an interview with CEO Alex Karp. software and artificial intelligence company Palantir.
Druckenmiller added that with inflation raging, central banks raising rates, de-globalization taking hold and the war in Ukraine dragging on, he believes the chances of a global recession are now the highest for 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 consistently outperformed the majority of his peers on Wall Street over the decades to come, delivering an average annual return of 30% from 1986 to 2010, according to Yahoo. Finance.
But Druckenmiller really made a name for himself when he led George Soros’ bet against the pound in 1992, helping the billionaire pocket a tidy $1.5 billion profit in a single month.
Druckenmiller eventually closed his hedge fund in 2010 and converted it into a family office – a type of private business created by wealthy families to manage their money – as many backers typically do when they retire. officially. But the views of the leading investor are still widely followed on Wall Street.
Druckenmiller’s argument for why the stock market faces a decade of “stable” trading is based on the idea that central bank policies around the world are shifting from supportive to restrictive.
This change is the result of the globalization that has characterized the last decades and which is fading amid the war in Ukraine and US-China tensions. Druckenmiller points out that globalization has a deflationary effect as it increases worker productivity and accelerates technological progress, but now that is gone.
“When I think back to the bull market we had in financial assets from 1982…all of the factors that created that not only stopped, they reversed,” he said, referring to the current trends of de-globalization like the divide between the United States and China, as well as a move towards increased government spending and more regulation since the 1980s.
Druckenmiller went on to explain how central banks have responded to disinflation caused by globalization since the 1980s – and particularly 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 lots of money printing, quantitative easing. It created an asset bubble in everything,” he said.
Central bank officials around the world are now moving away from near-zero interest rates and quantitative easing – a policy of buying mortgage-backed securities and government bonds in the hope stimulate lending and investment – which have bolstered financial assets over the past decades. .
“They’re like reformed smokers,” Druckenmiller said. “They went from feeling like a bunch of money, like driving a Porsche at 200 miles an hour, to not just taking their foot off the gas, but just slamming on the brakes.”
In his view, 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 stocks, are likely to underperform over the next decade according to Druckenmiller, there is some positive news.
“The good thing is that there were companies that did very well in that environment at the time,” Druckenmiller said, referring to the stock market stagnation seen between 1966 and 1982. “That’s when Apple Computer was founded, Home Depot was founded.”
Druckenmiller also cautioned investors about his pessimistic outlook, saying this is the most difficult time in history to make economic forecasts and that he has a history of “downside bias” that he had to circumvent his entire career.
“I like darkness,” he said.
This story was originally featured on Fortune.com
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